The cost of verifying the identity of credit and mortgage applicants is going up, way up.
Starting Oct. 1, the Social Security Administration plans to raise the fee it charges to check the identity of a mortgage or credit applicant from 56 cents to $5 for each verification.
As a means of fighting fraud, most lenders use the agency, either directly or through a third-party firm, to verify a borrower's identity because it is considered the "purest" database since errors or juxtaposed numbers have appeared in credit reports.
Jay Meadows, the chief executive of Rapid Reporting Verification Co. LP of Fort Worth, predicted lenders will quit checking identities, which in turn will lead to more fraud.
"Nobody is going to pay $5 for a name-search only, it's like paying $50 for a bottle of water," he said.
Jack Lentz, the president of Inco-Check Inc., an Irvine, Calif., fraud-prevention company, agreed. "This will mean a drastic decrease in the amount of verifications being done because financial institutions are competing for consumers and every dollar they can save is important."
Bill Canfield, the president and general manager of Talx, a unit of Atlanta credit bureau Equifax Inc., said the costs would be passed on to customers. "Basically the Social Security Administration has said they don't care about fraud," he said. "We will have to pass the whole $5 increase on to our customers and they will go to cheaper and riskier products."
Talx has roughly 300 clients including mortgage and auto lenders that may switch to less-expensive products that verify identity through other sources. They also may choose to use a credit report, which is riskier, Canfield said.
Rapid Reporting's clients include Bank of America Corp. and Wells Fargo & Co., but Meadows said the higher costs would have a larger impact on smaller mortgage bankers and brokers. Rapid Reporting conducted 430,000 verification requests through Aug. 31, and caught 21,000 names that did not match any Social Security number, Meadows said. Another 1,300 names matched those of people who had died, he said.
The "Consent-Based Social Security Verification" program was started in 2002 and allows any private business or federal, state or local government to check names and Social Security numbers against the agency's database.
Kia Green, a Social Security spokeswoman, said in an e-mail Tuesday that the program "is not part of our mission" and that Social Security does "not receive funding to finance the costs incurred in providing this service."
A July report from the agency's Office of the Inspector General found that Social Security had no reasonable way to recoup the estimated $7.8 million cost of developing the program other than by raising transaction fees for the next three years.
The report found that the agency expects to bring in just $1.1 million from 86 companies that have signed up for the program — roughly $6.7 million short of its actual costs.
Social Security based its initial 56 cent fee "on companies' expressed interest in the service and their estimate of their annual transactions," Green said. "The actual transaction volume was considerably less and it resulted in a loss of expected revenue necessary to recover our costs," she said. "This situation left us little choice but to recalculate the transaction fee in order to cover our costs." Social Security is prohibited by law from making a profit but is required to recover any funds it has spent on such programs, she said.
Rep. Kay Granger, R-Tex., met Tuesday with Social Security officials and has proposed that the agency delay implementing the fee increase for 60 days, arguing the fees would have negative repercussions for the mortgage industry. The inspector general's report questions whether the higher fees would allow the agency to "recoup its costs because of lower-than-expected participation."
Companies enrolled in the program pay a $5,000 registration fee.
When the first pilot program began in 2002, a handful of companies paid a $40,000 fee to assist the agency with start-up costs.
Incidents of mortgage fraud jumped 26% last year, with more than half of all reported cases stemming from misrepresentation of a borrowers' information on applications, according to the Mortgage Asset Research Institute, an antifraud software vendor.
"Identity issues are crucial in the lending process and an 800% increase [in the agency's fees] will have a significant impact," said Tony Musgrave, general counsel at Allied Home Mortgage Capital Corp. in Houston.