The mortgage lending industry has been subject to losses and turbulence in recent years due to mortgage frauds committed in the origination of mortgage loans. Compliance with certain federal laws and regulations, management of mortgage Red Flags, and effective risk management practices during the loan process are imperative to preventing or mitigating the effects of mortgage fraud. Forensic fraud audits, or some similar periodic audit, should be implemented as a part of an institution’s loss mitigation. Some recent examples of mortgage fraud schemes include:
September 2013 – Arizona – Conspirators committed a mortgage fraud scheme to purchase properties using companies with which they were associated, and they then sold the properties to straw buyers. They caused documents submitted for the loans to contain false statements and fraudulently obtained the loan proceeds. The conspirators were sentenced to prison terms and ordered to pay ~$4 million in restitution.
September 2013 – California – The defendant conspired to commit mail fraud, wire fraud, and bank fraud. The conspirators defrauded mortgage lenders by submitting false applications and fraudulent documentation, causing the loans to be funded based on false and misleading information. His sentence included 130 months in prison and restitution of ~$6 million.
August 2013 – Idaho – Husband and wife defrauded a lender by having the wife submit a residential loan application in which she made material misrepresentations regarding her employment and income/commissions. The loan was approved and funded based on her misrepresentations. The sentence included time in prison, supervised release, and restitution of ~$668K.
The Fair and Accurate Credit Transactions Act (FACTA) was signed into federal law in December 2003, and the majority of the requirements became effective in December 2004. Banks, thrifts, mortgage lenders, credit unions, U.S. branches and agencies of foreign banks, U.S. commercial lending companies of foreign banks, and certain “creditors” which is defined as “any person or business who arranges for the extension, renewal, or continuation of credit” must comply with FACTA.
The guidance in FACTA builds on provisions for credit reporting that are found in the Fair Credit Reporting Act (FCRA), and it implements guidance for identity theft and fraud prevention. (See the Alphabet Soup discussion of the FACTA for more information.)
Among other provisions, the FACTA includes guidance about fraud alerts and Red Flag Rules. Both of these provisions are intended to help protect consumers from identity theft and fraud.
Fraud Alerts – FACTA allows individuals who suspect they may be subject to identity theft or who are deployed overseas with the military to implement alert notifications on their credit records. Such alerts deter many fraudulent uses of credit records.
Red Flags Rule – The FACTA Red Flags Rule required federal agencies to create joint regulations about identity theft prevention that was applicable to financial institutions and creditors. The coverage of the FACTA Red Flags Rule extends to covered accounts at “financial institutions and creditors” which have been defined by the Federal Trade Commission (FTC) to include “lenders such as banks, finance companies, automobile dealers, mortgage brokers, utilities companies and telecommunications companies”. The FTC has also defined “covered accounts” to mean any account for which there is a foreseeable risk of identity theft. For example, credit cards, monthly billed accounts like utility bills or cell phone bills, social security numbers, driver’s license numbers, medical insurance accounts, and many others.
Secure and Fair Enforcement Act (SAFE Act)
Loan originators must be licensed and registered as required by the Secure and Fair Enforcement for Mortgage Licensing Act of 2008 (SAFE Act) or other applicable state or federal law. Loan originators who are not required to be licensed must be trained on the state and federal requirements that apply to their loan origination activities. The Loan Originator Rule (LOR) under Regulation Z changed background and character checks to be more consistent for different types of loan originators. (See Alphabet Soup Loan Officer Compensation 2014.)
The SAFE Act provides guidance on licensing requirements for mortgage loan originators (MLO) under the Nationwide Mortgage Licensing System and Registry (NMLSR). Regardless of changes in employment as an MLO; changes in personal information, such as address or name changes; disciplinary actions; and licensing renewals, MLO’s and the companies for which they work are required under the SAFE Act to maintain accurate records in the NMLSR, update registration information, and obtain and use the unique identifier (NMSLR ID) number assigned to the MLO from the NMSLR registration.