Identity Theft Prevention: How to Catch a Thief

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Here are four scenarios involving identity theft that mortgage originators encounter from time to time. Read them and then keep them in mind as I discuss how to ask for additional information in order to prevent identity theft.

1.       A law enforcement report containing detailed information about the identity theft and the signature, badge number, or other identification information of the individual law enforcement official taking the report should be sufficient on face value to support a victim’s request.

Question: Without an identifiable concern, such as an indication that the report was fraudulent, would it be reasonable for an information furnisher or Consumer Reporting Agency (CRA) to request additional information or documentation?

Answer: It would not be reasonable.

2.       A consumer might provide a law enforcement report similar to the above report, but certain important information such as the consumer’s date of birth or Social Security number may be missing because the consumer chose not to provide it.

Question: The information furnisher or CRA could accept this report, but would it be reasonable to require that the consumer provide the missing information?

Answer: It would be reasonable.

3.       A consumer might provide a law enforcement report generated by an automated system with a simple allegation that an identity theft occurred to support a request for a tradeline block or cessation of information furnishing.

Question: Would it be reasonable for an information furnisher or CRA to ask that the consumer fill out and have notarized the Commission’s ID Theft Affidavit or a similar form and provide some form of identification documentation?

Answer: It would be reasonable.

4.       A consumer might provide a law enforcement report generated by an automated system with a simple allegation that an identity theft occurred to support a request for an extended fraud alert.

Question: Would it be reasonable for a consumer reporting agency to require additional documentation or information, such as a notarized affidavit?

Answer: It would not be reasonable.

In these scenarios, a financial institution should be responsive in accordance with certain guidelines. Specificity of action must be appropriate, reasonable and proportional to the challenge. However, total reliance on the CRA is inappropriate.

Credit Committees: Central Hub of Mortgage Banking

Jonathan Foxx, PhD, MBA

Chairman & Managing Director

Many clients have credit risk management committees, sometimes referred to as loan committees, lending committees, or credit committees. Let’s just call them “credit committees” or, for the purposes of this article, “Committees.” For small mortgage lenders, the Committees wind up consisting of the owner and perhaps a second company official. Howsoever this internal entity is configured, it is very important to ensure continuity between the origination process flow and, where possible, the interaction with a loan committee that sets policy standards and, as needed, makes decisions on whether to approve a risky loan transaction.

When we are retained by a client to review its departments and functions, for instance to conduct an internal audit or a GSE readiness audit – one of the factors we consider is the lending function itself. This activity is in fact actually distributed over many departments. But the loan flow process must come under a set of review criteria which, when challenged, often requires resolution by a committee constituted to manage the loan transaction’s risk.

First and foremost, it is important to emphasize that an institution’s quality control, compliance, and audit procedures should focus on mortgage lending activities that pose high risk. Controls to monitor compliance with underwriting standards and exceptions to those standards are especially important.

To break this down further, the quality control function should regularly review a sample of loans from all origination channels. A representative sample of underwriters should be subject to quality control auditing in order to confirm that policies are being followed. When control systems or operating practices are found deficient, business-line managers should be held accountable for correcting deficiencies in a timely manner. This means, in effect, that the deficiency should be identified, mitigated through system and training solutions, monitored, and periodically tested.

Since some loans permit a borrower to defer principal and, in some cases, interest payments for extended periods, institutions should have strong controls over accruals, customer service and collections. Servicing must be an intrinsic part of the loan committee’s considerations. The exceptions made by servicing and collections personnel should be carefully monitored to confirm that practices such as re-aging, payment deferrals, and loan modifications are not inadvertently increasing risk. One suggestion would be to have servicing and collection personnel involved in the Committee. At the very least, servicing should be informed of credit decisions that affect its purview. Customer service and collections personnel should receive product-specific training on the features and potential customer issues with these products.

Mortgage Fraud Challenges: How to Catch a Crook

Jonathan Foxx

Chairman & Managing Director

Two of our Directors will be attending the MBA’s “Risk Management, QA & Fraud Prevention Forum,” held in Los Angeles, in September. Attending this venue will be Brandy George, who is the Executive Director of LCG Quality Control and Michael Pfeifer, who is a Director of Legal and Regulatory Compliance. I remember attending the first forum many years ago. The attendance was modest. Although risk management was strengthening, I felt the term risk management was much too broad, as it could be (and was) applied to many industries. So, I coined the term “Mortgage Risk Management” and it caught on! My view has been that mortgage banking poses a unique set of risks that require significant knowledge, experience, and expertise. Turns out, this insight has been reinforced over the years. Now, this event is highly attended and is brimming with new ways to handle quality assurance, mortgage fraud prevention, and risk management oversight.

As I contemplated this forthcoming conference, I thought of the difficulties that mortgage originators have in handling the challenges of mortgage fraud in particular. This is a nasty business and not for the faint hearted! When my firm conducts audits of the loan flow process, it is not unusual to find gaps – perhaps ‘chasms’ is a better word! – in a company’s procedures for managing mortgage fraud risk. It still surprises me, after so many decades in mortgage banking compliance and financial institution management, that the fraudsters seem to have no limit to their scheming, conniving, crafty, wily, and underhanded cunning. These guys are as slippery as a darkly oleaginous grease slick.

Maybe I can’t stop these swindlers and shysters from doing what they do, but I can let you know some of the lessons my firm, Lenders Compliance Group®, has learned in knowing how to identify and trap them. I may not have all the answers, but I sure do have a lot of experience in hooking the crook. So, come with me on a brief walk through the mortgage fraud maze, as I jot down some of my reflections, and perhaps you should consider using some of my ideas to fine-tune your own mortgage fraud prevention procedures.

Let’s start with a simple outline of what fraudsters do!

Committing Fraud

During the mortgage lending process, a fraudster is a person who knowingly does any of the following:

• Makes, uses, or facilitates any deliberate misstatement, misrepresentation, or omission with the intention that it be relied upon by a mortgage lender, borrower, or any other party to the mortgage lending process;
• Receives any proceeds or any other funds in connection with a closing involving mortgage fraud; or
• Files or causes to be filed with the county recorder, any document that contains a deliberate misstatement, misrepresentation, or omission.

In my view, there are two types of mortgage fraud: the first is fraud for property, and the second is fraud for profit.

Six Compliance Topics from Lenders about TRID

Over time TRID has settled in to a routine set of policies and procedures. Even so, some questions persist, and we are in a good position to know about these topics because we get inquiries from our many clients. Because of our clients’ inquiries, we are able often to know what regulatory compliance issues are most important in the loan origination and servicing processes. Our experts respond case-by-case, but the overall research is shared, as needed, with our clientele. Our collection of research is huge and we offer our knowledge, experience, and expertise to our clients in order to ensure that they receive the very best guidance – a commitment that Lenders Compliance Group is recognized for keeping!

In this outline, we provide six topics that have been raised several times over the last few years.

1. The Basics: Loans Subject to 12 CFR 1026.19(e) and (f)

The TRID rule consolidates four previous disclosures required under TILA and RESPA for closed-end credit transactions secured by real property into two forms:

-a Loan Estimate that must be delivered or placed in the mail no later than the third business day after receiving the consumer’s application, and

-a Closing Disclosure that must be provided to the consumer at least three business days prior to consummation.

The new disclosures apply to most closed-end consumer credit transactions secured by real property.

Credit extended to certain trusts for tax or estate planning purposes is not exempt from the TILA-RESPA rule.

However, some specific categories of loans are excluded from the rule. Specifically, the rule does not apply to home equity lines of credit (HELOCs), reverse mortgages, or mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land).

You may not use the new disclosures on applications received before August 1, 2015, and you may not use them after August 1, 2015, on loans listed above that are exempt. Therefore, you cannot use them on reverse mortgages or on loans for mobile homes not attached to real property.

You must use existing forms and follow the rules in 12 CFR 1026.18.

2. Timing for Delivery of the Loan Estimate

Generally, the creditor is responsible for ensuring that it delivers or places in the mail the Loan Estimate form no later than the third business day after receiving the consumer’s application and seven business days before the consummation of the loan.

If a mortgage broker receives a consumer’s application, the mortgage broker may provide the Loan Estimate to the consumer on the creditor’s behalf. [12 CFR 1026.19(e)(1)(ii)]

If the broker provides the Loan Estimate, it satisfies your obligation; however, you are still responsible for any errors or defects, and so third-party provider management is crucial.