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There are quite a number of tools available to lenders and Quality Control firms these days to help identify and prevent fraud in the processing, underwriting and closing of mortgage loan transactions.
Automated risk assessment reports, AVMs, Collateral Underwriter, backup credit reports, CAIVRS, Internet Searches, etc. are used on an ongoing basis by industry personnel in helping to identify possible fraud and/or misrepresentations made in a loan file.
Despite these tools (many of which were not available years ago), fraud in mortgage lending continues to be a huge concern.
Lenders certainly should review each month the results of the Post-Closing Quality Control reviews conducted by their audit staff or third-party QC vendor in order to help identify poor performing appraisers, underwriters, etc. and be proactive in addressing any major concerns outlined in their management reports.
In a February 23, 2016, Single Family News Center article, Freddie Mac has encouraged its customers to get “back to basics” in enhancing their fraud prevention initiatives. The mortgage screening checklist was developed by Freddie Mac to assist lenders in identifying red flags for potential fraud in the loan origination process.
Lenders should also be aware of the self-reporting obligations in place for FHA, VA, Fannie Mae, Freddie Mac, etc. whenever fraud is uncovered.
For example, whenever it is discovered that a breach of selling warranty has occurred on Fannie Mae transactions, the lender must provide notice to Fannie Mae immediately. A single self-reporting mailbox has been recently established by Fannie Mae to simplify the self-reporting requirements.
On FHA loans, lenders are required to report any Findings or material misrepresentation to FHA immediately via the Lender Reporting feature in Neighborhood Watch.
Loading ...One proven way to reduce the instances of fraud and/or poor underwriting on loan transactions is for lenders to process more pre-closing reviews (see my prior Blog Post dated December 9, 2015, relative to FHA’s new requirement that lenders MUST process pre-closing reviews as part of their monthly QC review requirements).
Lenders have reported rather consistently that the quality of their underwriting has greatly improved subsequent to making a decision to process more pre-closing reviews.
In this regard, Gross Defect Rates have been reduced when lenders have increased the number of loan transactions subjected to a pre-closing review thereby saving staff time in reporting and preparing rebuttal responses on cases found to have significant defects on a post-closing QC review.
In my opinion, the additional funds that may be spent on the processing of loan transactions on a pre-closing basis are more than justified in light of the projected savings in terms of fewer repurchase requests and/or indemnifications – not to mention the intangible benefits of improving your Firm’s image of performing high-quality underwriting.
The bottom line is that fraudulent loans will certainly continue to be originated but there are multiple tools and improved technology being employed to weed out this type of activity going forward.
The game has changed – you need to play different!
