Digital Risk In The News

Innovation in Fraud Prevention

January, 2007
Jeff Taylor
Broker Magazine

It may be surprising to hear that with all the extra attention (rightly) being paid to mortgage fraud these days, a significant number of third-party, risk mitigation professionals will be gone a year from now.

How can that be? More fraud + more attention = fewer people responsible for preventing it? The explanatory formula is simple: Automation plus experience results in streamlining.

Existing, standalone anti-fraud products including income, collateral and identity verification tools may be unable to deliver satisfactory levels of productivity, under current threats and conditions. And, relying on credit bureau information as the principal risk mitigation tool is simply insufficient against today’s fraudsters, who are too sophisticated for that solitary defense. That realization has never been more evident than it was this year.

In the new year, smart lenders and their broker partners will align themselves with companies that are constantly innovating and successfully implementing flexible technology platforms, data sets, and reporting. These are the fundamental pillars that will provide the solutions the lending community needs to meet the unpredictable 2007 cycle.

The reporting part is particularly crucial because the long-time standard has been to assign a single “gatekeeper” - someone who knew how to slice and dice information from a system – with the sole responsibility for presenting critical risk mitigation information in a company to those thought to need it.

It left most companies and their workers in the dark about how this information was being accessed and how it was being packaged; in other words: whether it was enough to prevent fraud.

But as we break down these silos and introduce innovation, no longer will there be the need for third-party, risk mitigation personnel in these isolated roles. Companies on this innovation track will be the major players in next business cycle.

Many of these third-party providers focus on credit scores and AVM-based collateral analysis as their key sources for validating borrower information. We utilize these indicators too but enhance them with additional information in a system of algorithms to make sure no type of fraud goes uncovered. For instance, to target investors posing as primary residence purchasers, we access multiple public and private record databases to alert lenders to the possibility that a borrower may not occupy the house he is financing. All such solutions are customized to our clients' specific business needs.

Resets require competitiveness
In 2007, lenders will be looking for a one-piece risk mitigation platform that also has the open architecture flexibility to allow other services to be integrated, as they become available. They also will want a low operational cost.

With $1 trillion worth of mortgage product expected to reset in the new year, and potentially another $1 trillion in loans that mortgagees may choose to refi, lenders are gearing up to streamline their processes to be competitive. Data accuracy has never been more important. Lenders learned a hard lesson this year with the large number of repurchase requests and they want to avoid repeating those same mistakes next year.

Originators who rely on credit bureaus to help them sidestep fraud with accurate borrower data are in for a sad surprise because data on individuals may only be as good as the integrity of the information source – often the person providing the numbers.

In working with federal officials at the Department of Homeland Security, the Social Security Administration and the Internal Revenue Service, we have endeavored to enhance credit bureau information that lenders use, by overlaying 4506T tax retrieval forms with Social Security Number authentication.

A new program by the IRS has automated the tax transcript retrieval system, which can be accessed by utilization of Form 4506. The new express service, scheduled to take effect this past October, includes electronic transcripts of personal and business tax returns that will be made available. It is significantly more secure than the current two-day program it is replacing. The financial industry as a whole will have a more valuable tool with which to verify income. From there we could unlock unique data sources and eventually have a standard that includes all relevant data.

It’s clean-up time
All of this is becoming mandatory as our industry has no choice but to clean up its own house. The FBI reports that about 80 percent of mortgage-fraud cases are “for-profit,” and that usually requires the work of an industry insider (appraiser, loan officer, real estate broker).

It seems ridiculous that right now when a loan is declined, someone can walk right over to another loan company and just try again and keep on going until eventually getting an approval from someone somewhere. Sharing information is a very important the first step to shutting down this hopping and shopping.

There is increasing recognition today that those who don’t take the necessary steps to identify and stop fraud may end up being buried by it.

One of these steps is broker buy-in, since so much (a majority today) origination business comes through that portal. As an industry we must get brokers to accept the fact that fraud hurts everyone. While there is a lot of resistance, if this approach is properly presented, there is a huge benefit for brokers.

As business slows, it gives mortgage companies their first opportunity in years to look at loans more diligently and management will be taking a harder look at return-on-investment.

Mr. Taylor is co-founder of Digital Risk, Dallas, a risk mitigation firm that provides special data authentication tools, which limit financial services firms’ exposure to fraud. Prior to founding Digital Risk, Taylor spent several years in financial services risk mitigation, where he created a successful identity theft authentication initiative for mortgage loan originators.