red flag overview. november, 2010

8/6/2019 Red Flag Overview. November, 2010

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Waquis Quality Control

Overview of Red Flag Policy

November, 2010

Because of the upcoming Red Flags Rule enforcementdeadline, we wanted to revisit the topic in more detail andhelp prepare your company for its release.

CONTENTS

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What is Mortgage Fraud?Mortgage Fraud Statistics.Common Mortgage Fraud SchemesPenalties for Mortgage Fraud SchemesCommon Fraud for Profit SchemesRed Flags to Watch ForFighting Mortgage FraudResources for Red Flags of Fraud

Reporting Mortgage FraudIdentity TheftSynthetic Name FraudFighting Identity TheftFTCs Red Flag PolicyWhat is a Red Flag?Who Must Comply with the Red Flag Rule?Your Unique Red Flag Policy

Step 1: Identify

Step 2: Detect

Step 3: Respond

Step 4: Keeping Your Program CurrentAnnual Review of Your Red Flag PolicyContact InformationResources

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What is a Red Flag Policy?

A Red Flag Policy is a set of procedures andguidelines for the specific purpose of identifying

and preventing mortgage fraud.

The Red Flag Policy must be in writing.

The Red Flag Policy must be signed off on bythe Senior Directors of a company and have a

specified individual who is responsible forimplementing the policy.

If your company has a Red Flag Policy in place,it seriously lessens the penalty by the FTCshould your company be the victim of mortgage

fraud.

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What is Mortgage Fraud?

The FBI defines mortgage fraud as:

Any material misstatement,

misrepresentation or omission relatingto the property, or potential mortgage,relied upon by an underwriter or lenderto fund, purchase or insure a loan.

01 A lending institution is deliberately

deceived by another party into lendingon a mortgage it would have otherwisenot funded, had it known all the facts.

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FBI Mortgage Fraud Statistics

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FBI mortgage fraud investigations in 2009increased 400% since 2005.

63% of all pending FBI investigations areover $1 million.

80% of mortgage fraud involves collusionby industry insiders.

FBI Mortgage Fraud Statistics(continued)

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Estimated Annual Losses $4-6 billionTotal Mortgage Fraud Suspicious Activity Reports

(SARs) in Fiscal Year 2009

67,190with more than $1.5 billion in losses

SAR Reports so far in Fiscal Year 2010(through 2/28/10)

29,780

Total FBI Mortgage Fraud Task Forces/WorkingGroups

77

Pending FBI Mortgage Fraud Investigations (through2/28/10)

2,989with 68%involving losses of morethan $1 million

Cases opened in Fiscal Year 2009 1,571compared to 136 in all of Fiscal Year2004

Successes in Fiscal Year 2009 494 convictions

http://www.fbi.gov/hq/mortgage_fraud.htm

States with significant mortgage problems:12 1.Rhode Island3 2.Florida4 3.Illinois5 4.Georgia6 5.Maryland7 6.New York 8 7.Michigan9 8.California10 9.Missouri11 10.Colorado

Fannie Mae Fraud Findings

Statistics

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https://www.efanniemae.com/utility/legal/pdf/fraudstats/fraudupdate0410.pdf

Fannie Mae Fraud FindingsStatistics

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https://www.efanniemae.com/utility/legal/pdf/fraudstats/fraudupdate0410.pdf

Common Mortgage Fraud

Schemes

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Fraud for Property

Fraud for property (aka fraud forhousing) occurs when a borrower wants to

purchase a property they cannot afford.

Borrowers may act independently or beaided by dishonest mortgage industryprofessionals to submit false informationabout the borrower.

Characteristics of Fraud forHouse/Property

Borrowers intend to make all payments

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Participants are rarely compensated

Documents are falsified0 Tax Returns1 Paystubs and W2s2 Asset information3 Employment Verifications4 Occupancy intentions

Identity falsified

Losses are smaller than other mortgagefraud

This type carries lower financial risk to lenders, as the fraud is

typically a one-time occurrence on a loan the borrower intends to

repay.

Buy and Bail

Borrower qualifies for loan on newresidence by falsely claiming the existing

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residence will be a 2ndhome, sold or rented

out.

Once they close, they walk away fromprevious loan without making any futurepayments.

They get a more desirable property withequal or lower payments than that of theircurrent property.

Scheme may be difficult to detect.

Penalties for Mortgage Fraud

1 10 years in jail

Fines up to hundreds of thousands of

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purchase other properties. Sometimes the fraudster

promises to handle the transactions, including leasing theproperties. He takes a cut of the profit and never leases theproperty.

1Straw BuyerA person used to buy property in order to conceal the actualowner. The straw buyer does not intend to occupy the

property or make payments and often deeds the property tothe other individual immediately after closing. The strawbuyer is usually compensated for use of his identity.

Common Fraud for Profit

Schemes(continued)

1

Foreclosure RescueThe homeowner is deceived into signing over title to theproperty with the belief that he will be able to remain in thehouse as a renter and eventually buy it back over time. Theterms are impossible to live up to, and the homeowner loseshis home and any equity he may have had. OR, The

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homeowners think they are signing documents to bring the

mortgage current, but instead actually surrender theirownership. They usually don't even know they've beenscammed until they are evicted.

Property FlippingIllegal property flipping occurs when a property isrefinanced or resold immediately after purchase for an

artificially inflated value.

Perpetrators of Fraud forProfit

Anyone standing to make a profit is a potentialperpetrator of fraud.

1Offenders of fraud include:0 Borrower1 Seller2 Builder

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3 Title representative4 Real estate agent5 Originator6 Appraiser7 Underwriter8 Loan Officer

Red Flags you can watch for toprotect yourself

Commute is significantly unrealistic

New house is too small to accommodate alloccupants

Borrower information is incomplete orinconsistent

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Social Security number is inconsistent

Credit patterns are inconsistent

Large employer, but pay stubs are not pre-

printed

YTD earnings dont compute or match W2

Red Flags To Watch For

(continued)

Occupant shown to be tenant or unknown

Significant appreciation in short timeperiod

Large positive adjustments made tocomparable properties

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Fighting Mortgage Fraud1Know the people with whom you are doingbusiness2

Understand and train staff on commonmortgage schemes3Learn to recognize red flags andinconsistencies in file4Ensure documentation is accurate and valid

Use third party resources to verify keyinformation

Report suspicious activity

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Resources on Red Flags ofFraud

Two useful resources for information on redflags of fraud are:

www.efanniemae.comMortgage Fraud Program/ Resources toHelp You Combat Mortgage Fraud

12 www.freddiemac.com/dgtg

3 Fraud Prevention Best Practices

Reporting Fraud19


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If you suspect fraud, or have been theunfortunate victim of fraudulent activity,you can report to the following agencies:

1 FBI:0

http://www.fbi.gov/contact/fo/fo.htm23 HUD:4 http://portal.hud.gov/portal/page/portal/HUD/localoffices

5

6 Fannie Mae:7 https://www.efanniemae.com/utility/legal/antifraud.jsp

Repurchase Demands

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Remember

Most of your agreements with lenders,investors, and agencies state that you willdeliver loans without material defect orfraud. If you do, then the loan is subject to

repurchase.

Identity Theft

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A recent survey conducted by Javelin Strategy

and Research Company found that identity theftcases are up 22% and have hit a 5-year high.

1 in every 10 U.S. consumers has already beenvictimized by ID theft.

The Better Business Bureau estimated thatidentity theft affected an estimated 11.1 millionAmericans, costing them nearly $54 billiondollars.

Synthetic Name Fraud

Synthetic Name fraud0 Using ones own name and date of

birth with another persons SSN.

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The Federal Trade Commission and LawEnforcement report that this is the fastestgrowing type of credit fraud and identitytheft.

Thieves find a valid SSN and use thisnumber but still use their own name, DOB,and address.

Synthetic Name Fraud1

Credit thieves have re-named stolen SSNsby calling them Credit Profile (or Privacy)Numbers (CPN).

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The SSAs Enumeration at Birth creates alarge pool of dormant SSNs issued tochildren for credit thieves to draw from.

Unsuspecting children may not have needfor their SSN until they apply for a job,credit, or college and find that a credit thiefhas stolen their identity.

Fighting ID Theft

As a mortgage company, you will want toverify your borrowers directly with theSocial Security Administration using aborrower signed consent form.

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This will verify the borrowers name,

DOB, address, and Social Security number.1If you are doing this on your credit reports,make sure its checking against all of theseitems and not just verifying that its a valid

SSN.

FTCs Red Flag Policy

The Red Flags Rule became effective January 1,2008.

Enforcement date has been pushed back to

December 31, 2010.

A policy to help combat and prevent theft ofcustomers private and personal information.

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In response, the FTC, the Federal bank regulatory

agencies, and the NCUA have issued the Red FlagsRule.

Financial institutions and creditors will be required todevelop and implement written identity theft

prevention programs.

Policies must be approved by Senior Managementand have a specific employee who is responsible forthe policy.

What is a Red Flag?

A Red Flag is a pattern, practice, orspecific activity that indicates the possibleexistence of identity theft.

The Red Flags Rule includes 26 illustrativeexamples of possible Red Flags that

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financial institutions and creditors should

consider when implementing a writtenprogram.

Who must comply with the Red

Flags Rule?1

Applies to financial institutions andcreditors with covered accounts.2

A financial institutionis defined as a:

State or national bank

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State or federal savings and loan

associationMutual savings bankState or federal credit unionEntity that holds a transaction accountbelonging to a consumer

Transaction Account1

A transaction account is a deposit or otheraccount from which the owner makespayments or transfers.

Transaction accounts include:Checking or savings accountsNegotiable order of withdrawal accounts

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Share draft accounts

Who is a Creditor

A creditor is any entity that:

Extends, renews, or continues creditArranges for extension, renewal, orcontinuation of credit

Is involved in the decision to extend, renew, orcontinue credit1

Creditors include:

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Finance companiesMortgage brokersAutomobile dealersUtility companiesTelecommunications companies

Covered Accounts

A covered account can be used for personal,family, or household purposes, which mayinvolve multiple payments or transactions.

Covered accounts include:

Mortgage loansCredit card accountsAutomobile loansMargin accountsCell phone accounts

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Utility accounts

Checking and savings accounts

Your Unique Red Flag Policy

The programs are not required to beidentical from one institution to the next.

Your program should be appropriate for thesize and nature of your organization.

A company at higher risk of identity theftwill implement a more complex program.

A company at lower risk of identity theftwill implement a less complex program.

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What should your program

include?

1.Procedures used to identify relevant redflags

2.Procedures used to detect red flags

3.Appropriate responses noted to preventand mitigate detected identity theft

4.Evidence to support steps have been takento keep your program current

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Step 1: IDENTIFY

The following categories of red flags maybe common for your type of organization:

Red flags, notifications received fromthird party providers (credit reports,

fraud detection service, etc.)

Inconsistencies and suspiciousdocuments provided

Suspicious personal identifyinginformation presented by borrower

Evidence of unusual or suspiciousactivity on covered accounts.

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26 Red Flags

1). Fraud Alert on Credit Report2). Unusual Credit Activity

3). Information on ID inconsistent4). Suspicious Addresses5). Person unable to provide identifying information6). Notice of Freeze on Credit Report7). Identification documents are suspicious8). Signature on ID inconsistent9). SSN and DOB range inconsistent10). SSN Associated with another person11). Address discrepancy on credit report12). Photo on ID inconsistent13). Identifying information with known fraud activity14). Address or phone number associated with severalapplicants.15). After change of address, creditor receives additionaluser requests.

16). Credit for cash advances and first payment not made.17). Drastic changes in credit payment patterns.18). Inactive account now showing unusual activity.19). Mail returned as undeliverable despite ongoingaccount activity.

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26 Red Flags(continued)

20). Customer is not receiving paper statements.21). Creditor notified of unauthorized transactions.22). Institution notified of unauthorized transactions.23). Creditor notified it has opened a fraudulent account.24). Application suspicious25). Information on ID inconsistent with other informationin file.26). Person unable to answer questions about identity.

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Step 2: DETECT

Once you have identified the red flags, youwill need to implement procedures used inyour daily operations to allow for their

detection.

Authenticate the identity of your customer.1 Verify Name, DOB, Address, and SSN2 Fraud Guard3 Safe Check4 Rapid Reporting

Verify data against publicly tradedinformation.

Step 3: RESPOND1

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Step 1 of your program identifies possible

incidences of identity theft common to yourorganization.

Step 2 identifies the processes yourorganization will use on a routine basis to

detect the red flag activities it has identifiedin Step 1.

Step 3 should provide for responses to thered flags detected that are commensuratewith the degree of risk posed.

Appropriate Responses1

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Examples ofappropriate responsesprovided

by the FTC:

Monitoring a covered account for evidence ofidentity theft

Contacting the customerChanging any passwords, security codes, or

other security devices that permit access to acovered account

Reopening a covered account with a newnumber

Not opening a new covered accountClosing an existing covered account

Not attempting to collect on a covered accountor not selling a covered account to a debtcollector

Notifying law enforcement

Step 4: KEEPING YOUR

PROGRAM CURRENT

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Criminals will constantly be updating theirtactics in response to efforts used to detertheir actions.

Step 4 should include implemented

processes to keep your plan current with theevolution of identity theft risk.

All employees should be trained annually onyour Red Flags policy and procedures.

Annual Review of your Red

Flags Policy

An annual review of your policy is required.At a minimum, the review should evaluate:

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Effectiveness of the program

Arrangements with Service Providerswith access to covered accounts

Significant incidents involving ID theftand company response

Recommendations for material changesin the policy

Contact Information

Please contact Waquis QC for any of your post-closing auditing or red flag requirements.

Waquis Quality Control

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www.waquisqc.com

Joe ONeillPresident

[email protected]

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Resources1 Federal Trade Commission:1 http://www.ftc.gov

23 Federal Bureau of Investigation:1 http://www.fbi.gov

45 The Mortgage Fraud Reporter1 http://www.mortgagefraud.org

67 Fannie Mae1 https://www.efanniemae.com

89 Freddie Mac1 https://www.freddiemac.com

1011 NBC1 https://www2.nbc13.com

1213 Better Business Bureau1 http://www.bbb.com2

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The information provided by Waquis Quality Control hasbeen taken from various public resources and does notconstitute legal advice.