Follow Insights Blog

CoreLogic

CoreLogic Econ

LATEST CORELOGIC ECON TWEETS

The Delay in Discovering Mortgage Fraud - Or What You Don’t Know for Too Long Can Hurt You

Part III of III in a series

Bridget Berg    |    Mortgage Performance

Unlike other types of financial fraud, mortgage fraud is rarely identified quickly. The problem with the lag in discovery is that by the time a financial institution gets the feedback, it’s often too late to mitigate the situation. Another issue is that the lag time gives management a false sense of security about their true fraud risk. As a result, poor practices or an undetected scheme could continue for years. And, unfortunately, the types of mortgage fraud most likely to be discovered early on are not representative of overall fraud risk.

Suspicious Activity Reports (SAR) have been used as a primary measurement of mortgage fraud levels for many years. When a known or suspected mortgage fraud is identified, a SAR must be filed with FinCEN (U.S. Department of the Treasury, Financial Crimes Enforcement Network) within 30 days of discovery. SAR information is available online in the form of reports that track the number of reports filed over time. However, one of the shortcomings of the report is that it only tracks the date the SAR was filed, and not when the actual fraudulent activity took place.

In 2013, FinCEN provided a one-time chart to show the timeline and the lag between when the fraud occurred and when it was reported. The report was quite enlightening, as it showed the difference between the peak of reporting and the peak of activity was about five years (from mid-2006 to mid-2011).

As you can see, most of the fraud was not identified until long after it occurred and was heavily influenced by the economy and close examination of defaulted loans. During the the mortgage crisis in 2008, the number of seriously delinquent loans and foreclosures ballooned and ended up in write-offs and losses for investors. In order to mitigate these losses, investors looked for fraud in the defaulted loans. Most secondary market transactions carry a life-of-loan warranty that loans are free from misrepresentation (reps and warrants). Investors were motivated to discover these misrepresentations so they could then ask for a repurchase or reimbursement of the loss from the institution that sold them the loan.

Given the delay in discovery, what can a lender do to protect themselves? Here are some best practices that our clients are currently using to detect and prevent mortgage fraud:

  • Add structured data fields within your tracking systems to capture the timing and discovery date, the type of fraud and the method of how it was discovered.
  • Develop reporting that tracks fraud by vintage (month/year of origination) and seasoning age. Report on each origination/application year separately and compare using consistent seasoning ages, e.g. 2015 vintage as of June 2016 versus 2016 vintage as of June 2017.
  • Since fraud is cyclical over periods of time, include as many years of history as possible in your tracking and reporting, and include pre-funding findings as well as post-funding findings.
  • Keep track of changes in controls or policies that are likely to impact fraud risk, such as income verification policies or reduced documentation programs. Comparing fraud activity to these policy changes can help you understand whether these changes reduced or increased fraud exposure.
  • Track fraud activity by origination channel, third party originators, loan programs, or loan purpose (purchase or refinance) as these may be leading indicators for trending purposes.

In this series of blogs, I’ve discussed the challenges of detecting fraud, where and when fraud occurs and can be discovered, and the discovery delay factor. I hope this discussion has helped you to frame your thinking about fraud risk and what you can do to be vigilant. Fraud is there whether you see it or not. Be aware.

© 2017 CoreLogic, Inc. All rights reserved