Digital Risk In The News

Lenders May Be Able to Combat Fraud Woes by Working Together

December 22, 2006
NMS Online
Lew Sichelman

LAS VEGAS--Some lenders are simply talking about mortgage fraud. But others are doing something to combat it. And it was some of the "others" who kicked off a conference on the topic last week with suggestions on how to fight what by all accounts is a massive and growing industry problem.

"It's a huge business," said Jeffery Taylor, managing director of Digital Risk, Dallas, who moderated the opening session at SourceMedia's first-ever Mortgage Fraud Conference and rattled off some scary statistics.

In the first five years of the new millennium, Mr. Taylor reported, the number of mortgage fraud reports has jumped sixfold, from 3,500 in 2000 to 27,000 in 2005. And that's just what's been reported, he emphasized, noting that much of what's taking place is slipping under lenders' radar screens.

Mr. Taylor also pointed out another sobering number: That according to the FBI, roughly 80% of the losses attributed to fraud involve either collaboration or collusion by industry insiders.

"If that's true," he commented, "it doesn't speak well for what we have in place to combat the problem."

Two of Mr. Taylor's panelists, Mark Nelson of J.P. Morgan Chase Bank, Iselin, N.J., and Bob Binnie of WMC Mortgage, Burbank, Calif., insisted that lenders cannot stop fraud by themselves but rather must work together.

An admitted rookie to the mortgage business, with only a year under his belt, Mr. Nelson said lenders should follow the lead of the credit card and deposit industries by sharing data with each other.

"Data's a powerful tool," Chase's senior vice president of risk management, told the conference. "If we put our collaborative brains together, we could put a big dent in what's happening to the industry."

Mr. Nelson said the perception among lenders that they cannot share data is wrong. While stressing that he is not a lawyer, he offered that Gramm-Leach-Bliley specifically allows data sharing as long as certain controls are put in place.

Urging lenders to join industry coalitions to combat fraud, he said sharing information would help them identify problems more quickly, enhance the quality of their loans, reduce default rates and improve profitability.

"Consortium data sharing is a big part of what we do to improve out intelligence," agreed WMC's Mr. Binnie, who also came to mortgages from the credit card business.

Speaking from the wholesale originator's perspective, Mr. Binnie said WMC, now a division of GE, has discovered that 60% percent of its problem loans were coming from 6% of its broker base. So the "first line of defense" is to bulletproof the broker approval process.

"Your starting point should be to check licenses, Social Security numbers, tax identifications, because once they get in, the trouble really starts," he advised.

Mr. Binnie, WMC's executive vice president of operations, also suggested having "clear and candid conversations" about fraud with the sales force.

Companies often "don't like to share bad news," but talking about what's taking place in the way of fraud is necessary to help the sales team understand what's going on, he said. "A lot of time, they don't know any better because all they only know is the good times."

Another way to fight fraud is for executives to have a high visibility among brokers, Mr. Binnie said. At WMC, the brass visits broker shops four times a year. That way, he said, "they know you're taking appropriate steps to stop fraud, and maybe the bad guys will move on to someone else."

Another panelist, Bridget Berg, director of fraud strategies at GMAC Mortgage Corp., Plymouth, Minn., told the conference that stopping fraud is "a whole lot more than simply looking for red flags."

GMAC takes a "holistic approach" to the problem, Ms. Berg said, by trying to identify the risks and then putting controls in place to wrestle with them. But she warned that fraud is a never-ending battle.

"There's no beginning and no end," she said. "It doesn't stop. And it's different for each line of business. One size does not fit all. A difference process is required for different levels of control."

Ms. Berg advised the audience to try to identify the risks before they occur, and study the controls to determine where there are gaps and then correct them.

"Don't wait for first-hand experience," she said. "And learn from your failures, because you will fail."

Panelist Tom Waterman of HSBC Mortgage Services, Brandon, Fla., said his company created a fraud scorecard as prevention tool.

The scorecard is used to help underwriters find fraudulent loans not only after they were purchased, but also before. And it is being shared with HSBC's clients so they can use it as a way to prevent having to buy back loans that are later found to be questionable.

The scoring system is based on six to eight risk factors, including whether the loan is being used to purchase property, the number of properties owned, the property type and certain loan characteristics.

It "was easier to put together than we originally thought," Mr. Waterman said, "but it has to be simple and based on pretty standard stuff."

The scorecard has been updated twice since it was first created, and will be updated again soon, the HSBC vice president said. Fraudsters "keeping finding new cracks in the wall, so we have to keep it updated. Variables change, the market changes, everything changes."

HSBC's fraud scorecard has yielded good results, he also said. Of the 38% of the broker submissions, which were put under the microscope, 41% contained misrepresentations.

But even then, Mr. Waterman warned, the scorecard is only "part of the toolbox" his company uses to combat fraud. "It's not the be-all, end-all," he said.