How to Identify Types of Mortgage Fraud and Reduce Risk with Automated Income and Employment Verification
Mortgage fraud is a key issue that impacts home buyers, sellers, and lenders. Take it from CoreLogic’s 2023 Mortgage Fraud Report, which stated that one in every 134 mortgage applications showed signs of fraud.
Deceptive mortgage applications can range from fraud for housing, where potential homeowners try to increase their chance of getting their application approved by altering information, to business schemes, where individuals commit fraud for financial gain.
For example, Los Angeles County describes real estate scams where fraudulent borrowers take out mortgage loans without the intention of repaying them, leading mortgage lenders to foreclosure.
Understanding how fraud can occur on a mortgage application is crucial to catching fraudulent applicants and lowering lender risk. Keep reading to learn the common types of mortgage fraud and the steps mortgage professionals can take to avoid them.
What is mortgage loan application fraud?
Mortgage fraud refers to any unethical practices buyers or sellers use during the home purchase and mortgage application process. Fraud frequently involves intentionally misrepresenting information or other deception aimed at financial gain for one or more parties.
Common areas of deception include:
- The appraised value of a property.
- The income, assets, or liabilities of the buyer.
- The identity of the buyer or resident of a home.
- How a property will be used (as a primary residence or a rental property).
Buyers may misrepresent assets, identity, or property usage to secure a loan they might otherwise be denied. On the other hand, sellers may misrepresent the home’s value in an appraisal to secure a higher selling price.
Why is preventing mortgage fraud important for lenders?
When a potential home buyer submits a loan application that contains fraudulent information or documents, it exposes the lender to a higher risk of loan defaults, resulting in financial loss and loss of reputation.
Here’s a closer look at the adverse impact mortgage fraud has on lenders:
- Financial loss: Mortgage fraud can lead to higher rates of loan defaults, resulting in financial loss for lenders due to increased foreclosures and the associated legal fees and court costs.
- Reputational damage: Mortgage lenders rely on their reputations to attract borrowers and investors. Falling victim to mortgage fraud can hurt their credibility and make it difficult to generate new business.
- Failure to protect borrowers: Borrowers who fall victim to seller fraud can suffer from financial losses, which could lead to legal consequences for the lender.
As such, identifying and preventing mortgage fraud is crucial for any lender who wants to reduce their overall risk, maintain a positive brand reputation, and protect their borrowers.
Types of mortgage fraud
Mortgage fraud can be thought of as an umbrella category that includes several types of deceptive practices.
Here are the most common types of fraud seen in mortgage applications and the signs lenders can use to detect them.
What is false identity fraud in mortgage applications?
Identity fraud occurs when someone wrongfully obtains and uses someone else’s personal information like name, address, and social security number to apply for a mortgage. In addition to stolen identities, identity fraud on a mortgage can include altered identities, altered credit scores, and fabricated identities.
Signs of identity fraud on a loan application can include inconsistencies in personal information, such as addresses, names, credit history, and social security numbers. Upon closer inspection, the information provided by the applicant may also not match official records.
What is occupancy fraud in mortgage applications?
Occupancy fraud occurs when applicants deliberately provide false information about how they plan to use a property. A common example is when an applicant says they intend to use the home as a primary residence but instead plan to rent out the property for income.
What is income fraud in mortgage applications?
Income fraud happens when potential homeowners misrepresent income or employment. Applicants may report false income and alter documents, such as pay stubs or tax forms, to support the amount they listed.
As technology has made it easier to forge or edit documents, it has become increasingly challenging for loan officers to catch income fraud. This is especially true when loan volumes are high, and teams have less time to review each document carefully.
What is a straw buyer in mortgage fraud?
Straw buyers are applicants who request loans in place of others who can't secure them. After the loan is approved and they secure the property, the straw buyer transfers the property title to the person they are representing.
Illegal property flipping
Illegal property flipping refers to situations where scammers purchase a property and immediately resell it for more at an artificially inflated price, usually by using a fraudulent appraisal to mislead the new purchaser.
What is home appraisal fraud?
Appraisal fraud occurs when an appraiser artificially inflates or deflates the value of a property, usually in collusion with one of the parties.
Non-arm’s-length transaction
A non-arm's-length transaction happens when the buyer and seller know one another personally. This can result in collusion between parties or one party having undue influence over the other.
What is asset rental fraud in mortgage applications?
Asset rental fraud occurs when applicants borrow someone else’s money (or other assets) to make themselves appear more qualified when applying for a mortgage loan.
Undisclosed real estate debt
This happens when the applicant deliberately fails to mention existing real estate debt or past disclosures.
Equity skimming
Equity skimming is a type of straw man scam where investors use a third party to purchase a property.
How lenders can avoid mortgage fraud
Dealing with the consequences of mortgage fraud can be frustrating. For lenders who want to take a more proactive approach, here are some best practices to detect fraudulent activity and lower your risk of defaults and financial loss.
Train staff to identify warning signs
Understanding common warning signs is key to preventing fraud. For best results, ensure that all staff members are trained to look for and identify the signs of mortgage fraud listed above.
Review loan applications thoroughly
Lenders should review all applications and loan documents thoroughly to ensure completeness. After all, missing or falsified information is a common sign of fraud.
Work with qualified appraisers
By building relationships with qualified appraisers, lenders can help prevent illegal property flipping and home appraisal fraud.
Leverage technology solutions with fraud detection
Using solutions with fraud detection can help you detect warning signs that are harder to spot.
Monitor industry trends
Lenders should stay informed about the latest types of fraud impacting the mortgage industry. That way, they can understand the warning signs and inform their team accordingly.
Verify income and employment information
Verifying income and employment information is essential to reducing the risk of mortgage fraud, and using an automated verification provider can make the process easier for lenders.
How Truework helps mortgage lenders avoid income and employment fraud
Truework is a comprehensive income and employment verification platform that helps lenders detect signs of fraud early while supporting fast turnaround times in the application process.
Source-of-truth payroll data
Truework Instant and Credentials use source-of-truth data to verify applicant income and employment.
Fraud detection for manual verifications
Truework Smart Outreach is used for manual verification when other methods aren’t available.
Automated fraud detection for document uploads
Truework Documents converts applicant-supplied files into a standard data format that makes it easier to detect anomalies that may signal fraud.
Steer clear of mortgage application fraud with Truework. Understanding the types of fraud and their common warning signs is an excellent place to start when it comes to preventing them.