Five More Mortgage Fraud Schemes

Mortgage fraudsters are dedicated to their craft.

August 24, 2010
KEYWORDS fraud , mortgage
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There are a variety of schemes by which mortgage fraud can take place—sometimes involving staff inside the financial institution.

The Federal Financial Institutions Examination Council warns financial institutions to be on the watch for these common mortgage schemes:

1. Loan modification and refinance

This scheme occurs when a borrower submits false income information and/or false credit reports to persuade the financial institution to modify or refinance the loan on more favorable terms.

Best practices for prevention:

  • Underwrite all modifications. Ensure that modification files include documentation of hardship; the borrower’s willingness and ability to continue to pay debt and retain property; independent verification of employment, income, and other information; a new credit report; an analysis of sustainability of performance post-modification; and referral to a reputable credit counseling service.
  • Establish legal department protocol for review of the modification agreement;
  • Establish strong post-modification loan performance reports; and
  • Ensure proper accounting for delinquencies, troubled debt restructuring, charge-offs, and the allowance for loan and lease losses.

2. Mortgage servicing fraud

This fraud is perpetrated by the loan servicer, and generally involves the diversion or misuse of loan payments, proceeds from loan prepayments, and/or escrow funds for the benefit of the service provider.

Best practices for prevention:

  • Perform annual on-site review of loan files and servicer reports;
  • Establish internal audit reviews that include a sampling of loans handled by each servicer and verify collateral lien status for such loans;
  • Obtain and reconcile reports to document and verify total amount of loans serviced, payments and allocation, servicer fees, delinquent loans, etc.;
  • Verify receipt of funds on loans authorized for sale by a servicer;
  • Review, at least annually, the servicer’s registration status, licensing status, financial health and capability, and compliance with the servicing contract/agreement;
  • Establish a contingency plan should the servicer be unable to perform its contractual obligations;
  • Verify current insurance policies and amounts of coverage (flood and hazard);
  • Verify payment of property taxes;
  • Establish appropriate limitations on access to internal bank systems and records;
  • Establish appropriate conflict of interest policies prohibiting compensation/payments from service providers to financial institution employees; and
  • Obtain and review samples of original payment documents to verify that the borrower is the source of payments and that funds from other sources are not being used to make payments or hide delinquencies.

Next: Property flip fraud

Property Flipping

Mortgage Loan Broker
August 27, 2011 11:50 pm
Unfortunately, this happens all too often. Borrowers, buyers and sellers must always be aware of with whom they do business.

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