Fraud-Why We are Scared!

Written By: Jane Harford

Did you hear about the settlement of a lawsuit that Lifelock was involved in? FTC was involved due to “overstated claims of how they would avoid ID fraud” for their customers. Here is a link to the story of the lawsuit being settled and what Lifelock has agreed to for the next 20 years that will result in a better, fairer and more accurate reflection of what Lifelock’s program actually does.

This is part #1 of several installments that will be done to update you on the emphasis that lenders are placing on the huge problem of fraud in our business-both from a pre production and a post closing, servicing and REO point of view. Fraud schemes exist in all areas of the mortgage business. There are many different schemes that start with the taking of the initial 1003 through settlement and for up to 24 month after the loan closes. Although, there are now numerous tools and technologies that exist to help fraud investigations, often it is a combination of the technologies and human efforts

That closes the cases, document the schemes and get the folks that do this convicted and behind bars or banned from doing business. Real estate fraud is complicated, unique and often difficult to detect. As often as the rest of this business changes, so does the type of fraud and how it is conducted. Many lenders are now developing zero tolerance policies towards fraud. Fannie Mae, Freddie Mac, FHA/VA and the MI companies have had teams in place for years to audit REO loans after they go into default.

The emphasis that these agencies are now placing on this has resulted in huge changes in how these loans are audited, how many are done and how the results are used to make changes in current and future program changes. Each of these groups is looking at their own book of REO problems, looking hard at the details that come out of these audits and finally sharing their findings internally with production departments of these agencies. Hopefully, these agencies will also share their findings with each other as well.

We will take the time this week to briefly identify the initial areas in which fraud can start. Since most initial applications now take place over the phone or via the internet, most loan officers do not meet their loan applicants in person. Often, the loan officers have established their sources of business via phone or other methods. Thus, there is room for information and documentation to be provided that is false or changed in some fashion to support income, assets, credit and collateral that is not what it will be once good solid investigation uncovers the truth.

The simplest forms of fraud start with the following areas-
-Occupancy issues often happen when occupancy status is misstated. For instance, if an application is taken stating that the property will be owner occupied when the borrowers fully intend to rent it out is considered to be fraud. There are often small hints along the way that give clues as to the fact that this is not what it appears to be.

Something as simple as when parents jump and want to help out a child by buying them a home can turn into a fraudulent situation. If the child’s credit doesn’t qualify for a mortgage under stricter standards, that person is often removed from the application. Often these loans then do become investment properties and are considered to be fraudulent under the misstated occupancy intentions. The simplest changes to a mortgage loan application may not always be caught by the processor or underwriter when submitted for an initial underwrite. these loans often close without the corrections made by decreasing the loan amount, increasing an interest rate and accounting for the correct change in occupancy status. And since most loan business is now conducted by phone/via electronic means and not in person, it is not possible to meet, get to know and learn about the true intentions of the parties on this loan.

Another form of misstated occupancy intentions has happened in the past few years as family members attempt to help out other family or friends if they are about to lose their home to foreclosure. There has been a huge increase in the numbers of non arms length transaction-the technical term we use for family members purchasing property from another family member for less than fair market value.

Many times, the folks that are selling the property are getting a payoff from the person purchasing it in order to start a new life some place else. The intent is to help out the family member, but it can often turn into a potential misstated occupancy issue or a property flipping issue. The best advice that can be given to first line production folks is to get to know the clients as much as you can even by phone or email. Ask those good questions and get good answers to your detailed questions. If there is something that doesn’t sit well in your gut, let a manager now that you have concerns about the loan applicants, the sellers or the agents involved.

Agents can often dictate or sway how a transaction is handled. Alert, intelligent and wary loan officers and processors can often get an idea that the loan package they have is not the loan closing that will take place.

In the next several weeks, we will cover all aspects of the mortgage loan process. In every step of the process, technology and good detailed detective work can stop loan fraud. It is a huge problem and now is the time that we can learn the basics of what to do and how to stop it.

Have a good productive week-free of fraud.

About The Author

Jane Harford - As an NAMP® staff writer, Jane brings 30+ years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP® , please email us at:


Opinion-Editorial (Op-Ed) Disclaimer For NAMP® Library Articles: The views and opinions expressed in the NAMP® Library articles are those of the authors and do not necessarily reflect any official NAMP® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMP®. Nothing contained in this article should be considered legal advice.