Mortgage loan fraud

The amount of documentation required and the seemingly endless process of getting a mortgage loan closed can be extremely frustrating. But those reams of forms that must be filled out are often an attempt to prevent fraud which has occurred int he past. Mark Wells of Preferred Financial Services discusses fraud issues in the loan process.

What is the most common type of loan fraud?

Most common is the intentional falsifying of income information by either the borrower or by the loan originator.

How is that done, and how does a lender keep a check on it?

The borrower may present a set of tax returns, a W-2, or a pay stub that overstates his or her income so they qualify for the payment they are applying for. To avoid this, the lender submits a 4506-T to the IRS, which provides a transcript of the tax return on record. The lender will then verify that the tax return and W-2s in the file match the ones the IRS received. For pay stub information, lenders often require the addition of a VOE (Verification of Employment), a form filled out by the borrower’s employer that states their current and past earnings.

What other schemes exist?

Many past loan fraud cases involved appraisers who received kickbacks for overstating the market value of houses. The borrower would then close the loan (often taking cash out of the transaction) and owe more than the house was worth. The Dodd-Frank regulatory laws require that all appraisals be ordered “blind” to the originator, through a third party company, where the originator has no contact with the appraiser.

Why have I been asked to show my I.D. multiple times?

In one type of fraudulent mortgage scheme, a “straw buyer” (a fictitious buyer) schemes with a seller to buy an over-inflated property, never makes a payment on the loan, and they both split the profit from the inflated price of the house. The straw buyer has actually stolen the social security number of an innocent person, hijacked his credit report, and used his information to apply for the fraudulent loan. Identification is required at application and at closing, to help prevent this type of fraud.

What other processes do lenders use to prevent fraud?

Lenders can check LDP/GSA lists for names of known criminals and terrorists to make sure they are not involved in a loan transaction. Databases of property sales provide comparable sales information to check appraised values. Lenders can call borrowers’ employers and banks to verify information obtained from the borrower.

Loan fraud is a federal offense and is prosecuted aggressively where uncovered.  Always make sure that you provide accurate information when applying for a mortgage loan, and remember that part of the reason you are going through so much paperwork is to prevent dishonest people from committing fraud. Wells is happy to answer any questions or provide quotes on mortgage products. He can be reached at (864) 235-9596 or via email at Mark@TheGreatestRates.com