There’s no question that mortgage fraud is rampant – and expensive. Since the beginning of 2012, mortgage application fraud has totaled more than $30 billion nationally with income fraud experiencing the biggest year-over-year increase, according to CoreLogic.
Industry experts say that the digitization of mortgages, or eMortgages, will be the holy grail – an instrument that will eliminate fraud in up to 95% of cases, while assuring lenders adhere to the onslaught of compliance regulations.
“If you can create a pure data exchange from the source to the party creating it, it eliminates a good portion of the opportunity for fraud,” said Jonathan Kunkle, president of Glendale, Colorado-based GuardianDocs, a division of LenderLive that provides mortgage document preparation, delivery and management services.
“That will be a bright spot for the future of lending when you can take an application, authenticate a borrower’s information and collateral and assets, and turn that into a virtual approval process where you can count on the data being presented. It’s more efficient and significantly more accurate.”
By popular definition, an eMortgage starts electronically with origination and ends electronically with eClosing and eVaulting, or being electronically stored. What exists today is a hybrid of sorts, with many lenders still relying on paper in part of the process.
Tim Anderson, who has been drinking the “eKool-Aid” since the early 2000s and was the original founder of the eMortgage Alliance, said going “e” is slowly gaining popularity as lenders are adjusting to regulations brought on by Qualified Mortgages, Ability-to-Repay, and the Consumer Financial Protection Bureau (CFPB)’s new “Know Before You Owe” disclosures, which go into effect Aug. 1, 2015.
Know Before You Owe gives lenders 72 hours to deliver the loan estimate and closing disclosure forms to borrowers prior to closing.
He said a paper log will no longer cut it and will require an electronic process to show the data trail, which supports the lender during a bank audit.
“The disclosures are data, or intelligent documents,” and will require automated validation to ensure the lender is compliant, said Anderson, director of eServices for Torrance, California-based DocMagic, which develops software, processes and web-based systems for the production and delivery of compliant loan document packages.
“[Know Before you Owe] forces the title agents and lenders to get it right,” he said, adding that he expects adoption to occur well before the August deadline.
As part of the Know Before You Owe initiative, the CFPB has launched an eClosing pilot project to “use technology in order to improve the mortgage closing experience for consumers,” CFPB Director Richard Cordray said in an April speech.
There are several ways that eClosings can pave the way for a more efficient process that is also more empowering for consumers, he said. Some of the benefits include easier delivery to consumers, greater consistency and accuracy, and a significant cost reduction.
“According to a leading title company, a typical mortgage closing generates about 6,000 pieces of paper across all stakeholders from start to finish,” Cordray said.
“The paper and storage costs for this title company alone amount to $20 [million] to $30 million annually – costs that can be significantly reduced through automated processes.”
TRUSTING THE PROCESS
Cordray acknowledged those automated processes raise concerns about data security and risk of fraud with people using eSignatures that are not their own. But those interviewed here seem confident that eSignatures offer a security not found with paper mortgages.
Anderson of DocMagic contends that eSignatures require more security and legal proof to authenticate the person signing the document and that a notary stamp is electronically applied.
In March, Mountain America Credit Union became the first lender in the country to conduct a live eClosing of an FHA loan using Stewart Title’s eClosingRoom platform and DocMagic’s eSign-enabled compliant loan documents.
The credit union began offering eClosing for conventional mortgages in 2011 and is currently paperless from beginning to end, said Amy Moser, vice president of mortgage services at the Utah-based Mountain America.
“There’s added security wrapped around the electronic process,” she said. “[The eMortgages] are all tamper sealed – you don’t have that with paper.”
Moser said underwriting now occurs within the electronic file and eliminates the need for loan officers to carry around a paper file filled with pay stubs and Social Security numbers.
“When we first started, the only investor accepting eNotes and eFiles was Fannie Mae,” she added. “Since then there’s been Freddie Mac, FHA and the VA. It seems like the progression is headed that way; the more investors are willing to accept them, the more lenders will be doing it.”
TYPES OF FRAUD
According to a 2010 Mortgage Fraud Report by the FBI, there are many types of fraud afflicting the mortgage industry today, including: loan origination, foreclosure rescue, real estate investment, equity skimming, short sale, illegal property flipping, title/escrow/settlement, commercial loan and builder bailout schemes.
The offending characters run the gamut from licensed/registered and non-licensed/registered mortgage brokers, lenders, appraisers, underwriters, accountants, real estate agents, settlement attorneys, land developers, investors, builders, bank account representatives and trust account representatives.
Digitization provides the tools the industry needs to wipe out those types of fraud, said Harry Gardner, vice president of eStrategies for Ellie Mae, a Pleasanton, California-based provider of on-demand software solutions and services for the residential mortgage industry.
“Paper documents are more susceptible to being tampered with and we have pretty much eliminated that in the ‘e’ world,” said Gardner, a 20-year industry veteran and longtime leader at the Mortgage Industry Standards Maintenance Organization (MISMO).
He noted that eSignature and eClosing solutions are doing a good job reducing specific types of fraud such as collusion and closing documents.
Functions such as borrower authentication go beyond asking for a driver’s license identification, adding “out of wallet” questions, such as a high school mascot or birth hospital, to prove the borrower is really who they say they are, Gardner said.
At the time of signing, each of the electronic documents has a tamper-evident seal, equivalent to a digital fingerprint, which uniquely identifies the document. The seal can be electronically validated by different entities at any point downstream, ensuring that the document is digitally identical to the original that was electronically signed.
If changes are made by an unauthorized user, the investor could re-request the original copy from the eVault, he said.
The original loan documents can be securely transferred to an investor “and eliminate the ability to falsify qualification documents,” said Joe Tyrrell, senior vice president of corporate strategy at Ellie Mae.
Income fraud is another prevalent paper mortgage problem, where borrowers provide false information by either over-reporting their income or supplying fictitious bank statements, W-2 forms and tax return documents. Kunkle of Guardian Docs said a large wholesale lender recently told him that it receives falsified bank statements about once a week.
He said a number of companies are working on a direct-to-consumer, loan-officer-free application process where the borrower can authenticate his identity and authorize the lender to pull his credit and verify income through sources such as the Internal Revenue Service or ADP payroll services.
Once that information is accessed from reputable sources it becomes easier to slice and dice the data to identify any discrepancies in income reporting.
Marianne Sullivan, senior vice president for Credit Portfolio Strategy at Fannie Mae, said digitization makes common fraud patterns more transparent.
“You would be able to look for common patterns in particular on agents,” she said. “Those acting in concert for fraud will do so on multiple mortgages. If it’s digitized, you know who’s involved and could see patterns. If it’s on paper, it’s very hard to see.”
Gardner of Ellie Mae noted that automated systems can check 100% of loans instead of relying on staff to manually identify potential red flags.
As compliance regulations snowball, lenders are incurring additional costs and allocating more resources than ever because they’re concerned about buyback risk and loan defaults.
“More and more lenders are going to have to rely on technology to remain profitable,” Tyrell said. “We’re only going to get more regulations in our industry and we will have to leverage technology.”
Fannie Mae has worked with FHA and Freddie Mac to automate functions and educate lenders about ways to improve loan quality and catch errors earlier in the process, Sullivan said.
“A repurchase could be that the underwriter didn’t understand the guidelines, and automated controls could catch that,” she said. “Digitization helps to put in checks and balances to make sure you’re not making certain mistakes or could catch certain mistakes before closing.”
In the last eight to nine years, more than 300,000 eNotes have been registered in the national MERs registry, which tracks the changes in servicing rights and beneficial ownership interests in mortgage loans that are on the registry, Gardner said.
That number becomes statistically significant as paper mortgages diminish and the registry is used as a forensic file review to legally prove chain of title and ownership. When the eNote is requested from MERs at the closing, it can prevent other fraudulent closings on the same property.
“In the paper world there would be a race to the courthouse where the first note that becomes legally evident has priority to that property,” leaving lenders with subsequent notes holding the bag, Gardner said.
“We’re getting there (with the MERs registry). The tipping point will occur where the paper loan becomes a minority.”
COMPLIANCE AND SECURITY
It takes just a few high-profile data security breach cases (think Target, JPMorgan Chase) to make you wonder about how your personal eMortgage data will be stored. It’s a question that gives chief compliance officers a good deal of job security.
Andy Dunn, senior attorney at Wolters Kluwer Financial Services, agrees that digitization will drop mortgage fraud numbers dramatically, but he warns that the hacks will only become more sophisticated.
“Fraud is like a virus, it continues to morph and evolve,” he said, adding that the industry must continue to innovate to stay on top of it. “It’s literally a never-ending cycle.”
From a compliance standpoint, the ability to log, report and monitor data becomes critical. Ironically, though, the ability to report and monitor that data also creates big data, which is “the very thing that causes vulnerability for fraud. The more information you collect to try and stop an activity, you’re giving someone the ammunition they need to come up with a different way to perpetrate that activity,” he said.
Melanie A. Feliciano, chief legal officer at DocMagic, warns that not all technology is created equal and data security is a huge concern.
“How fraud would be combated through eMortgages would largely depend on the quality of the technology and system checks that are actually used,” said Feliciano, who also serves on the Electronic Signature & Records Association board.
“And once an eMortgage is consummated, securing the data and data security is of paramount importance.
“If we’re going to digitize everything, we have to ensure that the borrowers’ customer information is going to be protected.”
Dunn said lenders should take a holistic approach when selecting technology partners, and consider if they will insource or outsource the eMortgage functions.
Then they should perform regular due diligence to ensure that compliance and risk are at the forefront of those processes. Some technology companies might offer eSign, but not eVaulting or the other suite of eMortgage services that a lender requires.
Ellie Mae’s Gardner notes that regardless of whether the mortgage is completed by paper or electronically it still creates a data file that must be carefully managed, so the transition to the eClosing process doesn’t create any additional challenges.
“The problem is already out there,” he said. “The real question is, can we improve on the origination and closing process by going to electronic documents where we manage documents efficiently and manage other forms of fraud?
“ That’s the core infrastructure challenge that every large entity faces.”
