For every $1 lost to fraud at financial institutions, it costs $4.23 to address it, an increase of 16.2% from 2020. By: Steve Goode, National Mortgage Professional magazine, December 2022
Mortgage fraud is not sexy. But it is costly and expensive.
How costly and expensive, one might ask?
For every $1 lost to fraud at financial institutions, it costs $4.23 to address it, an increase of 16.2% from 2020. At mortgage firms the cost was $4.20 and at banks the cost was $4.36.
Overall the cost is up almost 20% in the U.S., according to the LexisNexis Risk Solutions 2022 True Cost of Fraud study.
The cost of fraud is related to labor and investigation and fees incurred during the application/underwriting/processing stages, legal fees and external recovery expenses.
The study also found that fraud attack volume continues to rise as criminals use stolen or fake identification to open new accounts. For mortgage institutions application fraud was also an issue.
The study, which surveyed about 500 risk and fraud executives in financial and lending companies in the U.S. and Canada, did not include insider or employee fraud.
Considering that about 6 million existing homes changed hands this year and another 685,000 new homes were sold, the money lost to fraud adds up. Some speculate that the losses are in the billions of dollars.
And that leads to a second question: why is it happening?
DOWNSIDE OF ONLINE LENDING
The answer, in the view of the folks at LexisNexis, lies in what has become a new favorite among lenders for its money-saving capabilities, and among younger buyers, many of whom prefer on-line transactions.
Analysts said that customers want “a friction-less online experience in which companies they frequent recognize them, no matter the device they are using and expect access, convenience and consistency across all touch points throughout the process of buying a home.”
Relying on the responses of more than 500 risk and fraud executives in the mortgage industry, analysts determined that the bulk cost of fraud comes from consumers trying to buy a home through online and mobile transactions. Direct-to-consumer and correspondent lending are the leading transaction types and they also lead the way in the largest portion of fraud costs and average monthly attacks. Respondents reported that a sizable portion of fraud losses in the depository sector also came from construction-related loans.
Dawn Hill, director of real estate fraud and identity strategy at LexisNexis Risk Solutions, said that that while you can’t predict the future, it’s safe to say that the movement toward online and mobile transactions will continue to grow and that mortgage originators, as well as servicers and title companies will need to protect against fraud. Firms using a multi-layered solutions can lower fraud costs while improving identity verification and adding AI and machine learning also help, according to analysts.
“A successful fraud detection and prevention approach involves an integration of technology, cybersecurity and digital experience operations in a way that addresses the unique risks from different transaction channels and payment methods, as well as by individuals and types of transactions,” Hill said in the report.
Direct-to-consumer and correspondent lending are the leading transaction types and they also lead the way in the largest portion of fraud costs and average monthly attacks.
The challenge, in Hill’s view, is identification verification, which is contributing to customer friction, the inability to detect malicious bots and being able to distinguish between legitimate and fake customers.
But, Hill said, those who do engage in best practices can lower the cost and volume of successful fraud while improving their ID verification and fraud detection effectiveness.
That doesn’t mean that LexisNexis analysts expect the issue to go away anytime soon though, as the pandemic and a growing mobile channel have added to the increased risk of fraud, especially with call-center and phone-based interactions.
“Fraudsters are always one step ahead,” Hill said. “They’re financially motivated.”
They also warn that businesses that don’t embrace changing technology will be left behind and that customer expectations must be balanced with fraud protection, as cybercriminals continue to become more sophisticated in their use of bots and synthetic identities.
“It would behoove the industry to think like fraudsters,” Hill said.
The growing occurrences of global data breaches doesn’t help, as criminals use the dark web to get the information they need to masquerade as customers and commit fraud.
“Lenders need to focus on finding it up front. “You spend money at the application stage,” she said, adding that it could be something as simple as checking how long an email address has been in existence.
Corelogic, a fintech company that provides financial, property and consumer information to the mortgage industry, has its own take on the issue of fraud.
In its most recent annual fraud risk report, released in September, analysts there said that, while overall fraud is down 7.5% year over year (company officials said some of the decrease may be due to a change in the way the company analyzes statistics) they expect it to go up in the future.
But there were categories that experienced increases year over year.
The included: income fraud risk, up 27.3%; property fraud risk, up 22.6%; ID fraud risk, up 4.7%; and transaction fraud risk, up 1.6%.
According to the Corelogic report, industry experts say their number one concern going forward is income fraud and that they are including insiders, such as loan officers and mortgage brokers who could alter documents in order to process a mortgage as part of that concern.
Analysts said that income sources have no definitive source of truth and that the rise in remote work has made that even more difficult.
“There is no simple solution to income fraud, but we continue to build our techniques and data to identify high-risk situations,” the report said.
According to the report, analysts are also keeping a close eye on increased risk in multi-family mortgage applications, and noted that the risk of fraud is 4 times higher than for single-family homes.
Mortgage rates also drive different types of fraud, according to Bridget Berg, a principal at Corelogic and one of the leading fraud risk experts in the mortgage field.
When rates are low, occupancy fraud is more prevelant.
And when they go up and people can’t sell their homes, Berg said, that’s when more serious fraud occurs, such as straw buyers, or a lender taking advantage of someone who isn’t financially literate.
Another problem, she said, is that fraud doesn’t alway present itself immediately.
“It could be a year or two before you identify fraud,” she said.
Berg said the most important things for lenders to remember is that the tone starts at the top and not to rely on process over common sense.
“Do the smell test,” Berg said. “Does this transaction make sense?”
WHY LENDERS SHOULD CARE, BESIDES THE MONEY
Kip Mendrygal is a Dallas-based attorney who speaks frequently on the subject of mortgage fraud. A partner at Locke Lord, Mendrygal specializes in white collar investigations and defense involving public companies and financial institutions, corporate executives and high profile individuals involved in a variety of highly sensitive civil, criminal and regulatory investigations.
He is often called on to speak to groups about what happens when fraud investigations go bad.
“These investigations can whip-saw,” Medrygal said, “and companies can find themselves under investigation and getting charged.”
Mendrygal said it’s typical to expect that some borrowers lie, but added that some lenders do too.
“They know or they turned a blind eye and made it last longer,” he said.
Next thing you know, Mendrygal said, is the company that reported the fraud is under investigation for not being diligent.
That’s where he comes in.
“I help the mortgage industry design compliance programs,” he said. “I tell them do what you do with more force because when the crap hits the fan you need to show you bought in.”
Others warn against trying to be the good guy who gets a mortgage application over the finish line because a borrower was so close and seemed like a worthy risk.
If or when it goes bad, experts say, that borrower will point the finger at the good guy and say they never should have been qualified for the loan.