5 Common Red Flags for Mortgage Fraud and How to Avoid Them.

Mortgage fraud is a serious crime that can result in significant financial losses for lenders and borrowers alike. As a residential mortgage lender or originator (RMLO), it's important to be aware of the most common types of mortgage fraud and how to identify and avoid them. In this post, we'll discuss five common red flags for mortgage fraud and provide tips on how to prevent it.

1. Inflated Appraisals

One of the most common types of mortgage fraud is inflated appraisals. This occurs when an appraiser overvalues a property to help a borrower qualify for a larger loan. To avoid this type of fraud, RMLOs should work with reputable appraisers who are licensed and certified by the state. They should also review the appraisal report carefully to ensure that it is accurate and reflects the true value of the property.

2. Undisclosed Debts or Liens

Another red flag for mortgage fraud is undisclosed debts or liens. This occurs when a borrower fails to disclose all of their outstanding debts or liens on the mortgage loan application. To avoid this type of fraud, RMLOs should verify the borrower's credit report and review public records to identify any outstanding debts or liens. They should also require the borrower to sign a statement of assets and liabilities to confirm that all debts and liens have been disclosed.

3. Falsified Income or Employment Information

Falsified income or employment information is another common red flag for mortgage fraud. This occurs when a borrower provides false information about their income or employment to qualify for a larger loan. To avoid this type of fraud, RMLOs should verify the borrower's income and employment information by reviewing pay stubs, tax returns, and other financial documents. They should also contact the borrower's employer to confirm their employment status and income.

4. Occupancy Fraud

Occupancy fraud occurs when a borrower claims that a property will be their primary residence to obtain more favorable loan terms, when in fact they plan to use it as a vacation or investment property. To avoid this type of fraud, RMLOs should require the borrower to sign a statement of occupancy to confirm that they will use the property as their primary residence. They should also verify the borrower's address by reviewing their driver's license, utility bills, and other documents.

5. Straw Buyers

Straw buyers are individuals who purchase a property on behalf of someone else who cannot qualify for a mortgage. This type of fraud is often used to conceal the true identity of the borrower or to obtain a larger loan than they would otherwise qualify for. To avoid this type of fraud, RMLOs should conduct thorough due diligence on all borrowers and require them to provide documentation to verify their identity and financial status. They should also review the purchase contract and closing documents to ensure that all parties involved in the transaction are legitimate.

When an RMLO identifies a red flag for mortgage fraud, they should take immediate action to investigate and report the suspicious activity. Here are some steps that RMLOs can take:

1. Document the Red Flag: RMLOs should document the red flag and any supporting evidence, such as emails, loan documents, or other relevant information.

2. Conduct an Investigation: RMLOs should conduct a thorough investigation to determine if the red flag is indicative of mortgage fraud. This may involve reviewing additional documents, interviewing the borrower or other parties involved in the transaction, or consulting with legal or compliance experts.

3. Report the Suspicious Activity: If the RMLO determines that the red flag is indicative of mortgage fraud, they should file a Suspicious Activity Report (SAR) with the Financial Crimes Enforcement Network (FinCEN) and notify the appropriate law enforcement agencies. RMLOs should also notify any government-sponsored enterprises (GSEs) that they work with, such as Fannie Mae or Freddie Mac, as they may have additional reporting requirements.

4. Implement Preventative Measures: RMLOs should implement preventative measures to avoid future instances of mortgage fraud. This may involve enhancing their due diligence procedures, implementing fraud detection software, or providing additional training to employees.

By taking these steps, RMLOs can help prevent mortgage fraud and protect themselves and their clients from potential financial and legal consequences.