Let's look at some of the "red flag" issues that might indicate mortgage fraud may be happening. Keep in mind that below is not a complete or detailed list. More information can be found on both government sites or by completing the online Mortgage Fraud course. And please also be aware...
Not every red flag contains fraud!
Our industry is full of talented, ethical, and professional individuals who would never stoop to committing fraud. So don't go on a witch hunt. Every individual you encounter does not intend to commit fraud.
Every file you review will not contain fraudulent documents.
The purpose of introducing these red flags is to help you become more alert to the widespread threat. Don't become paranoid. But don't let fraud and the people who commit fraud infect your organization with a lack of trust.
We will consider areas from which fraud may or may not originate under four categories:
- Applicants with an employer (company, government, etc.)
- Applicants who are self-employed
- Social Security number identity theft or fraud
- The details about the property in question
There are a number of red flags to look for in the loan package or the buyer's information.
The list that follows is not complete, but it is a start. Any or all of these items can point to fraud. You might find it helpful to print these red flag lists and post them prominently in the office. It is also a good idea to share these lists with those employees who are involved in any transaction.
HELPFUL HINT:If you make all borrowers sign a 4506-T at the loan application and inform them that your company will check the income information if the file is chosen for pre-funding quality control, a fraud most likely will not complete the transaction as is with you. This may help to deter some fraud before it starts. It may also help to prevent soft fraud by forcing a would-be-fraud to tell the truth about a particular issue in order to qualify to purchase the new home.
Red Flags for Employment
- Evidence of white-outs or alterations on Verification of employment, pay stub and/or W-2
- Squeezed-in numbers (a number being added to a space too small)
- Appearance that verification of employment form was hand carried rather than mailed (i.e., the document is not folded)
- Handwritten pay stubs or W-2 forms
- Income out of line with type of employment
- Business entity not registered or in good standing with the applicable regulatory agencies
- No prior year's earnings on Verification of employment
- Company name and/or employer name are not imprinted on pay stub
- Check stubs from a large employer are not preprinted
- Sequence of payroll check numbers do not correspond with the payroll dates
- Social security number is not consistent on pay stub and loan application
- FICA amounts are incorrect
- W-2 contains invalid employer identification number
Red Flags for Self-Employed Borrowers
- Tax returns not signed or dated by borrower
- Evidence of white-outs or alterations
- Borrower with substantial cash in bank reporting little or no interest income
- Tax computation does not agree with tax tables
- Address and/or profession does not agree with other information submitted on the loan application
- No estimated tax payments by self-employed borrower (Schedule SE required)
- Paid preparer signs taxpayers copy
Social Security Number Identity Theft or Fraud
While few future homeowners would dare use their social security number for more than tax or identification purposes, to the mortgage marauders, the social security number is one of the main tools in their tool box.
Signs someone may be using a false or invalid social security number to help them commit fraud:
- Is it a valid number issued by the Social Security Administration?
- How many different variations of the number are on the credit report?
- Does it match in all areas of the file?
- Is the issued number consistent with the location of issue and the borrower's place of residence?
- Where bad social security numbers originate:
- Transpose the numbers, intentionally or accidentally
- Use a deceased person's number
- Use children's or a minor's social security number
- Stolen data bases via identity theft
- Use a tax ID number
The Property as the Key to Fraud
The final category to consider for fraudulent activity is the information describing the property. In the real estate business and the mortgage loan business, the property is central to the transaction. There is significant opportunity to introduce fraudulent information and documents regarding the property itself.
- Comparable properties not verified as recorded (data source MLS, sales office, SREA, CMDC, real estate agent, etc.)
- Information blank borrower, client, occupant, etc.
- Ordered by a party to the transaction other than the originator (i.e., seller, buyer, real estate broker, etc.)
- Tenant shown to be occupant on owner-occupied loan
- Income approach not used on tenant occupied single-family residences
- Subject photographs not consistent with date of appraisal or other information within the report
- Photos do not match the description of the house
- Occupants are unknown
These are just a few of the areas where fraud can be detected. Next week we will discuss some prevention techniques for borrowers.
Click Here for more information on our recently updated Mortgage Fraud class online, available for Continuing Education credit in some states.