Stepping Up the Fraud Prevention Game

An interview with Sam Bobley, CEO of Ocrolus

By Brian Honea

The COVID-19 pandemic has resulted in a substantial increase in the amount of online commerce for the mortgage industry in the last few months, which increases the likelihood of fraud. Recently, the National Credit Union Association recently issued a risk alert as fraudsters look to take advantage of newly implemented or expanded government programs for COVID-19 relief, such as the CARES Act.

Lenders’ legacy fraud detection models can often catch routine scams, but they may not be enough to prevent many scammers from slipping through the cracks as hundreds of thousands of borrowers are seeking COVID-19 relief. With scammers increasing their efforts to circumvent fraud detection models, lenders must step up their game by advancing their current fraud prevention processes. Sam Bobley, CEO of New Yorkbased fintech Ocrolus, recently spoke with The MORTGAGE BANKER Magazine about how lenders can reduce the likelihood of fraud through upgraded processes that catch fraud quicker and more seamlessly. MBM: In what ways are fraudsters known to be taking advantage of relief programs such as the CARES Act? Sam Bobley: To date, the PPP funding program has encountered every type of financial fraud imaginable: forged or manipulated documents, creation of fake companies, identity theft, and simply misuse of funds outside of business expenses. Fraud detection and prevention associated with PPP underwriting have involved reviewing documentation and creating an audit trail for post-loan investigation.

MBM: In what ways have mortgage lenders and servicers stepped up their fraud detection to prevent this? Sam Bobley: Given the profound economic uncertainty, lenders need to be more diligent than ever while reviewing applications. In our experience at Ocrolus, there are three key areas where mortgage lenders have adopted innovative technologies to prevent fraud: image, data, and identity fraud.

To combat borrower fraud, mortgage bankers need to deploy sophisticated technology that triangulates suspicious behavior. Firstly, the mortgage lender needs to defend against identity fraud, which can be done by implementing APIs that unearth synthetic identities and automatically complete extensive Know Your Customer verifications. Once a borrower’s identity has been confirmed as legitimate, approving mortgage applications boils down to an evaluation of the customer's credit, income, and assets (assuming the subject property appraises). The primary points of vulnerability are income and assets; meaning that a borrower has the ability to misrepresent their income and assets by altering financial documents or even creating completely fabricated documents from non-existent employers. To most effectively combat malicious behavior, identity verification should also be performed on employers. Tools like Middesk enable lenders to seamlessly perform Know Your Business checks to ensure the alleged employer is indeed a real company.

To avoid identity fraud, it is essential to perform a deep check for synthetic identity with clustering technology via participation in ‘fraud defense networks’ that enable the industry to collectively fight against bad actors.

File tampering technology can be used to discover image fraud—documents that contain information that was added or edited after the document was created. Ocrolus has taken this one step further by also helping lenders programmatically detect data fraud, which is inconsistencies in key data elements that signal foul play. For example, reconciling bank transactions against account balances and crossreferencing data elements across multiple sources can help mortgage lenders determine where greater scrutiny is required.

Image fraud helps lenders automatically recognize altered and fabricated documents and identify suspicious activity, including incomplete data sets, missing pages, invalid dates and amounts, abnormal fonts and

logos, and irregular formats. Using data sets is also essential for the foundation of strong fraud defense. It can help lenders in analyzing transactions to recognize schemes intended to game the system.

MBM: What method do fraudsters use that is the most difficult to detect or perhaps the one people have to be most on the lookout for? Sam Bobley: Fraudsters have developed a variety of methods to alter loan documents. This can range from altering specific data points to creating entirely counterfeit paper trails, which are sometimes even tied to entirely counterfeit identities. Fraudsters operate with a mentality of rapid iteration in an attempt to stay one step ahead of the defense. It is critical for lenders to invest in technology to fight against the threat of ever-evolving thread of altered loan documentation.

MBM: Is there an example of when the implementation of fraud prevention resulted in catching a fraudster who was prosecuted? Sam Bobley: In late September, a story broke on mortgage fraud perpetrated by a dozen individuals representing over 100 mortgages over four years. The alleged fraudsters were new home builder property agents; with their understanding of the loan application process, the agents guided homebuyers with the creation of falsified bank statements and pay stubs.

Brian Honea is the managing editor of The MORTGAGE BANKER Magazine.

This insurance protects the originator from losses stemming from loans contractually required to be repurchases by the investor. The cost is typically passed through and is less than the cost of the loss reserves.

Problem

Mortgage originators are increasingly at risk of financial losses resulting from application fraud such as: • Income misrepresentation • Occupancy misrepresentation • Property value misrepresentation • Undisclosed real estate debt • Transactional (e.g. straw buyers)

Benefits

Fully Customizable Protects originator from putbacks Increases loan value in the secondary market Pass-through cost Both QM and non-QM covered

Kris Anderson 812-887-0443 Click for Quote very little information is needed Click to schedule a call