In the middle ages, marauding bandits could pillage a town at any time. Wealthy lords built castles to protect their people from invaders. Today, financial institutions are like towns without a castle to protect them. The mortgage industry is in a particularly weak position, and a common target of fraudsters.
In a double-selling scheme, a corrupt loan originator takes a genuine loan application, copies it and sends it to various banks. Since the banks don’t have systems to collaborate and check for this duplication, they fund each loan.
Double Selling Fraud Red Flags:
The Federal Financial Institutions Examinations Council (FFIEC) lists red flags to watch for in double selling fraud.
- An incomplete or unsigned loan application
- A trail of outdated documents
- Missing mortgage insurance/guarantee
Banks shouldn’t have to worry about armies of fraudsters. The castle walls should deter attackers and serve as a vantage point to see the armies coming.
How do we build a modern day “castle” to protect against double selling?
First, we need a way to identify and validate that every individual in the process is necessary. This can be accomplished with an online, verified network of individuals. Fraudsters have power today because they can disguise themselves as castle residents—i.e., falsely represent their industries. Building a system that verifies the identities of everyone who uses would be a protective “wall” around the mortgage industry. This financial network could be built by thoroughly vetting all persons who are involved in the entire closing process.
Once the network is established, individuals who use it can manage their own information in the mortgage closing process. Just as guards on a castle wall need to have a clear view of the surrounding landscape, the homebuyer, lender, title agent and realtor need to be on the lookout for those who would do them harm during the mortgage process. This lookout system would be a secure environment where all information about the mortgage closing is stored, with an audit trail and automatic notifications to give everyone involved a complete, sweeping view of what needs to get done, where money is coming from and traveling to, and who is responsible for every task. Fraudulent activity would be discovered while it happened, instead of after the fact.
Lastly, just as castles could send for aid when under attack, financial institutions need to be able to collaborate with each other efficiently. If they were all part of a secure online network, they would easily notice duplicate loans. Even if the banks weren’t connected, a lender couldn’t copy a loan without the buyer or seller’s knowledge.
Instead of simply being on the lookout and reacting to signs of fraud when they happen, we can take a lesson from the middle ages and build a castle to protect investments, reputations and clients.
Check out Part 1 of this series: “The Best Way to Rob a Bank: Straw Buyers”