The mortgage lending industry is increasingly plagued by fraud, with a growing number of borrowers falsifying bank statements, income-tax returns, credit scores and declarations of debt in order to qualify for a mortgage or get lower interest rates.
In the first quarter of this year, U.S. banks reported 35 percent more mortgage fraud than in the same period last year, according to a report published this month by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network.
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FinCEN, whose sole purpose is to safeguard the financial system from crime, started investigating mortgage fraud after noticing a significant rise in the number of “suspicious activity reports” from banks concerning mortgage fraud, said spokeswoman Candice Pratsch.
After reviewing a sample of 1,054 such reports, FinCEN found that 66 percent of the reported mortgage fraud involved the use of false statements by prospective homebuyers.
Such statements are not an uncommon occurrence, said Peter Microulis, manager of quality control and regulatory compliance for Advanced Financial Solutions, a direct retail mortgage lender in Newport.
“Unfortunately, in a large majority of those situations, the fraud is never detected,” he said.
The type of fraud to which Microulis is referring is called “fraud for loan,” he said. It occurs when people provide false information, such as exaggerating their income or assets, in order to get approved for a loan. Often, if their loan is approved, the fraud goes undetected.
“Fraud for profit” – the second type mentioned in the FinCEN report – usually involves more intricate schemes, such as appraisal fraud, use of straw buyers or identity theft. Identity fraud and identity theft were involved in 27 percent of the reports the agency reviewed.
Microulis said AFS doesn’t experience the sort of “fraud for profit” identified in the FinCEN report, but he’s not surprised by the news. The lending company does occasionally find some “fraud for loan” cases, he said, but he hasn’t noticed any increase in their number or frequency.
“From what we’ve noticed, the levels have been relatively consistent,” Microulis said.
BankNewport also says it hasn’t noticed an increase in mortgage fraud.
“We do not have a history of having mortgage fraud,” said Wayne Long, senior vice president of residential mortgage lending at BankNewport. “The majority of our loans are fully documented files. … We verify income. We verify employment. We verify reserves.”
Long said most of BankNewport’s loans remain in the bank’s portfolio, so they are thoroughly documented.
Stephen Bessette, a director at the Rhode Island Mortgage Bankers Association, said he can’t remember any major cases of mortgage fraud in the state. Bessette is also executive vice president of consumer lending at The Washington Trust Co.
“I’ve been here 10 years at this bank, and we haven’t had any [mortgage fraud],” he said.
But that doesn’t mean Rhode Island banks and lending institutions won’t feel the effects of the nationwide trend.
Microulis said he predicts the industry will see an increase in foreclosures as a result of the increase in fraudulent activity.
The popularity of unconventional loans that allow borrowers to obtain mortgages with less documentation might also contribute to the number of foreclosures, he said, because they allow people with marginal credit to get approved for financing.
“There are some loan programs that allow people to apply for a loan and just state what their income is,” Microulis noted. Dubbed “stated income” loans, they don’t require borrowers to provide any income tax returns or other proof of income, he said.
“Historically used for self-employed people, we have noticed the delinquency rates among [stated income loans] are a little higher,” Microulis said.
Microulis said he’s seen more varieties of unconventional loan products in recent years. “None were originally intended to be anything less than a good loan product,” he said. “But they are probably more susceptible to abuse.”
Unconventional loans can inadvertently facilitate fraud, according to the FinCEN report. So can the growing use of the Internet and the telephone to process mortgage loan applications.
“The best way to prevent fraud is to have competent and realistic underwriting guidelines and apply them uniformly,” Microulis said. “If your underwriting is consistent and in-depth, most of the times you will find those inconsistencies.”
