FundingShield: Nearly Half of Transactions at Risk in First Quarter
(Illustration: FundingShield)
Nearly 47% of transactions on an $80 billion portfolio of residential, commercial and business purpose loans had issues leading to a risk of wire and title fraud during the first quarter, according to FundingShield, Newport Beach, Calif.
On average, problematic loans had 2.5 issues per loan–a new record–which indicates a lack of appropriate controls by closing agents and lenders to identify and fix issues, FundingShield said in its latest Wire Fraud Analytics and Risk report.
The first quarter saw record-high risk levels for Closing Protection Letter validation-related errors (10.8% of transactions) for critical data points such as borrower information, vesting / vested parties, non-borrowing parties on title, property addresses, borrower information and more. “This is another example of a lack of accuracy between lender and title systems alongside the CPL issues that hit all-time high levels last quarter of 47.7% of transactions,” the report said.
There were wire-related errors at 8.4% of transactions in the first quarter, the sixth straight quarter exceeding 8% for this category. License issues remained at elevated levels from late 2024 to early 2025 due to entities having lapsed, terminated or suspended licenses and inconsistent data when verified with registrars, insurance regulators and licensing bodies. “These persistently high levels combined with the CPL validation and key data element mismatch highlight the need for source data verification in workflows and for trusted data sets being used as part of critical processes,” FundingShield noted.
FundingShield said it sees further focus on wire fraud, title fraud and closing agent risk management including additional focus on closing agent risk management at the GSEs. FundingShield received requests for data from many of its lender clients that sell to Fannie Mae who recently underwent Mortgage Origination Risk Assessment (MORA) audits during the first quarter.
The clients were undergoing typical Mortgage Origination Risk Assessment audit requests. Fannie Mae had reached out to FundingShield clients, asking them to confirm the risk framework, measurement and tracking the lender used to conduct transaction-level risk reviews of the closing agent, the title insurance firm and transaction-specific details at the time of closing on each loan sold to them. This did not mean having a database of approved agents last updated “X” days, months, or years ago, but rather that the check was done at the time of closing and was transaction specific.
-Transaction-Specific Checks: Lenders were required to perform checks at the time of closing, ensuring that each transaction was reviewed individually. “It’s crucial that these checks are done for each transaction to mitigate risks effectively,” one Fannie Mae representative said.
-Documentation and Evidence: Lenders had to document and provide evidence of a framework for confirming recourse back to rated title insurance firms, the use of licensed parties, and steps taken to confirm the compliance of the agent with local insurance and escrow laws. Providing thorough documentation is essential to demonstrate compliance and risk management.
-Rising Market Risks: This requirement indicates rising risks in the market due to concerns around cybersecurity, data security, and credit risk. The increasing focus on cybersecurity and data security reflects the growing threats in the financial sector that are front and center as evidenced by increasing wire and title fraud attempts by first party and third-party (cyber-based) actors.
The implications of this include a higher expectation of recourse, FundingShield noted. “Fannie Mae’s validation of steps taken by sellers indicates a higher expectation of risk and a need to further confirm recourse from title insurance firms for loans sold to the GSE,” the report said. “Ensuring recourse back to rated title insurance firms is a critical step in managing credit risk. FundingShield’s transaction-level reviews that confirm license, coverage, bank data, title insurer system validation and remediation of issues and much more pre-closing is a market standard to manage this risk effectively.”
