Welcome to the September edition of Fighting Fraud with Frank. As we settle into our fall routines and gear up for end of the year conferences and 2008 forecasts, I’m optimistic about technology’s role in tackling fraud. Despite government and industry predictions about the anticipated growth of mortgage fraud, I’m seeing first hand the benefits of lenders contributing their data to a mortgage fraud consortium to uncover patterns of fraud.

For years, many sectors of the financial services industry have relied on sharing information on fraud patterns and trends to detect fraud earlier. Banks, insurance companies, cellular service providers and credit card companies have each contributed their data into consortiums in an effort to find those fraudsters that reuse information and data over and over again in their schemes. By pooling data, these companies have been able to get ahead of the fraud schemes that are being perpetrated against them. Similarly, mortgage companies are increasingly relying on this data sharing approach to help them identify some of the largest and most egregious fraud schemes as early as possible.

A mortgage fraud data consortium effort is now underway for mortgage lenders and investment banks. The consortium enables them to pool their information to help detect mortgage fraud pre-funding, before loans are purchased on the secondary market, and in portfolio reviews. The consortium acts similarly to a credit bureau or other data aggregator providing a central repository of information. In much the same way, lenders can submit their data relating to fraud trends to enable fraud scoring on future mortgage applications and loans.

In the mortgage fraud consortium, lenders and investment banks submit their origination information on all applications and loans, as well as data on loan performance, indicating loans that performed well, defaulted or had fraudulent misrepresentations. This data, aggregated across many institutions, is used to build analytic models to then be used by consortium members to fight fraud. In addition to all application and performance data, the consortium includes broker information, appraiser data and loan program details.

Why Should Lenders Join the Mortgage Fraud Consortium Now?

There are four key benefits to being a member of a Mortgage Fraud Consortium:

1. Access to predictive analytic models. These pattern recognition models are built on the robust consortium data from numerous lenders and investment banks and are highly accurate in predicting significant misrepresentations that would result in losses if the loan is booked or purchased on the secondary market. The BasePoint Analytic’s Mortgage Fraud Consortium currently contains information from over four million loans, 160,000 brokers and 135,000 appraisers, and is growing on a monthly basis. Having this depth of information gives the ability to very quickly understand how different parties involved in a transaction might perform with other lenders, or be represented in the loan.



2. Ability to create statistical norms and measure deviations. Lenders in the fraud consortium benefit from sharing information on applicants and creating statistical norms related to fraud that help them easily and quantifiably understand normal versus abnormal information. When members of the consortium aggregate data, they have a larger pool with which to compare average values and identify deviations of these statistical norms to help them prevent potential mortgage fraud.



3. Models built on more data are more robust. When building an analytic model based on five or 10 million loans instead of 50,000 loans, more patterns of fraud are found. This translates into more powerful detection capability. To date, the Mortgage Fraud Consortium contains over 35,000 instances of confirmed fraud and non-performing loans.



4. Ability to exploit links and anomalies. Consortium members can take advantage of link analysis to effectively identify mortgage fraud. Link analysis is the ability to detect a piece of information that has been involved with several fraudulent loans. The ability to create these links in the data becomes more robust as lenders and investment banks share data through the consortium.

Why is an Independent Data Aggregator Important?

If lenders were to attempt to share data on their own, without an independent data aggregator, there are some challenges, mainly relating to collecting data and privacy. These include:

• Lenders and investment banks may not know which data is most important to collect to predict and identify fraud, and how long it should be stored to build the most robust predictive model.



• Mortgage lenders haven’t always collected and stored historical data digitally since it has traditionally been a paper-based environment.



• Lenders and investment banks are hesitant to share sensitive data with each other directly, since information such as their number of fraudulent and defaulted loans is proprietary.



• Customer data needs to be safeguarded with adequate security protections.

These challenges are quickly alleviated by working with an independent third-party to build and manage the consortium. By doing so, lenders and investment banks quickly gain the ability to detect fraud early because they can respond to trends that are obvious in the consortium, but not in their data alone.

What are your thoughts? I invite you to email me your comments about the Mortgage Fraud Consortium. You may email me directly at frank@basepointanalytics.com.

Founded by BasePoint Analytics, Carlsbad, Calif., the BasePoint Mortgage Fraud Consortium has been active since 2005. More information about the Mortgage Fraud Consortium, predictive analytic technology or BasePoint Analytics can be found on our website.