In the mortgage closing process, the best risk management system doesn’t focus on catching fraudsters red-handed. By the time a scam has been realized, the stolen money is usually irretrievable.
Fraud Prevention, Not Just Detection
Instead, a risk management system should concentrate on identifying potential fraudsters and perceiving possible schemes before they are carried out. In other words, its motto should be prevention, not simply detection. In a game of chess, the one who can anticipate their opponent’s moves will win, because they can plan accordingly. Knowing a fraudster’s next move is a prerequisite to stopping him. Simply reacting to bad situations will result in a quick checkmate. This kind of risk management is not only possible, but imperative. Fraudsters are getting more and more sophisticated in their attempts to commit fraud, so we have to prevent their schemes from happening in the first place.
Types of Fraud in the Mortgage Industry
Fraud can be separated into two categories: Closing Fraud and Mortgage Fraud. Closing Fraud is related specifically to title agents, while Mortgage Fraud is more of an umbrella term for the various fraudulent schemes that entities in the closing process can perform. Closing Fraud is separated out from Mortgage Fraud simply for the fact that it accounts for such a large percentage of the schemes that occur. According to Ryan Barry, Chief Strategy Officer and Co-Founder of ATS Secured, “the FBI estimates [Closing Fraud] at $1.6 to $1.9 billion a year,” though there’s no way of knowing whether that number is correct as there’s no way to record the amount lost every year during the closing process if you don’t know about it.
Here’s an Example of Closing Fraud:
A fraudulent title agent works by exploiting banks’ lack of communication. Financial institutions don’t have a system in place with the ability to cross-check information with each other. This silo mentality lends itself to the 25/9 problem, which is the fact that nine different systems and twenty-five eyes are all trying to work towards one goal, that of a mortgage closing. When all these different entities can’t track where funds are being directed, fraudulent parties can easily take advantage of the system.
The title agent is responsible for the buyer’s money. When the buyer’s bank sends money to the title agent, the title agent is supposed to pay off the prior liens. If they don’t pay off the prior liens, but say that they did, the buyer’s bank has no way of knowing.
For example, a buyer, Sue, gets a loan for $90,000 from Bank A, in order to buy a house for $100,000 from the seller, John. Sue comes with cash, Bank A comes with the loan and that money is deposited in the title agent’s trust account. After closing, the title agent has all of John’s information to know where his loan is to be paid off with his bank, which is Bank B. Pawn to E5.
The title agent now has $100,000 in his escrow account. As a fraudulent agent, he will tell Sue and Bank A that he paid off John; that he sent a check to pay Bank B. What no one knows is that while he did send a check or a wire to Bank B, he did not apply it to pay off that loan. He put it into an account that he has control of.
He can get away with this because he has all of John’s information and called Bank B impersonating him, “Hi, this is John, here’s my personal information proving that it’s me. The closing we were going to do between me and Sue didn’t happen, but I’m still going to service the loan. In the meantime, I’ve moved. So those statements that were being sent to this address, send them to P.O. Box 1234.” By doing this, the title agent is able to receive the statements at an address which he controls. This is where the banks’ lack of communication truly starts to hurt them, because they do not collaborate with each other and cross-check the title agent. Rook to C8.
Then the title agent shows Bank A the wiring instructions stating he sent $90,000 to Bank B to pay off John’s loan when, in actuality, it went to his personal account at Bank B. Rook takes queen. To further cover his actions, he services the loan, making the minimum payment in John’s name so it doesn’t show default. Horse to rook four.
Bank B thinks that since the loan’s being serviced, everything is in order. Sue is making payments to Bank A without seeing anything amiss and John thinks the loan is paid off. Queen to E4, check.
The title agent is also in control of all of the documents. So, he can say to Bank A, “You are in first lien position,” when they’re not because he never paid off Bank B.
Barry puts it this way, as if he were the fraudulent title agent, “I’d basically play the shell game. I’ve got $90,000 in the checkbook and I’m only paying $900 a month, so I could keep it there for a long time. And I could take the rest of it and go buy a car.”
This is just an example with one property. Imagine if that title agent is scheming with thirty properties, with each house worth $250,000, not $90,000. Checkmate.
This is one of the main ways a fraudulent title agent can play the game: they take advantage of the 25/9 problem and the banks are paying dearly for it.
Our Technology Can Help Prevent Fraud
Banks need a platform that ensures payments go exactly where they need to go. This technology will help financial institutions communicate with each other, monitor escrow accounts and thwart any schemes that try and funnel money where it isn’t supposed to go. And in case this transparency isn’t enough and a fraudster does somehow slip through the line of defense, it is essential to have indemnification backed by a secure source, a safety net.
Knowledge is power. Banks need to anticipate fraudsters’ moves and plan counterattacks accordingly, or they will be checkmated.
Want to make your mortgage process easier and more accurate? Contact ATS Secured today.