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

First American Data Solutions recently released a report indicating that mortgage fraud has increased almost 6% in the first quarter.  The rise in fraud is tied to the recent shift from refinance business to primarily purchase money mortgages.  As everyone knows the purchase market is much riskier than rate and term refinance transactions. Whenever the market adjusts, rates increase, and home sales spike, then fraud rears its ugly head.

What type of fraud are First American and others seeing? : Unfortunately the same kind of fraud that has plagued the mortgage industry for years.  These schemes continue seemingly impervious to the adoption of front end borrower fraud deterrence and detection tools.  It seems as long as there is money to be made, criminal schemers, working with or fooling loan originators, have an unending stream of weapons available to cause havoc within a mortgage lender’s operations.

Fraud generally takes two forms: fraud for housing and fraud for profit. Fraud for housing involves efforts by an applicant with or without loan originator assistance, to fudge income, asset and employment numbers to qualify for a home purchase they otherwise would not be able to afford.  The applicant intends to occupy the premises and pay the mortgage.  Fraud for profit is far more insidious and usually is coordinated in an organized conspiracy involving multiple parties that may include a seller, buyer, settlement agent, attorney, real estate agent, appraiser and others.  Motives are typically foreclosure avoidance and outright intent to steal the mortgage proceeds.

According to the FBI the most prevalent schemes they see, which have not changed in a decade, include: loan origination fraud, foreclosure rescue fraud, equity skimming, short sale fraud, illegal flipping, builder bailouts and straw buyers. At the lender level these schemes are fueled by income and employment misrepresentation, occupancy fraud, undisclosed transactions, undisclosed third parties, appraisal inflation, title policy substitution (fraudulent removal of actual liens) and wire fraud.

They key for lenders?:  Training, diligence, full-time quality control staff, pre and post-closing audits, and well documented accountability for aiding, participating or willfully ignoring fraud at any stage of the mortgage process.

Mortgage fraud is not a victimless crime.  It causes financial harm for lenders through non-saleable loans, loan repurchases, first and early payment defaults, and foreclosure costs.  For honest consumers it can mean delays, transactions unwound, clouds on title, as well as legal fees and expenses.  As costs increase for a lender, consumers may also feel those through higher rates, higher loan costs and more stringent underwriting guidelines.

At Secure Insight we have a motto, “Trust, but Verify.” Feel free to use it!