ben niles, master cmb - mbba-nh

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Presented by

QC & Fraud

Ben Niles, Master CMB

Mortgage Banking InstructorCredit Policy & Product Risk SpecialistResponsible Housing Finance Advocate

603-305-0590 (C)[email protected]

Proprietary information, do not distribute or use without permission of MBBA-NH.

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AGENDA

1. Quality Control

• Sample Size & Selections

• Defects

• QC Resources

2. FRAUD

• What, Who, Why?

• Fraud Detection

• Fraud PreventionProprietary information, do not distribute or use without permission of MBBA-NH.

Principles of Mortgage Banking – QC & Fraud

Quality Control Basics

• Written Plan meeting Investor Guides• FNMA, FHLMC, HUD, USDA, & VA.

• Approved by Senior Management &/or Board of Dir.

• Independent of Originations (Ops) & Servicing

• Monthly Written Reports to Sr Management/Board

• Report Correction Action Recommendations

• Report Ineligible & Not Investment Quality (NIC) Loans

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Principles of Mortgage Banking – Quality Control

Quality Control Sample

• Prefunding QC: min. 10% Credit & 1% Collateral Docs.

• Post-Closing QC: same as above.

• Post Closing Review: 100% Prior to Delivery to Investor.• Fix all defects/data integrity issues prior to shipping loans to

your investor.

• Re-Underwrite & re-run AUS as necessary, based on type of defect.

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Loan Defect Rates

• Defect Rates: Goal is Zero Defects

• FNMA Defect Guideline:

• Max acceptable minor defects = 10%.

• Max acceptable major defects = 3%.

• I lude o plia e ith le di g regs i all e ie s.

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10% Quality Control Sample

• Random Sample: Product, Purpose, & Channel.• Discretionary Review: full file review, or component review

(ie- ’s & T fo self-employed, or TRID).• New origination & servicing employees. • New branches, brokers, correspondents, &

products/programs.• High risk loans- LTV > 80%, FICO < 680, 2-4 units, NOO, C-O

refi.• Loans with layering of high risk features.• Ea ly pay e t defaults EPD’s - 1st 12 months.

• Random/Discretionary Ratio- varies based on RISK.

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FNMA: 4 Most Common Defects As of July 2017

• Liabilities = 51%

• Income = 27%

• Occupancy = 8%

• Value = 8%


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2017 USB Survey: 2,000 Americans

How honest are your loan applications?• 20% said their loan information was not completely

accurate and factual, as follows:

• 32% inflated assets

• 24% underreported debt

• 21% underreported expenses

• 19% inflated income


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FNMA Resources @

https://www.fanniemae.com/singlefamily/loan-quality

• Beyond the Guide.• QC Self-Assessment Worksheet.• QC Vendor Management.• Loan Defect Categories & Spreadsheet.• Certainty: A Shared Commitment (Day 1 Certainty).• Post-Purchase Review & Reports Lender Job Aid. • QC & U/W Boot Ca p , dates to e a ou ed.

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Freddie Mac QC Resources @

freddiemac.com/singlefamily/quality_control.html

• QC Best Practices.

• A Renewed Focus on Quality Control.

• Focus on The Facts: The Key to Strengthening Loan Quality.

• Post-funding QC review checklist:• QC Review Doc Checklist.

• Responsible Lending Compliance Review Doc Checklist.

• Responsible Lending Compliance & Performing/Non-Performing Loan (Dual Review) Doc Checklist

• Announcements regarding QC.

• Training Resources. 10



QC Axioms for the Ages

• Quality is ot a a t; it is a ha it. A istotle

• Ze o defe ts p og a . DOD i ’s

• Quality is al ays the est usi ess pla . Mike Scherer

• Quality is jo o e. Fo d

• The oad to uality is a jou ey . FNMA 11



What is Mortgage Fraud?

• The intent to materially misrepresent or omit information on a mortgage loan application to obtain a loan that would have been denied had the lender known the truth.

• A federal crime, a felony

• No statute of limitations (wire fraud, bank fraud, mail

fraud, & money laundering)

• Penalties of up to 30 years in prison, plus fines,

plus restitution.

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Principles of Mortgage Banking – Fraud

Four Classes of Fraud

• Fraud for House: Always Borrower Misrep• Usually 1 loan

• Predatory Borrowers or Predatory Lending?

• Fraud for Profit: Schemes & Conspiracy• Usually multiple loans

• Usually multiple players

• Institutional Fraud: Enterprise Level for Profit

• Broker or Lender: multiple loans

• So e eig Citize ’s F aud: fastest g o i g• (see FNMA Tutorial)

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Loan Level Fraud for House (Misrep)

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• Appraisals: • Comp Shopping, value inflated or deflated• Bogus Appraisal Data & Phony Rehabs

• Assets: Source of Funds & Recent Deposits• Debt: Undisclosed• Employment/Income: Salaried or Self Employed

• Fraudulent Paystubs, W-2’s, & 1040’s• Occupancy: Investment Property or Owner Occupied



Misrep by Region: (FNMA 7/17) 2016+ VS 2015

• CA: 25% 20%

• North Central: 19% 17%

• Southeast: 16% 17%

• Northeast: 13% 18%

• Southcentral: 9% 9%

• Southwest: 9% 8%

• Northwest: 5% 5%

• Capitol Region: 4% 6% 15



Top 10 Fraud States- 2015+ Originations,

(FNMA Data)

1. CA 6. CO

2. NY 7. NJ

3. TX 8. GA

4. FL 9. IL

5. VA 10. NV

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Misrepresentation Data: FNMA, 7/17Type: 2016+ Originations 2015 Originations

1. Liabilities* 51% 37%

2. Income* 27% 18%

3. Occupancy* 8% 12%

4. Value 8% 27%

5. Assets* 4% 3%

6. Property: 2% 2%

7. Credit* 0% 1%

8. SSN* 0% 0%

90% = Borrower* Misrep 17



FRAUD Schemes

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• Air Loans (straw or non-existent buyer or non-existent property)

• Affinity Fraud

• Appraisal Identity Theft

• Arts & Crafts Docs• Builder Bailouts

• Buy & Bail

• Cash-out Purchases



FRAUD Schemes

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• Cyber Security Breaches- Identity Fraud • Deed Fraud• Investment Clubs & Ponzi Schemes

• Foreclosure Rescues• Misrepresentation of Current Owner• Phantom Renovations• Property Flipping & Flopping



FRAUD SCHEMES – o ’t

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• Ransomware- now targeting small to medium businesses• Rapid Refi’s Hides details of pu hase• Rental of Vacant Property• Reverse Mortgage Fraud

• Reverse Rental (occupying a rental property) • Sale of Vacant Property- (rentals & 2nd homes)• Silent Seconds



FRAUD SCHEMES – o ’t

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• Straw Buyers• Short Sale/Payoff Fraud

• Shot-gunning (multiple simultaneous loans, same house)• So e eig Citize ’s Mo e e t • SSN- Identity Theft (used in fraud for profit schemes)

• Wire Transfer (new wire instructions re-directs funds)



So e eig Citize ’s Mo e e t

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• Domestic Terrorism- decentralized via the Internet• 300,000 “anti-government” members & growing.• Members believe they are sovereigns, not subject to:• IRS taxes• Local Laws • State Laws• Federal Laws



So e eig Citize ’s Mo e e t

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• Financial Fraud for Profit- Typical Fraud Schemes

• Retaliation against Gov’t employees- create & record

fraudulent financial instruments & records

• Deed Fraud

• Judgements

• Liens

• False claims

• False IRS refund filing

• See FNMA tutorial at fanniemae.com under

A ti-F aud Pa t e ship T ai i g Se ies Ta .Proprietary information, do not distribute or use without permission of MBBA-NH.


Local Fraud Cases

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• Confed Mortgage Co- MA Institutional Fraud• Countrywide Financial Corp Institutional Fraud• Dime Mortgage Co- NH Builder Bailouts- hidden seconds• Bankeast Mortgage Corp Victim of Straw Buyer Fraud- MA • “a bank in Maine” Insider Conspiracy• American Mortgage Funding PA Mtge Broker Payoff Fraud*

Corp in Maine PA Closing Agent Payoff Fraud*

• 35+ Funding wires sent to Broker’s or Closing Agent’s account & diverted- existing mortgage was not paid off.



Fraud Headlines• 9 in NJ Charged in $10M Fraud

• 4 in PA Charged in Multi-Faceted Conspiracy

• NY Man Arrested by FBI for Ponzi Scheme

• Businessman & Attorney Guilty of Loan Fraud in MI

• Former CA LO Arrested- Straw Buyer Scheme

• Former Nashua Man- Equity Stripping Scheme

• Thieves Steal Whole House- deed fraud at epidemic levels in

Manhattan & Florida;

• European & Asian investors are easy targets in Detroit Rehabs.

• Man accused of stealing $10M from 122 elderly West Side victims in Chicago reverse mortgage scheme.

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Fraud Headlines

• NH Mortgage Consultant- Loan Mod Fraud

• NH Lawyer Sold Home He Did Not Own

• MA Woman Sentenced for Appraisal Fraud

• Hopkinton Brothers Indicted- Straw Buyers

• MA Fraudster Gets 6+ Years- Mortgage Scam

• Boston Man Convicted- Straw Buyers

• MA Attorney Jailed for Stealing Closing Funds

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•

Straw Buyers: Former Realtor & Real Estate Developer Sentenced to Prison for Massive Mortgage Fraud

In June 2015 Michael David 51, of Mansfield, pleaded guilty to 32 counts of wire fraud, 14 counts of bank fraud, and 22 counts of money laundering. Developer sentenced to 135 months in prison and ordered to pay restitution of over $11,374,201 and to forfeit $7,413,712.

From September 2006 to April 2008, Scott purchased 3-4 unit buildings in Roxbury and Dorchester, converted to condo’s, & sold units to straw buyers from as far away as DC.

Scott submitted mortgage loan applications that falsely represented key information, such as the buyers’ income, personal assets, down payment, and intention to reside in the condominiums to 9 national mortgage companies and one local bank.



Fraud & Misrep Docs

• Applications (1003)

• Appraisals

• Sales Contracts

• Bank Statements- Source of Funds

• Paystubs & W- ’s• ’s• Credit Docs

• Closing Docs

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Research: Small Fibs Lead to Big Whoppers

• Neuroscientists show that the brain becomes

desensitized with each successive falsehood.

• The more we lie, the less the brain responds.

• This is the slippery slope- of falsehoods leading to fraud.

• Fraud becomes financially rewarding.

• Ethics & honesty requires that you walk away from some

deals.

• Only then do you have a conscience. 29



Return of SIVA Loans for

Self-Employed Borrowers• 24, 12, or 1 month Bank Statements to verify income?

• No Yea s ’s • No 4506T

• Ho do you a age the isk of SIVA’s? • Use the 3-C’s: edit. Capa ity, & ollate al.

• 1st ti e as…..? • 2nd ti e as….? • Third time will not be a charm.

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Moody s Issues Cautio o Ba k State e t Mo tgages

• Ba k state e ts & A ou ta t’s letters to erify income:

• These loans are more risky- self-employed borrowers

• More susceptible to income fraud

• Esp. less than 24 months bank statements

• So, how do you manage the loan risks?• See slide 33

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The Return of SIVA• Does Non-QM exempt Lenders from:

• Repu hase R&W’s: fo life of loa ?• Investor Litigation: loss recovery?

• Mortgagor Litigation: rebuttable presumption?

• Regulatory Enforcement:

• UDAAP- deceptive practices

• Fair Lending- discrimination, protected classes

• Predatory Lending- pricing & credit policies

• ATR- credit, collateral (equity), & capacity

• SARs- mortgage fraud is reportable32



The Bottom Line• 90% of Stated Income is Misrepresentation.

• Self-E ployed Bo o e ’s: ’s a e the eal issue.• If they a ot e ify i o e ith thei ’s, eithe

• Application income fraud- true income is too low to qualify, or

• Income tax fraud- not paying taxes on unreported income.

• Solutio is to U/W usi g ’s. If DTI > %, use Residual Income U/W.

• O … set max LTV/CLTV of 50-60%, min FICO of 700 & 36-38% max DTI

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Major Bank Fines Exceeding $200 Billon

• Ally Financial, Barclays, BNP Paribus, BOA, Chase, Citicorp, Countrywide Financial, Deutsche Bank, Goldman Sachs, HSBC, IndyMac, Rabobank, Societe Generale, Royal Bank of Scotland, UBS, WAMU, Wells Fargo.

• Regional Banks

• Subprime & Alt A Servicers

• Blowback to Originators: Wall Street sues to claw back losses.

• Call this paying for the sins of the past!

• No wonder Banks are playing it straight- QM/ATR.

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Current Fraud Trends• Highly organized schemes

• Collusion between property seller, broker, appraiser

and title closer

• Collusion is the new norm

• O e Stop Shoppi g• One person controls the entire transaction from sell of

property, origination, appraisal through closing

• All have value issues / losses

• Loans are kept current for period of time35



Bo o e s’ Role i F aud S he es• Borrower is not aware of scheme• Naïve, greedy, & stupid!

• Good FICO score

• Trustworthy

• Borrower not aware of:• Loan level misreps

• Inflated value

• Quit claim deeds

• Or Borrower Intentional Misrepresents.

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You cannot have appraisal fraud

without lender complicity or

indifference.

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Appraisal Fraud Prevention• Follow HVCC

• Know your Appraisers

• Rank your Appraiser Panel: A, B, C, D

• Rank Appraisers by performance: quality of work, timeliness, & professionalism

• Rotate Appraiser Assignments

• Use Lo al App aise s o Sales i put • Order all appraisals on a rotating basis

• Report appraisal fraud / questionable practice to law enforcement / licensing boards

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Principles of Mortgage Banking – Fraud Prevention

Appraisal Internet Resources

• Ways to verify sales history and ownership of subject and comps• Title commitment

• Tax records www.searchsystems.net

• www.SearchTheNationalMLS.com

• Map distance www.mapquest.com

• Use FNMA’s Collateral U der riter ith DU- Day 1 Certainty.

• Use Freddie Ma ’s Collateral Ad isor ith LP.• Use AVM’s he i dou t.

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http://www.searchsystems.net/

http://www.searchthenationalmls.com/

http://www.mapquest.com/

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Basics of Fraud Prevention


• Sr. Management Support (culture)

• Annual Fraud Training- all employees

• E po e U/W’s to Say NO!• Notify Investors & Authorities

• Hire Honest Staff

• Practice Integrity & Ethics

• Avoid Conflicts of Interest in Hiring

• Increase Pre-Funding QC (targeted)

• Report all fraud to State Police & the

Professional Licensing Boards


Efforts to Prevent/Detect Fraud• Obtaining information independently

- Credit- Employment

• Re-verify by phone, using your phone number, not theirs. Get number from Company Website or Internet Directory

• Detail Instructions to Closing Agents: Verify revised wire instructions directly with your contact by phone & email.

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Efforts to Prevent/Detect Fraud

• Use Freddie Mac Exclusionary List

• Freddie Mac 1-800-4FRAUD Hotline

• Fannie/Freddie Websites

• Attend FNMA QC & U/W Boot Camp

• Annual Fraud Training- all Ops, QC, & Servicing staff.

• New Employee Training42



Fannie Mae Resources

• Common Red Flags

• Fraud Schemes & Their Characteristics

• Misrepresentation Data

• Loan Defect Categories

• DU Potential Red Flag Messages

• www.fanniemae.com/singlefamily/mortgage-fraud-prevention

A ti-Fraud Part ership Trai i g Series : 13 Tutorials43



http://www.fanniemae.com/singlefamily/mortgage-fraud-prevention

Freddie Mac Resources

• www.FreddieMac.com/singlefamily/preventfraud/

• Fraud Hotline: 1-800 4 FRAUD 8

• Freddie Mac Exclusionary List

• F aud Mitigatio Best P a ti es• Mo tgage S ee i g P o ess: Red Flags• Preventing Mortgage Fraud for Servicers Fact Sheet

• Preventing Mortgage Fraud Fact Sheet

• Mortgage Fraud Prevention Tip Sheet

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http://www.freddiemac.com/singlefamily/preventfraud/

Additional Fraud Prevention Resources • AVM’s (automated valuation models)

• MLS (Multiple Listings Services)

• MARI MIDEX Report (Mortgage Asset Research Institute)

• Lexis Nexis, DataVerify Drive Report, 1st American FraudGuard

• Co e Logi ’s LoanSafe Collateral & Fraud Manager

• Rapid Reporting Verifications

• Undisclosed Debt Monitoring (thru your credit report vendor)

• Reverse Directories, White Pages, Yellow Pages

• Linked-In

• Secretary of State Records of Incorporation

• And of course, Google searches.45



Self Employed Case Study

• 3rd Application submitted- same Borrower. Loan was

sele ted fo p e-fu di g QC .

• 1st 2 applications were declined for insufficient income.

• You are the Quality Control VP- what do you do?

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Self Employed Case Study• Borrower owns the business & submits 3 paystubs to

verify his income.

• Paystubs are numbered consecutively.

• When questioned, the MLO states that it is his job to help the borrower structure their loan. The MLO has 9 active loans in pipeline & is a top producer.

• You are the Quality Control VP- what do you do?

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Self Employed Case Study, Cont.

• Wife convicted of theft & fraud (not on loan)

• Business bank statements show massive transfers to &

from Pakistan, UAE, China, Hong Kong, Singapore,

India, France, Canada, & within USA.

• $2M+ Large Deposits

• $1M+ wired to businesses that are either unverifiable

or shell companies

• You are the Compliance VP. What do you do?48



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Find the Truth!

“Study the past if you want to define the future.”Confucius

“Follow the argument wherever it leads.” Socrates

“What a tangled web we weave when first we practice to deceive.” Sir Walter Scott

“When the truth comes around, all the lies have to run and hide.” Ice Cube

Fraud

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Ben Niles, Master CMB

[email protected]

603-305-0590 (C)

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QC & Fraud

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ben niles, master cmb - mbba-nh

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