SVB Failure Starts Aggressive Regulation Talk in Washington, IMBs Take NoteFBI Fraud Alert for Lenders on Wire Fraud Scams

February 21, 2018
It did not take long after the Silicon Valley Bank failure for politicians in Washington to rush to the next available microphone and lament the “loosening of bank regulations”. Instinctively the finger pointing began, and in many quarters ended up in the direction of the prior administration’s policy to generally roll back stringent business regulations and allow free market decisions to govern various industries. Chief among the complainants (no pun intended) was Sen Elizabeth Warren, who emerged out of the 2008 crisis as an architect and advocate for the Wall Street Reform Act and the creation of the vaunted Consumer Financial Protection Bureau ( CFPB), which she briefly directed. Just yesterday in DC’s The Hill publication, Sen Warren was reported as blaming the the collapse of Silicon Valley Bank on Republicans in Congress, which in 2018 helped pass a law to ease bank regulations put in place following the 2008 financial crisis. “No one should be mistaken about what unfolded over the past few days in the U.S. banking system: These recent bank failures are the direct result of leaders in Washington weakening the financial rules,” Warren is quoted as saying. According to The Hill piece, Warren, who voted against the 2018 bank deregulation bill, said that the crises would have been avoided if the banks were required to hold more liquid assets because the bill exempted banks with less than $250 billion in assets from rigorous Fed stress tests. Warren and other Democrats say the old rules could have caught the issues at SVB sooner. Given that politicians generally “never let a crisis go to waste,” many now suspect that the banking industry is about to be slammed with heightened regulatory scrutiny, tighter operational rules, more audits and exams, and larger and very public fines, penalties and consent orders. What does this mean for independent mortgage bankers (IMBs)? It means that they have to get back to the compliance mindset they were frightened into adopting between 2008 and 2018, and before the bottoming out of interest rates led everyone to believe that easy money was here to stay and that self-regulation meant hiring more loan officers. Keep those risk management officers and compliance directors close by folks, we are all in for a bumpy ride on the regulatory

Wells Fargo Bank and the Federal Bureau of Investigation (FBI) recently issued separate alerts throughout the industry regarding settlement agent wire fraud.  The reports, circulated in September, provided details of a widespread scam whereby criminals are hacking attorney and title agent email addresses and changing wire instructions prior to closing.  When the new instructions are not validated the criminals make off with the mortgage proceeds.

While most lenders request written wiring instructions, whether to satisfy warehouse bank requirements or their own internal risk management policies, very few verify them.  The assumption is made that if the instructions are being sent from the email address of an attorney or title company then they must be valid.  Some lenders are taking an extra step and checking the ABA routing number and bank account number with the Federal Reserve website to verify that the account is actually at the bank indicated.  However these processes are not a foolproof method to avoid the type of fraud warned of by federal law enforcement.

The most efficient way to protect your bank from wire fraud through this latest criminal scheme is to only wire funds to a verified account.  Verifying an account means more than simply checking the Federal Reserve records.  It requires true verification, at the source, that (a) the account is truly a trust account and not a business or personal account, (b) the account holder and authorized signers match the company owners and, (c) the account is in good standing and not fraught with bounced checks or fraud alerts.  Once the account is directly verified, then a bank should never wire funds to any other trust account associated with that settlement professional. In the event an account is changed (which does occur occasionally) then the new account must be verified prior to be used in conjunction with a closing.

At Secure Insight we have always prided ourselves in building something more than a “check the box” risk management platform.  Built with the input of risk experts at Lloyds, the Secure Insight platform has always included a direct at the source trust account verification and ongoing monitoring component.  We are proud to say that none of our bank clients would ever wire funds for any reason to an account that has not been independently verified by our analysts.  Perhaps this is one reason why after four years, the vetting of more than 25,000 settlement agents nationwide, and more than 750,000 closed transactions, not one of our clients has ever experienced a loss from escrow and settlement fraud.

Whether you choose to hire a firm such as ours to manage the risk, or you are committed to building, developing and managing your own process, one thing is certain.  You should never wire mortgage proceeds to an account that has not been truly vetted and verified.  In addition, any last minute requests to change wiring instructions should cause an immediate red flag alert, and a closing delayed until the change can be determined to be legitimate.



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