or "Pay attention! You're in the best position to prevent mortgage fraud!!" (part 2...borrowers are people)

Series overview:

part 1 – prevention is people-focused

part 2 – borrowers are people

part 3 – loan officers are people, too

Part 2 – Borrowers are People

We’ve discussed how fraud prevention is primarily people-focused. Now we’re going to drill down and concentrate on the most important people in the mortgage process, the borrowers (aka your customers).

The Borrower

For your loan applicant (and we’re not talking about a professional fraudster here), they’re applying to either purchase a home or refinance a current mortgage. There can be a variety of reasons behind that – independence, starting a new family, recovering from divorce, needing a bigger house, consolidating and paying off debt, reducing their current mortgage payments, creating an investment (a rental), wanting a second home…the list goes on. But at the core, the borrower simply wants the loan to get approved.

The borrower doesn’t know or understand all the intricacies involved in the underwriting process nor the specific loan product they’re applying for; all they know is that the process is complicated, involves a lot of paper, and they’re trusting their loan officer to guide them through it all. They are probably not aware of the maximum seller contributions allowed, the underwriting difference between a gift and a loan for the down payment, and what DTI even means.

However, they know they need decent credit, they need cash to close the loan, and they need to be able to make their new payments. It’s here where the borrower may be tempted to commit mortgage fraud and where you, as a loan officer or manager of a team of loan officers, need to be vigilant.

Incentive

So let’s look at incentive. Given the variety of reasons a borrower may be applying for a loan, it’s easy to imagine multiple scenarios where a borrower can become desperate. Whether it’s an emotional need to change housing, a financial need to reduce debt, or an ego-driven need to keep up with the Joneses, a desperate borrower is more willing to do whatever is necessary to get the loan. You need to be on the lookout for this desperation and find ways to help the borrower legitimately address any stumbling blocks that might move them from desperation to criminal activity.

If credit is an issue, help them avoid fly-by-night credit repair schemes and fraudulent CPNs (credit privacy numbers) and encourage alternatives such as debt counseling, paying down loans to 75% or 50% of their credit limits, requesting the credit bureaus remove old tradelines, and even adding a stronger co-borrower to the application. If cash-to-close is a challenge, help them with community-aid or affordable-housing loan products or gifts from family members; steer them clear of side agreements with the seller or undisclosed loans. If their ability to make payments is going to be a challenge, perhaps work with them on a more appropriate loan product or loan size, and ensure they are not hiding debts just to qualify (other property, undisclosed credit cards, etc.).

The key here is to listen well, and to ask detailed and direct questions. You don’t serve your borrower by barely talking to them or by ignoring signs of desperation that may lead them to commit fraud, nor do you serve yourself and your business. If you sense desperation in your borrower, dig in fast and deep so you can help them, honestly and legitimately. Building a good relationship with your borrower is essential to this.

Rationalization

As humans, we have an amazing capacity to engage in self-deception to convince ourselves to do what we know is wrong. These rationalizations flow from our incentives for taking action in the first place, and as noted above, a borrower may have real-life problems pushing them to make such rationalizations. Like all good lies, their self-argument contains some truth in it (usually the current situation the borrower is trying to resolve) along with some false information (usually the part explaining why it’s okay to commit the crime). Together, these are used as a justification for fraud.

For example, “my spouse just left me and I need a new place to live because I can’t afford the current payments” (truth, current situation), “so it’s okay if I don’t mention the extra car payment I just took on” (false). Or, “I’m only a little bit short on my ability to pay” (truth, current situation), “but the loan is a stated income so that means I can state what I should be earning or just stretch the truth a bit there” (false). Or, “I’d never get this deal if the seller wasn’t my brother-in-law” (truth, current situation), “so no one needs to know it’s a sweetheart deal (aka non-arms-length) with a side agreement” (false).

As a loan originator or manager of loan originators, you’re not likely going to hear these rationalizations out loud. But if you’ve built a solid relationship with your borrower, you will be able to pick up clues that tell you something is going on. How? Again, a listening ear and direct questions – essential parts of a good relationship – will be tremendously helpful in addressing these kinds of arguments before they take root in a borrower’s mind.

And don’t say you don’t know how to do that – you’re in sales, for goodness sake! You’ve been taught how to read people and motivate them to make certain decisions. The key is to use those skills to pay attention and help prevent a borrower from rationalizing fraud.

(…but is that my job?)

“But wait,” I hear you counter, “my job is not to be the borrower’s therapist but to sell them a loan product for whatever their reasons.” True enough in part, I reply, but not the whole truth. (The careful reader will notice this counter is itself a rationalization for not building a relationship…and, quite possibly, for negligence.)

Remember, as a loan originator or branch manager, duly licensed and carrying your NMLS number, you have an ethical duty to ensure your borrower is obtaining a loan honestly, in accordance with the loan product requirements, and is one they can repay. And in some states, that duty is more than ethical – you may even have a legal duty to determine a borrower’s ability to repay, a legal duty investigate, or even a legal duty to file a Suspicious Activity Report (SAR) with FinCEN (make sure you’re aware of the applicable laws in your state!). But even if you set aside the ethical and legal guidelines, paying attention and attempting to reduce or eliminate rationalizations for committing fraud is just good business all the way around.

Capability

The last people-aspect of the fraud diamond is the ability to carry out the fraud. In a digital age where anyone can purchase false paystubs or other mortgage-related verifications online very easily, this becomes less of a capability issue for borrowers and more of a knowledge-based concern. What exactly do they need to provide to get the loan approved? What is the underwriter going to need? While a borrower who has been around the block a few times may be able to answer some of those questions, in truth, this is where the defrauding borrower is usually aided by a willing loan originator or processor. Which leads us to the next section, part 3…

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About the Author:

Kevin Danford is a former FBI agent, experienced mortgage insider and Subject Matter Expert (SME) specializing in combating mortgage fraud (KD Mortgage Fraud Consulting). The Rogues Gallery on his website contains just a few of his exciting FBI cases. He can be reached here on LinkedIn, by email at [email protected], or directly at (703) 403-6736.