Serial Loan Level Fraud Hurts the Mortgage Industry
November 16, 2016
We hear plenty about big fraud schemes that capture the headlines.
But often the most pervasive and costliest mortgage fraud starts with small omissions and fabrications that show up on one borrower loan after another.
Recently, we've noticed several cases of what we call serial loan level misrepresentation (misrep), which occurs when loan officers and/or real estate agents misstate facts on the loan application and/or fabricate documents to support those misstatements.
Three Examples of Serial Loan Level Misrepresentation
By omitting and fabricating essential information, fraudsters are hoping to qualify borrowers for loans they wouldn't normally get. How do they do it? Consider these three examples:
A borrower's employment information is changed to reflect an incorrect employment period, a change in employment status from part-time to full-time, a fake promotion, or the fact that the borrower was never employed at all. Sometimes, the fake "employer" is engaged in the fraud, provides false employment verification, sets up a fake company website or Facebook page, and may even have someone answer a fake work phone number to confirm employment. We're seeing much more sophisticated executions of this kind of fraud than we've seen in the past.
A borrower's contribution comes from gift funds. One of our most recent investigations shows that the borrower's "relative" providing the gift funds isn't related to the borrower, but may be related to another participant in the origination (e.g. real estate agent, loan officer, etc.). A number of Freddie Mac Seller/Servicers have reported this to our fraud team.
- Multiple false employers are tied to the same address. For example, all of the investigated loans come from the same loan officer or the borrowers are all represented by the same real estate agent.
"These types of schemes result in real financial losses for our customers and Freddie Mac, and also negatively impact the perception of our industry," said Chris Mock, Freddie Mac's Vice President of Quality Control and Customer Eligibility.
And while all borrowers are susceptible to misrep, history shows us that first-time and affordable lending borrowers are more susceptible to this type of fraud. They're often novices to mortgage lending and can be taken advantage of more easily by an unscrupulous mortgage or real estate professional.
The good news is that we're getting better at busting fraudsters for two reasons:
- Freddie Mac is receiving a richer set of data from our lenders than before. This allows us to more quickly identify the rogue counterparties we're actively looking to catch.
- Our lending partners have fraud on their radar. They're following our Guide requirements and best practices for fraud management and reporting.
International Fraud Awareness Week
"Freddie Mac is proud to acknowledge International Fraud Awareness Week, which runs from November 13-19," says Joan Ferenczy, Vice President of Enterprise Fraud Risk. "Our team stands with our customers in fighting fraud together. Early detection is key to stopping fraud before perpetrators can get away with it."
For More Information
- Read the Single-Family mortgage fraud mitigation best practices document and mortgage screening checklist.
- Visit the Freddie Mac fraud prevention web page and share our updated resources with appropriate members within your organization.
- Don't miss our articles on rising incidences of affinity fraud and investment property schemes, both from earlier this year.
- Refer to Single-Family Seller/Servicer Guide Chapters 3100 and 3200 for our complete requirements on fraud prevention, detection and reporting.
- Contact us immediately if you suspect fraud related to any loans we're working on together. Call (800)-4FRAUD8 or email Mortgage Fraud Reporting.