As we predicted last year, fraud risk continues to increase. In fact, we have seen increases in our fraud risk index for seven consecutive quarters. In the last year, from Q2 2017 to Q2 2018, the fraud risk index grew by 12 percent.
We base our Fraud Risk Index on the predictive score delivered with LoanSafe Fraud Manager, which compares current loan application patterns to our database of known frauds. We estimate the application fraud rate has increased from 82 basis points last year to 92 basis points today. That’s one in every 109 loan applications.
Two fraud issues that are top of mind for risk managers right now are false credit disputes and income misrepresentation.
In a typical false credit dispute, the perpetrator attempts to remove negative records from their credit report by claiming to be a victim of identity theft. Templates for authentic-looking police reports are available online. This is a problem for loan servicers, who receive the false reports and have to spend limited resources researching them. When a negative credit tradeline is incorrectly removed from the report, it becomes a problem for any potential new lender. Identifying an applicant’s prior foreclosure through public records is a good way to detect this scheme.
This past May, Fannie Mae released a fraud alert for a Misrepresentation of Borrower Employment Scheme. Dozens of fake businesses were used to verify employment for borrowers over the past three years. While the fraud alert from Fannie Mae is new, and focused on Southern California, the method is an old standby, and members of our fraud consortium have been reporting an increase in this scenario across the country.
One of the common elements of this tactic is that the borrower has been in their current job for a less than a year, so verifying income with the IRS isn’t an option. An analysis of our consortium data shows a significant rise in mortgage applicants with less than a year on their current job, especially for first-time homebuyers.
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