A private firm's sampling of loans guaranteed by the Department of Agriculture's Rural Housing Service discovered that lenders have become more lax this year in verifying borrowers' income and employment.

Tommy Duncan, the executive vice president and owner of Quality Mortgage Services, said "fraud for housing" in the federal program is up nearly 220% since 2009. If lenders were more diligent, "some people wouldn't have gotten a loan," Duncan said.

Fraud for housing occurs when consumers exaggerate their income or the length of time they have worked for their current employer in order to get a mortgage — and a lender fails to catch it. (This is different from "fraud for income," where straw buyers might default shortly after closing.)

Jay Fletcher, a spokesman for the Rural Housing Service, said the agency "adheres to stringent underwriting standards — including verification of income and employment." Duncan's findings are not consistent with those of the agency's internal and external audits, Fletcher said.

But Duncan said there is no evidence of Rural Housing Service lenders pulling tax returns to verify income, which some major lenders require. The agency only requires tax returns for self-employed borrowers. Duncan's Franklin, Tenn., firm performed quality control audits of Rural Housing Service mortgages for clients and verified the borrowers' income and employment. The sampled loans were approved by the agency's automated underwriting system, known as GUS.

Incidences of fraud for housing jumped to 3.77% of GUS-approved loans in 2010, compared with 1.18% in 2009, according to Quality Mortgage Services' data. The Rural Housing Service said an independent audit it received in April indicates only 2.8% of GUS-approved loans were missing complete documentation. The audit covers loans originated from September of 2009 to March.

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