Why CUs Can’t Afford To Neglect The ‘Back End’ Of Mortgage Loans: Potential Fraud
Much has been written over the past few years about the growing threat of mortgage fraud. Beyond the FBI statistics, MBA workshops, and the burgeoning industry in fraud detection software for loan originations, the threat of closing table fraud is being overlooked. The failure to look at the “back end” of the mortgage loan process is occurring to the detriment of credit unions and threatens to derail the many advances made in fraud detection and prevention to date.
Fraud in loan origination is a serious problem, and has been thrust upon the mortgage industry largely due to the zeal of pursuing profits during the housing boom without facing the risk that large volumes of originations, by untrained loan officers, would attract opportunists who see any chance in any booming market to commit criminal acts in pursuit of unbridled greed. Now that fraud in originations is down, thanks mainly to self-policing, increased training, and automated fraud detection software, closing table fraud remains a glaring problem yet to be seriously addressed.
Closing Table Fraud
Closing table fraud involves many of the same elements as mortgage fraud at the origination stage, except that those who conspire tend to be off of a credit union’s radar screen. Realtors, sellers (including builders), and closing agents have little contact in loan origination since they do not participate in the loan application process. However they play an enormous role in real estate transactions that are the basis for purchasing money mortgage loan transactions. Improper and illegal collaboration among borrowers, sellers, realtors, and closing agents creates as equally a dangerous and costly scenario as any other fraud scheme. Yet, does a credit union lender know enough about the seller, the realtor, and most importantly, the closing agent?
Every day credit unions nationwide wire hundreds of millions of dollars into the accounts of men, women, and settlement companies about whom they know very little. While they wait anxiously for their signed closing packages to return, their money lies exposed “on the street,” without guarantees of security. Why credit unions (and title underwriters, for that matter) place universal confidence in the existing loan closing process is a mystery–and a recipe for disaster.
Who are these closing agents? Are they experienced? Licensed? Insured? Do we care? Should we care? Of course we should! Credit unions that rely solely on closing protection letters, in those states where they are issued, ignore the common practice for agents of title underwriters to issue them without any criteria, and for closing agents to recycle them on their own. It is not unheard of for closing agents to simply “white out” the specific transaction details on a protection letter and use them over and over again.
While there is no foolproof method of preventing fraud–since the fraudsters tend to change their tactics and methods, and since anyone who is determined to defraud a lender and has the cooperation of enough of the parties to a transaction usually can accomplish it, credit union lenders can arm themselves with more data about the closing process and demand that closing agents meet certain minimum levels of experience, insurance, and overall reliability. Shining a light on the closing process, and those who work it, can go a long way toward weeding out the bad operators and defining a better process for the honest and orderly distribution of mortgage loan funds.
Furthermore, having access to real-time data about the parties at the closing table, immediate access to key closing documents, as well as the ability to access detailed reports about a closing when audits or loss mitigation efforts are required, is highly desirable in today’s fraud-infested environment.
The answer: closing table data and fraud deterrence is available. There are online solutions that combine closing table data collection, warehousing, and reporting functions with closing agent registration and transaction recording features that help close the gap between front-end fraud protection and the back end still vulnerable to fraud. There are also third party closing agent verification services to quickly verify the credentials of the “professional” to whom credit unions are wiring their closing funds.
Some software solutions require closing agents to register and to upload key data regarding the closing process, including data relating to sellers, realtors, source of funds, closing participants, and other important information not normally collected during origination, processing and underwriting. These systems also generate an automatic fax cover sheet sent by email to the closing agent and require key closing documents, immediately upon signing, to be faxed to an “800” number–which by way of a special barcode, attaches these instruments to the loan transaction data for real time access by a lender.
If and when a post-closing problem occurs, whether through fraud or due to some other closing error such as an unsigned document, a credit union lender can download a report of the key information about the closing that will allow loss mitigation or post-closing follow-up to be completed in a matter of minutes.
Other features some of these systems have include the ability to upload red-flag data, such as exclusionary lists, that can act as a pre-wire authorization, stopping transactions from closing, or delaying them until a resolution, when the system identifies potential closing fraud issues undetected at the front end of the process. One example might be a seller who appears on an exclusionary list, or a power of attorney where none was disclosed pre-closing.
The third party verification companies charge the closing agent, or the fee to verify credentials is charged as a closing fee on the HUD-1. In both cases the service is provided without charge to the credit union.
Closing table fraud remains a glaring problem yet to be seriously addressed. With the real estate market in its current state of flux, now is the time to incorporate the practices and procedures necessary to eliminate this type of fraud when the next housing boom occurs. Every realtor, seller, closing agent, and lender will only flourish under this protection with minimal worry.
Andrew Liput is President and Managing Attorney of The Liput Group. For info: bankerman44
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