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Best Practices to Detect and Avoid Mortgage Fraud

How can you protect your organization from the risks and costs associated with mortgage fraud? Below are best practices compiled by our Financial Fraud Investigation Unit to help various mortgage professionals detect and effectively prevent fraud. One particular best practice that can be valuable to all mortgage professionals, regardless of the role they play in your organization, is to have robust operational controls and comprehensive policies and procedures regarding fraud prevention and detection.

Best practices for brokers and loan officers

  • Utilize only appraisers who have fully met state licensing and continuing education requirements, and have demonstrated their competency by maintaining high quality appraisal standards.
  • Do not accept complete loan packages from third-party sources. Independently verify the authenticity of loan documentation and data supplied through completed appraisals, credit reports, and loan applications.
  • Do not accept qualifying documentation that cannot be verified as coming directly from the borrower.
  • Except for a power-of-attorney used in a hardship or emergency situation, do not allow someone else to be the intermediary between you and the borrower. Take steps to verify the occupancy status, employment, and equity contribution of your borrower.
  • Be prepared to be held accountable for the contents of a loan file, including:
    • The sources and authenticity of all qualifying documentation
    • Representations made on the loan application
    • Transaction representations. For example, if the loan is presented as a refinance, does the borrower currently own the property?

Best practices for appraisers

  • Implement an adequate records retention policy to ensure accessibility to archived appraisal data and completed appraisal reports.
  • Discourage the practice of accepting appraisal orders from anyone other than the broker or lender.
  • Avoid the perception of impropriety by independently selecting comps.
  • Implement controls that provide strong governance and oversight of apprentices and trainees, and perform on-going quality control reviews of their appraisal work.
  • Independently verify the "owner of record" with a valid, executed instrument (i.e., executed HUD-1, executed warranty deed).
  • Disclose any discrepancies between what you report and what is shown in real estate and/or land records.
  • Have policies, procedures, and the adequate technology in place to protect your electronic signature from unauthorized use, and understand how to "lock" the final report prior to electronic delivery.
  • Report instances of identity theft to your licensing board or law enforcement.

Best practices for closing agents

  • Ensure that title records are thoroughly researched to verify and validate the owner(s) of record. For example, a red flag should occur if the transaction is presented as a refinance, but property records reflect that the borrower currently is not in title.
  • Employ best efforts to ensure that the source of a borrower's funds to close are fully disclosed and transparent, and that evidence supports that all funds required from the borrower were originated from the borrower and not another party.
  • Carefully scrutinize simultaneous closings with significant increases in value.
  • At closing, ensure that the borrower is fully aware of the details of the transaction.
  • Verify through the collection of supporting documentation that recipients of funds provided at closing are entitled to those proceeds. Account for all disbursements to ensure that the recipients of any funds were in fact entitled to those funds, especially lien holders.
  • "Mail away" closings should be handled by an authorized title agent from the appropriate jurisdiction.

Best practices for lenders

  • Report suspicions of fraudulent activity and all instances of fraud to Freddie Mac at (800) 4 FRAUD 8.
  • Know who you are doing business with by performing due diligence background checks on third-party originators, loan officers, net branch managers, and appraisers.
  • Implement a robust pre/post funding quality control program.
  • Provide closing agents and title companies with clear direction and greater responsibility to look for fraud. Don't issue cookie-cutter closing instructions.
  • Audit appraisers and their work product, and incorporate the proper control procedures for accepting appraisal reports.

Important Freddie Mac fraud prevention resources

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