Attending Annual Non-QM Forum 2024? Pre-book your meeting with us today!
Attending Apartmentalize 2024? Pre-book your meeting with us today!
home / Fraud Detection and Prevention

The Truth About Preventing Mortgage Lending Fraud Early With TPO Loans

13 Dec 2021
T1.1 1024x619 1

Mortgage loan fraud rates, especially among TPO loans, have risen steadily in the US in recent years. Scammers have been increasingly successful, in significant part due to the mass migration to digital loan fraud application processes during the pandemic. However, lenders can fight back against enhanced fraudster sophistication and minimize losses with the right technology and document processes in place.

This article will focus on the current state of mortgage lending fraud in the United States, how cases become worse the longer they proceed, and the most common types of mortgage fraud. It also looks at the role of human error in overlooking telltale signs that loan fraud could be occurring, and how identifying it early is the critical period on which to focus.

Mortgage Lending Fraud in the USA

The number of fraud attempts at mortgage lenders in the United States rose from an average of 1,280 per month in 2019 to 1,316 per month in 2020, according to a recent LexisNexis report. The average rise was more pronounced for digital lenders, increasing from 1,390 a month in 2019 to 1,810 in 2020.

Worryingly for mortgage lenders, this trend was accompanied by a large rise in the fraudster rate of success, from an average of 36% of all mortgage fraud attempts in 2019 to 55% in 2020.

It is crucial for lenders, especially those working with TPO loans, to stop loan fraud early. The benefit of doing so is that it stops it from progressing, and the longer each case of fraud is allowed to go on, the heavier the financial loss tends to be for mortgage lenders. However, lenders report difficulties with a number of important initial steps. For instance, according to the same LexisNexis report, 45% of lenders struggle with identity verification and 43% with address verification.

Common Types Of Mortgage Lending Fraud

There are various categories of mortgage fraud that scammers use to attack lenders.

Fraud For Profit

Fraud for profit usually involves a group of industry insiders working in unison. They take advantage of the shift to digital onboarding and loan application processes. A lot of mortgage fraud sees groups of industry insiders work together in collusion. They typically hold positions such as mortgage broker, loan originator, appraiser, or bank officer, among other mortgage industry roles.

Loan fraud techniques include so-called “air loans”, in which a mortgage is issued by the lender for a property and to an applicant, neither of which actually exists. Another method is “appraisal fraud”, which sees insiders, such as builders, estate agents, and loan officers artificially inflating the price of a property to generate higher commission fees.

Fraud For Housing

Fraud for housing describes when mortgage applicants falsify key information on their loan application to drive a higher loan amount. For instance, they may exaggerate their annual salary or lie about the value of other assets they may hold. It is also fraudulent for a borrower to state that they will be living in the property when they have no intention of doing so.

The ultimate aim of fraud for housing is to manipulate the lender to qualify for a mortgage that they would be declined for if they completed their application process truthfully.

Other types of mortgage fraud include foreclosure fraud and home title fraud. Foreclosure fraud which sees fraudsters target vulnerable mortgage holders in danger of defaulting on their repayments or whose homes are in foreclosure. With home title fraud, a fraudster uses forgery techniques to change ownership of a home to another name.

Third-Party Mortgage Origination Increases Loan Fraud

Financial institutions often buy loans from third-party companies or individuals that originate the loan. These include underwriters, entities engaged in marketing mortgage loans to prospective applicants, and mortgage onboarders. Financial institutions engage the service of these third parties to outsource speciality needs and/or to reduce costs. However, the problem is that they also outsource control over areas such as quality assurance, applicant vetting and verification, human error, and the technology that these third parties use for their document automation processes.

The result is that they may purchase mortgages from them that are fraudulent without realizing it. Mortgage origination from third parties generates a large number of fraudulent cases for financial institutions.

The Role Of Human Error: Overlooking Signs Of Loan Fraud

While fraud generates financial losses for lenders, it’s also expensive, as well as time-consuming, to prevent it, requiring the combination of HR specialization and anti-fraud technology. Moreover, lenders must strike the right balance between loan fraud prevention and customer friction or risk losing competitiveness.

As long as humans are responsible for checking data, there will always be errors to one degree or another. In the case of mortgage verification steps, the consequence can be enormously expensive for lenders. A person may be tired, distracted, or simply negligent. It’s possible that an individual merely misses something that they would usually catch. However, at the same time, mortgage lenders need humans to carry out these critical steps, but they don’t have to do it alone.

One of the most economical ways of minimizing loan fraud is to reduce human error in the loan approval process. Financial institutions can decrease human error by implementing more precise verification steps, document automation techniques, and AI-led technologies to detect and stop fraud in its tracks.

The right mortgage automation technology can process massive tranches of data for verification. Doing so manually is very time-consuming and always involves the risk of human error or oversight. Working with mortgage document processing automation technology helps workers flag mortgage lending fraud in TPO loans early on with more precise verification performance, which is the key to significantly reducing the impact of fraud.

free checlklist banner cta 3

Unprecedented Mortgage Lending Fraud Detection With Advanced Automation

Financial institutions now have the opportunity to integrate advanced technology in AI, automation, and data analytics, specifically designed for loan fraud detection and reduction.

The right automation and machine learning solutions can equip lenders to achieve far greater early document fraud detection. This is particularly important now as a result of the migration to more remote and digital banking. Moreover, lenders can use advanced technologies to drastically reduce the time employees spend on steps like identity verification. Instead, employees can dedicate more time to investigating and solving flagged potential mortgage fraud cases and driving toward a smoother customer experience.

To learn more about how to identify suspicious activity and potential mortgage lending fraud, schedule a demo to see how Ocrolus can help with document fraud detection.