Tag: mortgage fraud

Successful Risk Management Requires Proper Top-Down Governance

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Any organization seeking to adopt appropriate operational risk management policies and procedures must ensure that they have met the five step process to ensure success.  This process focuses on proper governance.  It is not enough to simply “check the box” and hope that wire fraud, mortgage fraud and closing fraud never reach the organization.

The first step is LEADERSHIP BUY-IN.  Unless the “C Suite” decides to make risk management a priority no effective tools or policies will succeed.  There must be top down leadership in this area.  If your chief risk officer (CRO) or chief security officer (CSO) have to “push” their agenda, then the organization is in trouble.  Effective leadership is not only embracing the issue though, it also means effectively communicating it throughout the organization so that even the receptionist and the part-time employees know where you stand on the issue.

The second step is DEFINED HEAD OF COMPLIANCE.  Someone must be placed in charge.  Studies show that management by committee on risk issues results in failure.  Decide who is in charge  and let them manage with minimal interference.

The third step is ORGANIZATIONAL CULTURE.  As mentioned above, everyone has to buy into the  importance of risk and the method chosen to manage the risk.  Frequently in the mortgage industry sales and operations staff push back on risk management and compliance rules and tools because they are viewed as “disruptive” to their departmental goals (more sales, quick closings).  Without the buy-in of these departments measures to address risk of fraud and cyber crimes will not be successful.  Attitudes and behaviors must fall into line with processes and procedures.

The fourth step is CLEAR PROCESSES AND PROCEDURES.  Putting a process into place or using a tool only works if you go beyond the simple framework itself and successfully implement them.  We have seen lenders engage a tool or service and then never use it or only use it occasionally, without any clear policy directives.  Beyond implementation is testing and oversight.  Someone must be regularly making sure that your risk management tools actually work.

The fifth and last step is having a RESPONSE PLAN.  This is important to understand: No risk management tool or policy is foolproof. When an event occurs, whether a cyber breach, wire fraud or other loss, how you react, how quickly you react, and how you learn from the event can be more important than the event itself.  More than one lender recently has found that reputation risk and litigation risk arise when an organization fails to properly react following an event.

The last point to make is that cyber risk and fraud risk must be an “untouchable” line item in your operating budget.  Addressing these issues cannot be the “last in, first out” business decision we see too often.  When business is down, the risk of harm is GREATER because you do not have the economic cushion to absorb a loss. Good leaders, who manage an effective top-down process and set the proper tone about operational risk will not sacrifice protective tools and policies at the first sign of a market slow down.

We spent 12 years studying closing table risk, including 5 years working with risk analysts at Lloyds. Our closing table risk management tool is designed to meet your operational needs, with little disruption, while providing effective management of the risk of loss from cyber crimes that evolve in wire fraud, and all manner of closing and title fraud.  If you are a business leader concerned about closing table risk, please reach out and ask us how we can provide a solution you and your risk team will embrace.

 

 

When a Closing Attorney’s E&O Policy is not Actually Insurance and Why a Lender Should Care

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If you are merely collecting a “Certificate of Coverage” on behalf of a closing attorney and passing them through your loan process as meeting your internal risk management protocols you may be in for an unpleasant surprise if a claim arises.

At Secure Insight we do more than collect insurance certificates, we review policies and validate coverage and payment directly at the source: the insurance agency or insurer where the policy originated.  We ask important questions about the validity and extend of coverage, and exclusions, because in the event of an incident a lender needs to know they can offset risk by filing a claim that will be processed and paid under a valid policy of insurance.

Recently we have discovered a rise in offshore, low cost risk-shared E&O coverage plans.  These companies and policies are designed to exploit the high cost nature of E&O for real estate attorneys and other professionals by offering ridiculously low fees for coverage. Notice I said “coverage” and “fees” and not “insurance” and “premiums.”  That is because these policies are not traditional insurance and are likely not worth the paper on which they are written.

Risk sharing groups in the E&O space are based upon the concept of cooperative pooled risk arrangements.  The idea, which has found success in the health insurance area, relies upon the pooling of all plan participant fees to cover expected losses from claims.  The problems with this arrangement  in the E&O space are numerous.

First, the plan is not an insurance product, and therefore is not governed by insurance laws or regulators.  It is not filed or supervised in the United States.  Second, the companies arranging these risk sharing pools are inevitably based outside the legal jurisdiction of the United States making the enforcement of any lawful claim highly improbable and definitely costly.  We are talking Belize by the way, not Canada, by way of example.  Third these companies have no obligation to publish financials or provide any accounting of the fees being collected and supposedly held in a risk pool for the payment of claims.  Fourth, the policies of coverage (they cannot use terms such as insurance and deductible) usually limit the covering company’s obligations significantly.  One policy issued in Belize that I reviewed recently denied any obligation to defend a covered attorney in the event of a lawsuit and created a right on their part to access the attorneys personal and bank records, tax returns, finances and assets so they can recover their losses directly from the covered party!

It appears many attorneys and others are being misled into believing that they can actually receive $2 Million in aggregate insurance coverage for $400 annually rather than $4,000 annually and they will meet their own risk needs and those of their counter-parties in the mortgage industry.  This is certainly not the case.

At Secure Insight we do more than just collect documents, we do real analysis, assign risk ratings, and monitor risk 24/7.  Reviewing E&O “coverage” is just one way we accomplish that and ensure that our lender clients have a real source to offset potential losses and not one that looks like insurance but is really something else.

To our attorney friends: buyer beware!  As my mother used to say, “If it appears too good to be true it usually is dear.”

New Attorney E & O Exclusion Exposes Lender Closing Table Risk in Massachusetts

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We have noticed that in Massachusetts, insurance carriers providing attorney errors and omissions coverage have been quietly adding a new exclusion to their new and renewal policies.  This exclusion is known as the “Disbursement of Funds” exclusion, and it creates enhanced risk for lenders in that state in the event an attorney fails to properly disburse funds.  Any “negligence” in this regard will not be covered as it had been traditionally in the past.

The exclusion reads as follows:

“The following acts are EXCLUDED from coverage under this policy: the disbursement or transfer of funds related to (a) the deposit of a counterfeit check or a check with insufficient funds; (b) the lack of a written verification from the issuing bank that the funds are available and valid, (c) a fraudulent scheme, or (d) the failure of any funds reaching the proper party or the intended recipient, for any reason.”

In a discussion with a Massachusetts agent we learned that some insurers are doing this because (i) the cost of wire fraud is becoming unbearable for them and (ii) they want to push attorneys to pay for cyber liability coverage which would help cover some (but not all) of the risk now being excluded.  Cyber coverage is not mandated for attorneys in Massachusetts.

The problem for lenders is that this new exclusion means that there is NO COVERAGE they can attach for reimbursement for a claim where an attorney disburses funds before a deposited check clears (which occurs far too often) or where an attorney fails to follow the closing instructions and disburses the proceeds to the wrong party or in the wrong amount.  Although these acts/omissions rise to the level of negligence, with this new exclusion there will be no coverage.

At Secure Insight we are encouraging attorneys in Massachusetts whom we monitor to acquire cyber liability coverage and also to certify to the adoption of internal policies and practices avoiding the risks inherent in the excluded matters.

As always, it is critical to keep abreast of all changes in all matters which may affect your mortgage lending business.  At Secure Insight we are watching for you, 24-7, 365 days a year to help prevent losses from title and closing fraud.

Stay vigilant and stay clear of fraud!

NYSAR Reports Up Market for Sales in NY, with No CPL Lenders Face More Purchase Mortgage Closing Table Fraud Risk

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Lending in New York?  Purchase money business always carries closing fraud risk, however New York business tends to be riskier for many lenders.  The state has high average loan amounts, features instrument recording procedures that delay evidence of mortgage and deed recordings for long periods of time following the closing, and there is no CPL (closing protection letter) in the state.  Lenders doing business in New York should be pleased business is on the uptick, however if they do not have a closing table fraud prevention tool in their arsenal they may be facing more risk of potential losses due to fraud.

The NYSAR report released today stated in part:

“With 46,883 new listings and 29,100 pending sales across the Empire State in the first quarter, the real estate market is trending upwards, according to the housing market report released today by the New York State Association of REALTORS®. New listings were up 4.1 percent from the first quarter of 2018 while pending sales rose 0.8 percent.

Median sales prices were also up in a quarter-over-quarter analysis, rising 6.8 percent to $275,000. The average home sales price increased 1.5 percent as well to $360,526.

While closed sales declined from the first quarter of 2018, dropping 6.2 percent to 24,405 homes, other factors are allowing potential home buyers to remain optimistic. According to Freddie Mac, the 30-year fixed rate mortgage rate has steadily decreased since the beginning of 2019, falling to 4.27 percent, its lowest rate since January 2018.

With the typically strong spring season just around the corner, inventory continues to rise, increasing 3.4 percent to 63,504 homes for sale across the state.  The month’s supply of homes for sale was up 5.6 percent in year over year comparisons to 5.7 month’s supply. A 6-month to 6.5-month supply is considered to be a balanced market.”

 

 

House Flipping Is Back to Pre-Crisis Levels according to NY Times

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An article just published by the New York Times trumpets the news that house flipping is popular again.  Those of us who have been in the mortgage industry for the past 10-15 years know that low interest rates and loose credit standards combined with property flipping  fever drove much of the housing bubble in 2003-2008.  That bubble eventually burst when many “flippers” encouraged by late night infomercials promising fast and easy profits in real estate, learned that the housing game can be more difficult than what can be explained in a 15 page pamphlet written by an “expert” and costing $300.00.

The focus on flipping for too many non-experts is profit maximization at all costs.  Profit driven flipping can mean short cuts, substandard renovation work and beyond that appraisal, seller and closing agent fraud involving straw buyers, inflated values, and hidden defects.  It can also create scenarios where unscrupulous investors prey upon inexperienced buyers and construct impossible or fraudulent sales scenarios where everyone but the seller walk away with a serious risk of loss.

In the mortgage industry it is common to state “everything old is new again,” and when we read articles like this one today we cannot help but remember the confluence of easy credit, low interest rates, lots of available inventory and many real estate “newbies” seeking to get rich quick flipping homes for profit.  Lender beware.

Conviction of Attorney and Title Agency CEO for $26 Million Fraud Crime Reinforces Need for Closing Agent Risk Management

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According to an article published today in Mortgage Professional America, the former CEO of LandCastle Title, who also served as the managing partner of a real estate law firm, will spend 15 years in federal prison for orchestrating a scheme to bilk his firm out of millions of dollars.

Nathan E. Hardwick IV, 53, operated both LandCastle Title and Morris Hardwick Schneider, a law firm that specialized in residential real estate closings and foreclosures. He was convicted in October of wire fraud, conspiracy, and making false statements to a federally insured financial institution.

Real estate attorneys and title professionals have access to lender funds, lender loan documents (including the note and mortgage), are charged with satisfying liens and judgments and ensuring lien priority.  They also have direct access to consumers and all of the consumer’s personal and financial information.  One a scale of 1 to 10, with 10 being the highest risk tier, settlement agents are in Tier 10.

Lenders must have a comprehensive, ongoing program of evaluating, rating, monitoring such risk as well as taking immediately steps to alter or disengage in any relationship that may cause harm.

Title and closing fraud are, by most estimates, a nearly $1 Billion dollar annual problem.  If you add in wire fraud the numbers escalate.

Ignoring this risk will not make it go away.  The Nathan Hardwicks of the industry will make sure of that.  Be vigilant and remember our motto: “trust, but verify.”

Protecting Borrower Data in An Age of Hacking and Phishing Schemes

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“Data privacy” and “data security” are terms most lenders are hearing over and over again these days.  The reasons for this are numerous but include federal and state regulator focus on the issue, increased publicity over wire fraud and data storage breaches in business and industry, and heightened concern by consumers about how their sensitive non-public information is being managed by banks.

Although data privacy and data security are terms that are commonly used interchangeably, they in fact mean different things.  A data security policy is required to ensure that data privacy is protected.  When a lender is entrusted with a borrower’s highly private information, the business must develop, implement and manage a security policy to protect this data.   So data privacy identifies that personal and private information which must be protected and how it may be used in a business in an appropriate manner, while data security includes the means and methods used to ensure the security of the data both internally (from employee breaches) and externally (from third party breaches).

Data privacy rules mean that lenders must define and police the appropriate use of borrower data within their walls.  This includes what data is gathered (relevance to services), who has access (need to know), and where data is stored (how long and how safe).  Both the CFPB and the Federal Trade Commission have jurisdiction over the mishandling and misuse of consumer data, and each may enforce penalties against lenders that have failed to ensure the privacy of a borrower’s data.  At a minimum, lenders must screen employees with access to private data regularly, have an appropriate policy in place regarding handling of data, and test these policies on an ongoing basis.

Data security encompasses your company’s practices and processes that are in in place to ensure data is not being used or accessed by unauthorized individuals or parties. It ensures sensitive data is accurate and reliable and is available when those with authorized access need it. A data security plan includes facets such as collecting only the required information, keeping it safe, and destroying any information that is no longer needed. These steps will help any business meet the legal obligations of possessing sensitive data. A data security policy is simply the means to the desired end, which is data privacy. However, no data security policy can completely overcome the efforts of third parties bent on hacking into databases and seeking access to consumer data to monetize for improper and illegal purposes. At a minimum, lenders must develop written data security policies that include safe storage of data and penetration testing of their backup systems (local and/or cloud) to search for gaps and leakage.

Knowing that there is no such thing as a foolproof data security system and that all systems are ultimately vulnerable to breach by determined criminals, lenders must demonstrate a commitment to adopting the most stringent policies relevant to the size and scope of their business, while also considering purchasing crimes and cyber liability insurance to off-load risk in the event of unexpected and unintended breaches.

Making sure all borrower data is private and being used properly can be a near-impossible task that involves multiple layers of security. Fortunately, with the right people, process and technology, lenders may support their data security policies through continual monitoring, testing and visibility into every access point with insurance back-up when things go wrong.

If The Table Starts Rockin’, Who’s Gonna Come Knockin’?

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One of the biggest concerns that mortgage lenders have had for years is that they send their mortgage funds and collateral security documents to complete strangers who gather together and manage a process where there is no seat for them at the table.

Even though the closing of a mortgage loan involves significant sums of money important legal agreements and disclosures, and sensitive personal information, the lender must wait and hope that the event took place on time, with the proper parties present, and without incident.  Then the lender must wait and hope that money was properly disbursed and the documents properly executed, recorded and returned.

When mistakes are made or outright fraud takes place who can a lender rely upon to notice and to take measures to protect its interests and those of its borrowers?

The men and women who manage the closing of mortgage loans are generally experienced, honest and trustworthy.  However a lender has little idea whether the person assigned to handle its funds and documents and manage the process for any one transaction is going to also be its advocate against errors and fraud.

One of the problems for a lender is that there are no uniform rules or education and training requirements to establish common expectations of professionalism.  A closing can be managed by an attorney, a notary, a title agent employee, an escrow officer or even a real estate agent in some states.  Each of these have different levels of minimum education, training, licensing standards, insurance and bonding requirements.

Lenders are also hampered by the absence of generally accepted principals of agency and fiduciary duty.  Title agencies who issue closing protection letters disclaim any agency relationship established by the letter between the closing agent and the lender or borrower. Courts have no universal opinion whether a closing agent acts as an agent of the lender or the title company beyond their duties to act for their buyer or seller clients.

Where does all of this leave lenders?  Waiting patiently post-closing hoping that the loan package returns completed and the mortgage proceeds went where they were intended to go.  After years with increasing numbers of title and closing fraud incidents, it seems about time that the lender has an advocate and seat at the closing table.

 

 

Data Breaches from Email Phishing Scams Still Rocking Mortgage Industry: WEI Mortgage latest victim.

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Just today the industry learned that WEI Mortgage has discovered a data breach from an email phishing scam last Fall that appears to have exposed loan file information and borrower personal identifying data such as Social Security numbers to outside parties.

Back in October 2016 I wrote that Wells Fargo Bank and the Federal Bureau of Investigation (FBI) had issued separate alerts throughout the industry regarding settlement agent wire fraud.  The reports 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.  Despite these warning, this crime scheme is spreading as title agents, lenders, attorneys and the consumers they serve are finding out to their great harm. WEI is only the latest victim.

According to Wikipedia, Phishing is “the attempt to acquire sensitive information such as usernames, passwords, and credit card details (and sometimes, indirectly, money), often for malicious reasons, by masquerading as a trustworthy entity in an electronic communication.”

Although the FTC, through the Graham-Leach-Bliley Act, and the Consumer Financial Protection Bureau (CFPB) have broadcast the need for data security and privacy measures to protect consumer non-public, personal information (NPPI), many banks either are unable or unwilling to implement the steps required to root out and block criminal enterprises in the US and overseas who are busy hacking into email accounts.

Several incidents around the country in the past year have reflected a similar theme.  Hackers accessed a lender’s email, either through a borrower’s address, a loan officer using a personal email domain not protected by a lender’s network, or an attorney’s email.  The scammers then sent an email, either to the title agent, attorney or to the closing department of the lender, including revised wiring instructions.  The wires were then sent to the criminal’s bank and not the intended recipient.  In one case in Florida a title company is accused of neglecting to conduct appropriate internal data security measures after it received a bogus wire instruction and sent it off to a consumer who then wired the seller’s proceeds to someone else.  With the money long gone, the seller sought recovery against the agency and the buyer for their alleged negligence.

Affirmative measures to combat this crime are being implemented by many in the industry.  For example many 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.  Others are sending a verification of trust account to the settlement agent’s bank to verify that the account is truly a trust account in the name and for the business of the title agent, attorney or other closing professional.

Most title agents are now sending lenders and attorneys their title reports with cover letters containing language in red or bold black print with instructions such as:  We no longer send wiring instruction by email, please call our offices to verify the proper bank information!

Phishing is not a new problem.  I have located articles dating back to 2005 warning consumers and lenders about email phishing schemes designed to access and steal NPPI. It is clear that this is a serious problem that is getting more serious as technology has advanced and criminals have become more resourceful and bold.

Today’s announcement by WEI Mortgage is yet another acknowledgement that electronic innovation in society generally and in the mortgage banking industry specifically, while offering tremendous benefits also offers serious perils.   With federal and state regulators very firm positions on lender obligations to protect consumers from harm due to data security breaches, and lawyers lining up to file lawsuits for damages, every lender is on notice that they very well could be the next victim.  Cyber liability insurance coverage carriers are surely experiencing a booming sales period.

 

Why Settlement Agents Pose the Greatest Risk to Mortgage Lenders and Borrowers

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Settlement agents, the men and women who manage the closing of residential mortgage loans, carry a great burden with them.  Each time they close a loan they have access to mortgage proceeds, lender documents including the important collateral security instruments (note and mortgage) and borrower personal and financial information (in the final 1003 and other closing table documents). No other third party that participates in the mortgage loan assembly-line process has greater authority, greater responsibility and greater opportunity to commit fraud.

Because fraud risk is elevated during periods of high purchase volume, as opposed to a boom in rate and term refinances, lenders are faced with the potential for serious losses when the managing of closing agent risk fails to occur.

It was not until about 2011 that the FBI and FINCen began to report title and closing fraud as a subset of overall mortgage fraud.  Since that time the numbers have consistently demonstrated that fraud at the closing table is more than 20% of overall fraud.  With the annual reported mortgage fraud numbers in excess of $4 Billion this means that the actual reported losses are in the $800,000-$1 Billion range.  This is an enormous problem for the industry and one which only recently has been addressed with heightened vendor management scrutiny.

While it is certainly true that the vast majority of settlement agents (attorneys, title agents, escrow officers and notaries) are professional, competent and trustworthy there are many who are not.  One reason for this is that the different disciplines have varied education, training, licensing, insurance and bond requirements.  The second is that there are no performance standards or uniform, cross-disciplinary training programs to ensure that everyone has a base of key knowledge about all things consumer protection, mortgage loan and title insurance. Another issue is the lack of required training in regulatory and compliance for this group of professionals so that they have an understanding of what investors, the GSEs, HUD, the CFPB and state regulators expect from lenders in the nature of risk compliance and loan quality assurance.

While the industry has come a very long way since Secure Insight began in 2012 and created a storm of controversy over settlement agent vetting, much has yet to be done to assure lenders and borrowers that the single largest financial transaction of their lives has been fully vetted and managed for risk.   We continue to strive to enhance our tools and to find means and methods to assure both of these groups that they can trust a process that poses so much potential for financial harm.

For more information reach out to us at in**@se***********.com and visit our website at www.secureinsightsales.com

 

 

 

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