Quality-control executives in the residential lending industry are beginning to cast a suspicious eye on what they believe may be the next big source of mortgage fraud: their own loan officers.

During the past two years of hearty home-loan refinancing, qualitycontrol people were more concerned with handling the mountains of loans than with finding the odd rotten application.

But now, they fear their own people will increasingly manipulate documents to insure loans get approval.

"The fact of life is that it will go on," said one quality control executive at a nationwide lender. "In a shrinking market, it is going to happen."

Worrisome Trend

In general, lenders say mortgage fraud is up.

For the week ending May 20, Guaranty Asset Protection Services, a West Hills, Calif., fraud investigation firm, received 17 loan applications for fraud checks. According to Dick Ward, president, 12 applications, or 71%, came out fraudulent.

Usually, only 10% of loan investigations at GAPS show some level of fraud, Mr. Ward said.

"You really have to have a watchful eye right now because fraud is running rampant now, especially with lower volume," he said.

"There is always going to be internal fraud," said Victoria Freeman, staff assistant in the Mortgage Bankers Association of America's residential finance department.

Document Tampering

Lenders say loan officers have been known to tamper with tax returns, bank statements, money orders, and W2 pay stubs.

Lenders also are wary of "hand carried" documentation. When getting a verification of deposit from a bank, a loan officer can "add a one" to the dollar figure on the document, said one lender.

One Midwest quality control executive at a nationwide lender acknowledged doing just that when working as a loan originator.

The executive said it was "human nature" to tamper with documents to ensure a loan's approval. He called it "falling prey to the dark side."

Quality control executives point out that some loan officers were earning more than of $200,000 at the height of the refi boom.

"There are a lot of BMWs and Mercedes to support out there," said Cheryl Howe, vice president for quality assurance at Directors Mortgage Loan Corp., Riverside, Calif.

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