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"Sometimes the best way to stop fraud is to simply call the borrower directly."

The simple phone call – it can unravel even the most sophisticated fraud scheme in less than 3 minutes, and it is amazingly cheap. Insurance companies use them to detect potential discrepancies on applications for auto insurance. Credit card companies have used them for years to verify confirmed and unconfirmed claims of fraud. Online merchants have relied on them to verify that they are not sending merchandise to a fraudster. And now, I believe the mortgage industry can leverage this technique to reduce billions in fraud loss exposure every year.

When is a fraud, a fraud?

Lenders are able to find quite a few discrepancies during a fraud investigation. However, even though a discrepancy in information may be found (such as the borrower is reporting an annual salary that is 25% higher than others for a similar occupation), the process of declaring that discrepancy an actual misrepresentation is not over. The underwriter must then make a judgment call to determine if the discrepancy is extreme. If it is, they may condition the loan for further documentation from the broker, or decline the loan outright. While this process may take anywhere from 30 minutes to 3 hours, in many cases the verification is not completed. If brokers fulfill the conditions, then the entire process can start over with another review.

With such a cumbersome and potentially disjointed process, it is understandable how fraud slips through. The process of classifying a mortgage as fraud is at best an educated opinion, but is rarely ever a proven fact.

Fraud verification calls reduce the need for judgment calls

It is clear that the fundamental fraud risk management issues for the mortgage industry are 1) the time consuming nature of analyzing loan files for fraud risk, and 2) the reliance on human judgment to classify a loan file as fraud. Performing a fraud verification call to a borrower helps a lender reduce the impact of these issues by getting borrowers to re-verify key pieces of information they supplied on the application. There are generally two ways that misrepresentations are exposed during verification calls:

1. Borrowers tell you information that doesn’t match the application, and
2. Borrowers hesitate, or can’t remember information.

Borrowers are often unknowing victims of the fraud themselves. They will answer the questions truthfully and provide the lender with accurate information. If the broker has changed information on the application without the borrower’s knowledge, these misrepresentations are often exposed immediately. This is particularly common in the area of income manipulation where brokers falsify the borrower’s income to fit the lender’s debt to income ratios.

A simple process

Fraud verification calls involve a few simple steps:

1. Choosing the highest risk applications for misrepresentation,
2. Placing a call to the borrower, and
3. Verifying key information about the borrower’s application with them on the phone.

Typically a lender will send no more than 5% of applications for a verification call. A phone call is placed to the borrower at the work phone number, and a few key questions are asked, such as:

1. We received an application for a mortgage loan for you. Can you verify the address of the property this loan is for?
2. Will you be moving into this property from your current address?
3. Can you confirm the name of your employer?
4. How long have you been employed there?
5. Can you provide me with your annual income?

The benefits of verification calls

The power of verification calls in preventing mortgage fraud is in the earliest stages of being discovered. While it is true that verification calls are quick, cheap and work well, additional side benefits are still emerging:

1. Verification calls offer definitive proof of fraud – Lenders are finding that they can decline or condition a loan in minutes versus a long investigation process.
2. Verification calls protect borrowers - Verification calls offer a lender another layer of ensuring that borrowers are not victims of identity theft or predatory lending from a dishonest broker.
3. Verification calls can be expanded to include affordability education - Lenders are under increasing pressure to ensure that they are informing borrowers of the affordability of the loan program. Verification calls provide them direct contact with borrowers prior to funding the loan.

Verification calls reduce defaults

Certain lenders’ studies have definitively shown that verification calls placed with borrowers prior to closing reduce loan defaults.

Author

Frank McKenna is Co-founder and Chief Fraud Strategist for BasePoint Analytics based in Carlsbad, CA. He may be reached at (760) 602-4971 x104 or via email at FMcKenna@BasePointAnalytics.com

Frank McKenna, Co-founder and Chief Fraud Strategist of BasePoint Analytics

Frank helped develop and introduce advanced predictive technology to detect mortgage fraud. Frank's vast experience in fraud management has enabled him to identify unique and effective tools to manage lender risk through pattern analysis and evaluating other parties in the transaction, such as mortgage brokers.

Additional Information

Ask Frank

Send your questions, comments, and/or ideas for future discussion topics to Frank.

*Content in this newsletter was pulled from the May 2008 issue of Mortgage Banking. See the full article at You Had Me at 'Hello'