Lenders Should Be Vigilant When It Comes To Mortgage Fraud

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VIEW BLOG: Mortgage fraud is a huge problem for financial institutions. In the second quarter of 2020 alone, it was estimated that every 164 mortgage applications contained signs of fraud. Consequently, organizations, especially financial institutions, need to have strict procedures in place to prevent the success of fraudsters.

As defined by the FBI, Mortgage fraud is “a crime of material misstatement, misrepresentation or omission in relation to a mortgage loan on which the lender then relies.” In other words, any lie that affects a financial institution’s decision to lend someone a loan or agree to certain repayment terms is a mortgage fraud. Mortgage fraud can usually be divided into two categories: profit fraud, in which the purpose is to make money using the mortgage lending industry, and housing fraud, which usually refers to illegal actions taken by a borrower to enforce a right home ownership. …

At the moment, demand for housing in the United States far exceeds supply. Freddie Mac reports that there are 3.8 million fewer single-family homes than needed to meet demand, which in turn drives prices up 9% year over year. As a result, it has become more expensive for first-time homebuyers to enter the market and more lucrative for sellers looking to divest property.

It is possible that the current conditions in the housing market will lead to an increase in the number of fraudulent housing schemes. As the competition for even entry-level homes increases significantly, many are likely to feel the need to exaggerate their income and other assets in their bids if they want their proposals to be considered. Mortgage applications are a particularly vulnerable area to fraud simply because applicants can easily falsify some or all of their documentation.

According to a survey by Equifax Canada, 23% millennials (people between the ages of 18 and 34) consider it permissible to overestimate income when applying for a mortgage, compared to 12% of the general population. While this does not mean that millennials are necessarily more prone to mortgage fraud, it does indicate that there is a significant portion of the population that is willing to falsify their mortgage applications in any way.

In fact, industry insiders noted “Rising errors and general negligence in the application, documentation and approval process” for loans, possibly due to a combination of low interest rates (and therefore a surge in refinancing demand), as well as a general lack of experience among most mortgage underwriters, most of which they have worked for two years or less. Even if these mistakes were not made with malicious intent, they can still force a financial institution to approve a mortgage on a false pretense.

Taken together, these factors highlight the need for electronic verification and automated KYC checks. Manual checks can be full of errors and staff are not always properly trained to recognize fraudulent documents. On the other hand, electronic platforms can check multiple sources in a matter of seconds to confirm that someone is who they say they are. They can also detect inaccuracies that might not be visible to the human eye, making them a more reliable verification method.

As the housing market continues to heat up, it is even more important to be on the lookout for suspicious activity. By making these decisions now, banks and other financial institutions can better protect themselves from mortgage fraud and reduce the time it takes to acquire new customers.

John Dobson – CEO SmartSearch, a UK-based provider of regulatory technology including solutions for AML compliance and fraud protection.

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