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MBA Newslink: Combatting Fraud in the Mortgage Process

MBA NewsLink recently posed questions to Brent Chandler, founder and CEO of FormFree Holdings Corp., a privately held technology provider that specializes in helping financial institutions determine the ability of their customers to pay back loans.

Chandler has more than 20 years of experience in the financial services and technology industries. He helped create the CheckFree online trading platform and led the development of the CashEdge wealth management platform (both now part of Fiserv). He has also held senior level positions at Merrill Lynch and Fidelity.

MBA NEWSLINK: Fraud in the mortgage process doesn’t appear to be going away. What are some of the trends you are seeing?
BRENT CHANDLER: Fraud continues to persist throughout the loan qualification process. Falsifying employment, identity, income, assets and deposits and undisclosed debt are some of the most common forms of fraud in the application process. Scammers take advantage of borrowers and lenders by misstating, misrepresenting, or omitting essential information in a real estate transaction.

Unscrupulous investors, unethical real estate agents and other fraudulent loan participants are constantly trying to beat the system. They use mule accounts, they make large deposits to temporarily inflate the amount of assets in an account, they falsify account statements to reflect different numbers than actually exist and they hide debts to skew debt-to-income ratios. These and other tactics account for billions in annual losses to the mortgage industry.

NEWSLINK: How can lenders avoid bank and asset statement fraud?
CHANDLER: The right technology is the key. For example, the problem with paper bank statements is that you don’t know if they were edited using something like Photoshop before it was printed, or if a bank statement was put on a copier with a transaction hidden via a fold or white-out. The first line of defense in combating this type of fraud is to retrieve “verified data.” The information being analyzed needs to come in a digital form, directly from the financial institution with no human interaction. This removes the opportunity for anyone to tamper with account information before you see it.
With a system like ACCOUNTCHEK, the digital bank data goes through a detailed analysis engine that scans every transaction, identifies items like paycheck deposits and calculates whether the total deposits match the net-income amount the borrower stated on the 1003. If the numbers don’t match, the system flags this anomaly and provides an opportunity for the lender to have a conversation with the borrower and request additional information. Sometimes an applicant will deposit money into their account just for the purpose of inflating the assets on the loan application. Our system highlights these “unusual deposits” and alerts the loan officer.

Borrowers will often try to hide debt. How does the lender see things like a private loan between family members that does not show up in a credit report? In the past, this sort of thing could be difficult to catch. However, technology now allows us to review all transactions in the submitted accounts to look for patterns. If there seems to be a regular payment leaving the account, and it is not a utility or general living expense, there is a good chance it is a debt payment of some sort. We can calculate that in the total Residual Income and raise a flag, thus enabling the lender to have a conversation with the borrower for clarification.

NEWSLINK: What kind of real-time verifications can be performed to detect certain frauds?
CHANDLER: There is another pitfall to paper statements that we haven’t discussed yet, and that is the fact that paper statements are not real time; they can be up to 30 days old. Paper statements don’t give you any kind of insight into the applicant’s current financial position. What if they lost their job, and provided you with three months of statements that show income they are no longer receiving? Or what if they received a bonus since their last paycheck and have ample funds in reserve to qualify for the loan, but it is not being reflected by the most recent bank statement?
The data we get is a snapshot of what is happening in a borrower’s account. There’s no lag time. Our clients get a real time view of the borrower’s current finances in a verified form in addition up to 90 days of historical information. It really is a complete picture of a borrower’s ability to pay. But we don’t stop there. ACCOUNTCHEK continues to monitor the borrower’s account during the application process. We pull fresh account information regularly, and provide the lender with the latest analysis and any undisclosed issues we discover in that analysis.

ACCOUNTCHEK then archives all the statements we analyze, so if a question about the documentation associated with a loan were ever to arise, we could provide the original statements for comparison, years after the fact. This will make quality control much easier. It is a sad fact that lenders have been responsible for fudging numbers, not just borrowers. The best way for an organization to protect themselves is to use a trusted third party to collect and verify the data.

NEWSLINK: We’ve seen gradual progress toward the paperless mortgage, but not all lenders are still up to speed. What kinds of disadvantages do they face?
CHANDLER: Quite simply, replacing a paper process with a digital one is disruptive. It requires a change in long-term habits at the individual and institutional levels. Lenders tend to have to-do lists a mile long and are frequently trying to stay ahead of the paperwork pile, so adding anything that might cause a temporary delay can be at best an annoyance and at worst a total roadblock.

It requires learning something new, even if the software is extremely easy to use. All workflow processes have to adjust. In the end, the time and cost savings, along with greater compliance and lower risk, will result in a better bottom line, but sometimes it is hard to see the forest for the trees. The answer isn’t cutting down the trees for your print-outs, though.

NEWSLINK: What will be the most immediate impact of the Consumer Financial Protection Bureau’s Ability to Repay rule, once it presumably kicks in this January?
CHANDLER: The Ability to Repay rule is a completely new deal. It’s not a borrower’s FICO score, and it’s not the borrower’s debt-to-income. Ability to Repay looks specifically at the loan you are getting and your current and future financial state to answer this question: Can you pay back that loan?
But if FICO and DTI cannot help lenders answer that question, what can?

From 50,000 feet, ability to repay means that the borrower has a verified stream of income that sufficiently exceeds their actual expenses so they can take on a new debt obligation. They must have sufficient residual income (or free cash flow, to use an accounting term) so that they can cover the payment on their new loan.

So how do lenders calculate ability to repay? What are the data points they need? The book of record for a borrower’s financial picture is their bank statements. It shows their inflows and their outflows. But to consistently and accurately evaluate every borrower’s ability to repay, lenders need an automated system, like ACCOUNTCHECK, that uses verified data directly from the borrower’s banks. And they need to do it the same way, every time, for every customer to comply with Reg Z rules.
This article was originally published in MBA Insights.

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