Q UA LITY CON T R O L & R I S K M A N AG EM EN T
Unlocking Risk Secrets TO REDUCE FRAUD LIKELIHOOD IN 2021, LESS IS MORE, THANKS TO SCIENCE By FR ANK M CK ENNA , Point Predictive, Special to Mortgage Banker
T
he economic fallout of 2020’s pandemic brought historic unemployment levels that we expect will lead to an increase in mortgage fraud rates in 2021. Experts expect to see more income and employment misrepresentation, higher incidences of credit washing, and an emergence of synthetic identity schemes that could make fraud detection even harder next year. But as damaging as it is to lenders’ bottom lines, fraud itself may not actually be the industry’s biggest challenge. In a case of the cure being worse than the disease, current methods of detecting fraud may rival the impact of the original threat. Perhaps the key to stopping more fraud is to do less work, not more. As fraud rises in the next 12 months, perhaps the answer is working smarter, not harder.
THE HIGH COST OF UNTARGETED FRAUD PREVENTION
Preventing mortgage fraud is extremely important to brokers, lenders, and servicers. But over the last 10 years, the process of identifying where to look for it has become increasingly difficult because new technologies are introduced to the masses and the fraudsters, corporate strategic priorities ebb and flow, and no process is ever 100 percent secure. In the effort to identify and prevent fraud in all forms, the industry has progressively layered more and more rigid policies and manual processes on top of a fluid problem space. This result is the industry looking for fraud everywhere, instead of better anticipating where it is likely to be. Statistically, mortgage fraud is a relatively rare event, affecting only about 1 percent of loans in any given year. Yet current approaches to fraud prevention have buried underwriters under mountains of
8 MORTGAGE BANKER | JANUARY 2021
paperwork and third-party verification data. This ultimately burdens borrowers with lengthy, onerous loan processing and months of duplicative or unnecessary documentation and compliance checkboxes, while the rates of fraud detection are only marginally improved, at best. This disruption comes at a high price. In 2021, it will be more important than ever to explore reliable ways to accelerate the mortgage loan approval process while also improving our fraud detection abilities. To do this, lenders will need to focus on the top fraud prevention issues plaguing the industry: • The high rate of reviews and false positives that inundate underwriters and threaten the efficacy of the process of fraud prevention. • Poor targeting of quality control (QC) measures due to the inability to know what is risky and what is not during the pre-funding portion of the process.
• Limited streamlining options for more effective routing and passing lower risk loans more quickly through the system. Three Steps to Saving Time, Reducing Loss, and Accelerating Low-Risk Lending through Smarter Fraud Prevention My company, Point Predictive, analyzed more than 80 million loans that have contributed to its anti-fraud lending data consortium. Our analysis demonstrates the opportunity that lenders have in 2021 to improve operating results for their mortgage portfolios.
1. REDUCING FRAUD REVIEW RATES AND FALSE POSITIVES SAVES TIME
The most common types of fraud are misrepresentation (with income misrepresentation still the single most frequent type of mortgage fraud), early payment default, and repurchase risk. They drive far too many foreclosures and burden lenders with enormous financial loss. So, all the “i-dotting” and “t-crossing” that goes into preventing them is understandable. In extensive data analysis with lenders, Point Predictive data scientists discovered that nearly half of all lenders saw up to 80 percent of their loans subject to some fraud flag or review process that required manual intervention. This high rate of review may be giving lenders a false sense of security. High review rates result in expensive and
