Fraud as a Compliance Issue


LOS ANGELES–Lenders must increasingly demonstrate that adequate risk management controls are in place. One way to do this is by implementing an internal audit program, either internally or by engaging a third-party vendor.

When fraud and compliance issues overlap, said Rachel Dollar, CMB, partner with Smith Dollar PC, Santa Rosa, Calif., mortgage lenders and servicers have a problem.

“It’s very important to be looking underneath your loans so that they remain compliant with the Consumer Financial Protection Bureau and other agencies,” Dollar said here at the Mortgage Bankers Association’s Risk Management, Quality Assurance and Fraud Prevention Forum. “You must have controls in place that can detect potential compliance issues and prevent them from escalating.”

Besides the CFPB, Dollar said, the government has increasingly targeted fraud through the False Claims Act. A case in Colorado, Adams v. Aurora, even alleged that agency loans could violate the False Claims Act, potentially exposing lenders and servicers to serious financial liability. Another case, U.S. v. Bank of New York Mellon, alleged BONY violated mail and wire fraud statutes in a scheme to defraud BONY’s institutional clients.

Matt Merlone, AVP of product & fraud strategy with First American Mortgage Solutions, Santa Ana, Calif., said companies must build and enhance screening tools for anti-money laundering and other schemes.

“Recognizing real estate schemes is key,” Merlone said, noting existence of shell companies and LLC, “funnel accounts” (placing funds in multiple accounts under depository thresholds, then aggregating those funds together), EB-5 programs (illegal immigration scams under the guise of a legal government program) that result in on-shoring of funds; and reverse occupancy, a money laundering affinity fraud scheme.

“When I look at fraud schemes, I’m looking at the mechanisms of fraud,” Merlone said, such as affinity fraud targeting certain ethnic groups of classes of people. “Online lending fraud is getting a lot of attention right now and it’s going to be a source of focus for some time to come,” he said.

Linda Terrasi, chief risk officer with United Shore Financial Services LLC, Troy, Mich., said it is important to “be in the know.” She said identifying fraud trends begin with underwriting.

“In the past, underwriters used to carry the loan all the way through, but today, the processes are more spread out, which increases the risks for missing something,” Terrasi said.

One process that United Shore does with underwriters is have them handle a loan without automation. “Technology can be a life saver, or an inhibitor,” Terrasi said. “Taking technology away from the underwriter forces them to do the entire process manually, so that they trust their gut and understand how well they know the process. The biggest thing we can teach our underwriters is to understand, ‘does this make sense?'”

Many companies allow underwriters to work from home. “It’s a great benefit for underwriters to work from home,” Terrasi said, “but what happens to communication? What happens to training? In some cases, this is hurting the industry. It’s very important to make sure that you have excellent training and good reporting capabilities.”

Ultimately, Terrasi said, regulators hold the lender responsible for third-party processing. “If you’re not doing it properly, then you will have issues,” she said.

Peggy Sasser, manager of fraud risk and loan defense with Primary Residential Mortgage Corp., Salt Lake City, Utah, said her company files a Suspicious Activity Report with Financial Crimes Enforcement Network for any unresolved instance of suspect activity. “We’d rather file the report than not,” she said. “If there’s a problem, we file a SAR. We’d rather catch a problem early in the process than later.”

Sasser said Primary Residential issues immediate alerts to warn of new fraud trends or concerning patterns to its employees. It also has mandatory fraud training on a regular basis for all employees. “When I tell employees that their actions prevented $2 million in fraud, it gets their attention,” she said.