Mortgage Fraud Awareness - Part 3 of 5

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello – I hope everyone is holding on to their job. In this economy it is frightening to say the least with the downturn of the real estate market. As the market gets tighter and banks are again tightening guidelines, it is important that good quality loans be submitted for underwriting and even more important that the borrowers are qualified to purchase and given instructions not to make any changes in their job or credit report prior to closing. In my opinion, the one issue that is not needed is for the lender to pick up discrepancies in the file between submission and audit closing – your borrowers could be packed with the moving van parked at the settlement office and the loan is not being funded because the investor ran an updated credit report and there is more debt or the borrower quit their job the day before. EEKKK!!!!!

I just happened to think of the above ways to kill your loan and thought I would share those thoughts with you. Now – back to the series on RED FLAGS during processing. This is the 3rd Part and as stated last week – I will discuss what to look for and the Red Flags on Tax Returns.

Regarding the income of the borrower – determine the type of work the borrower performs Does the borrower receive a 1040 or 1099 from his employer? When calculating income, in addition to base pay, does the borrower receive any bonus, commission or “other” income? If the borrower receives bonus or commission or “other” income – there must be a two year history of receiving this income. My philosophy underwriting a file is simple – if a borrower is receiving a base pay and you do not need the bonus or commission income for qualifying – do not use it!!!! Use only the income that is needed for the borrower to qualify, since bonus and commission income must be averaged and could open up more questions.

What types of income should be suspect of receiving salary and bonus income and when should you request the 1040’s or better yet – the 4506, then you can order the tax returns yourself directly from the IRS.

In addition to obvious occupations that receive salary and bonus and/or commission income – sales, cosmetology field, bartender, and waiting tables – you must also look at the title of the occupation. Is the borrower a “Manager” on the 1003 – verify that the borrower is not the owner. Is the telephone number for the borrower and employer the same? Is the borrower working for a family member? Red flags should be popping up.

Any time there are red flags you need to do your due diligence to preserve the integrity of the loan.

When looking at the tax returns – determine; are the returns signed; was the returns prepared by borrower or independent tax company. If the borrower receives bonus or commission is there a copy of “Unreimbursed Employee Expenses” attached? If so – the percentage of expenses must be deducted from the current year’s income. If the tax returns are signed, what date is the signature? Are the tax returns handwritten? If you have W2’s – verify the income on the W2 compared with the income on the tax returns. Whenever you have a question regarding taxes – use the 4506 that will confirm or alleviate your suspicions.

If you suspect a borrower is working for a family member or owns the business – check with your State Assessment and Taxation Office. The state where I live we can obtain (read only mode) the corporation papers; if the borrower is president, resident agent, any officer of the company. Check with your State Assessments or Licensing Bureau for specific information for your state.

There are many issues involved with tax returns; however, they can tell a story. The information supplied here is very general because every form means something different and if you have an accountant friend – I am sure he/she could answer your questions more in depth than outlined here.

So until next week – Keep Processing. More Later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Mortgage Fraud Awareness - Part 2 of 5

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello – This is the 2nd part of a series of 5 that will alert all loan processors, as well as loan officers and underwriters to “RED FLAGS” on the original application (1003). This week we will cover the income/employment section of the 1003.

The employment section of the 1003 must MAKE SENSE. First the age of the borrower must coincide with the number of years the borrower states he has been working. If the borrower is 22 years old has been working 8 years – that must be questioned. I have had borrowers who have worked in a family business since they have been 14 years old; however, that could open up another can of worms, and we will get into that later. The occupation of the borrower must also align with the number of years of schooling the person disclosed, which was in last week’s article.

Let’s start – the borrower has been working for ABC Company for 2 years (which always seems to be the magic number). You need two pay stubs, 2 years W2’s and a verbal VOE or written VOE. When verifying an employment verbally – it is important to independently obtain the telephone number from Superpages.com; 411; Google, etc. Do not use the telephone number supplied by the borrower on the 1003 and never verify using a cell telephone number. It is always suggested that you verify the employment through Human Resources, or an Office Manager and not the borrower’s direct supervisor, since they would not necessarily have the date of employment and salary.

I would like to state at this point it is important to be aware if the borrower is, or could be, working and receiving commission or bonus income. Also, any borrower working for a school system, whether it is a teacher, bus driver, crossing guard, and secretary or maintenance person – chances are, they get paid 20 pay periods per year – not 26. I always request a written VOE. This could dramatically affect the annual income.

Some red flags to look for when looking at pay stubs and determining income should be – Are the pay stubs consistent? Are they prepared by a payroll company or in-house by the employer? Hand written pay stubs are never acceptable – you will need a copy of the payroll ledger from the company and docs to support appropriate taxes were withheld. If no taxes were withheld from the check – you must get tax returns because the borrower would be considered self-employed.

When obtaining a written VOE check for white-outs or alterations on the verification – I know most companies now fax or e-mail verifications, however, if there is any doubt about the content, I always condition for the original.

It is important to verify the information on the pay stub, for example, verify that the year-to-date income matches with the hourly/monthly rate paid by employer. Recently, I was underwriting a file – the borrower was employed by a hospital, paid bi-monthly ($2000) so it should not have been a problem. However, when checking the year-to-date income – the numbers did not add up to the current salary. For example, the ytd income was $22,000; instead of the current ytd being $24,000 – the pay stub shows $22,300 – I have checked for any non-taxable income, flex spending, etc. and there were no non-taxable items. RED FLAG – Why wouldn’t a hospital calculate correct income? The file was suspended until the issues could be resolved.

If a borrower is working in sales, cosmetology field (including, nails, waxing, etc.) it is known in the industry - the borrower works on commission or tips – Recently I have been instances where an employer, in order to help the employee – states the borrower has been promoted to a salary job and no longer receives commission or even tips. This is of great concern to me, considering where the market has been recently. If a borrower has received a “promotion” and no longer receives tips or commission, I ask for two most recent pay stubs – a written VOE will not suffice. I will most likely also ask for a letter on employer letterhead – explaining the promotion, when it was effective and what duties the borrower has undertaken differently, i.e., supervises other sales persons, etc.

Another red flag is income, taxes, deductions, with no cents, only whole dollars. I would suggest asking for a letter from the employer. Numbers that look squeezed in on pay stubs, W2’s – anything that looks suspicious should be questioned.

Fraud is getting harder to detect since just about all forms can be generated on the computer – therefore, it is important to verify any and all information that is questionable.

In closing this week – I would like to say – The fewer conditions the underwriter requests – the sooner the loan closes. The Loan Officer and Processor are the first point to making the loan close on time. ‘Til next week – Keep Processing. Next week, we will cover looking at the tax returns for borrowers receiving commission, bonus and tip income.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Mortgage Fraud Awareness - Part I of 5

Written By: Joan Ewing
Certified Ambassador Loan Processor & FHA DE Underwriter

Hello Readers! As a first time blog writer for NAMP's The Mortgage Standard, I would like to say that I am most anxious to share with you some of my experiences in the real estate industry. As an FHA DE Underwriter for the past 15 years, there has been instances when an initial 1003 and the final 1003 had so many discrepancies, I was not sure it was the same person. As the loan processor, you are the first person after the loan officer to review the 1003. Review the information to verify it makes sense. Question the loan officer. The fewer questions (conditions) the underwriter has the quicker your loan will be approved.

Let’s look at some potential red flags on the initial 1003, which should be questioned prior to underwriting. It is important that the following fields of information be completed. In addition to the obvious such as name, address and previous address – it is imperative that the borrowers – date of birth; years of school; time at present residence and current and former employer with correct dates. Let’s discuss why these areas of information are important:

Date of birth – How old is the borrower. In most states a borrower must be 18 years of age to purchase a house. I have seen parents who try to use an underage child’s income in order to qualify. This is not acceptable, unless it is social security with a guaranteed three years of continuance.

Years of school – Does the years of school match the occupation of the borrower? If a borrower is stating he is a teacher and has 12 years of education, chances are the borrower may be a substitute teacher or a teaching assistant.

Time at present residence and previous – Again is the borrower 25 years old and states he “owns” his residence for 12 years. Chances are, he is living with his parents and not paying rent.

What makes these areas so important on the 1003? These initial areas on the 1003 are the start of the picture of the applicant. They can be reviewed rather quickly and you know immediately if there are any potential problems. When reviewing a 1003, as I do when underwriting, rather than asking 10 different questions – 10 different times, write notes and ask all questions of your LO at the same time or e-mail the questions. He in return can get back to his borrowers with one telephone call.

We will cover the employment and verification of deposit in another blog; however, in closing my first blog, I would like to let you know that NAMP will be offering a fraud course early next year. And I would like you to know, if you have any ideas you would like me to address in a blog, please let me know. See you soon.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.