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A Closer Eye on Mortgage Fraud

Lenders Look Out for Phony Applications, False Credit Scores

By Gene Koprowski
Special to The Washington Post
Saturday, October 30, 2004; Page F01

As concern over fraudulent mortgage applications grows, the lending industry is stepping up its use of sophisticated software in hopes of screening out the scoundrels before they strike.

"We're working with a lot of lenders, and they have definitely said that fraudulent applications from third-party brokers are on the increase," said Lori Ernst, strategic relationship manager in the Washington office of Lexis-Nexis, the information products provider. "It's at the forefront of their minds now."

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A hearing early this month on Capitol Hill examined the alleged fraud by some unethical mortgage brokers, who are dummying up credit scores, income assessments and property valuations of their prospects to secure loans that otherwise would be rejected. Fraud schemes highlighted at that hearing and in recent announcements from the FBI have also involved real estate agents, appraisers, speculators and loan officers. Such fraud can cause losses for lenders; it can also stick homeowners with loans they can't afford.

"Mortgage fraud hurts everyone," according to a statement by Bob Armbruster, president of the McLean-based National Association of Mortgage Brokers, in reaction to the congressional hearings. "Those who perpetrate such schemes ultimately increase the costs for consumers and taint our entire industry. These criminals should be brought to justice."

Lenders are fighting back, particularly by tightening their controls for loans originated with mortgage brokers. They are also using new software to screen credit applications.

"Technology will enable clients to target customers based on risk assessment at the loan origination stage, thus potentially minimizing the use, need and reliance on brokers," said Caren Barbara, a public relations representative for Reveleus, a subsidiary of business analytics software provider I-Flex Solutions Ltd.

Lexis-Nexis has developed a "search match algorithm," a mathematical formula, embedded in software that "allows us to authenticate someone's identity," Ernst said. "That helps in the mortgage industry -- if a broker is misrepresenting an applicant's income, assets or even their Social Security number."

Ernst said crooked brokers will transpose the numbers of an applicant's Social Security number in an attempt to evade a credit check on someone who has bad credit. "We can take the information the broker provides and validate it," she said. "Is it an accurate number? Is their address actually a vacant lot? Is the telephone number they've provided accurate?"

The mortgage lenders are learning a lot from their counterparts in the credit card industry, who have been handling fraudulent applications for years, according to William J. Haffey, technical director for the public sector of Chicago-based software maker SPSS Inc., who works in the company's Arlington office. "The software can perform a number of functions," he said. "It can conduct what is called an association analysis, which looks at the sequence of actions a particular individual has taken over a specified period of time. Thus, you could look at all the applications by a particular third-party broker to determine what they have been up to. You can also conduct what is called a cluster analysis. Within each cluster of applications, what are the trends? Are the figures correct for the demographics of the applicant?"

The technology is not foolproof, experts caution, but it does enable mortgage lenders to focus their resources on "unusual cases" and thus ferret out potential fraud, Haffey said.

Mortgage lenders also are likely to increasingly vet brokers with whom they work, said Phillip J. Smith, executive vice president of TrustWave Corp., an information technology developer in Annapolis.

"You need to set up specific controls and measures for third parties that you are dealing with," Smith said. "You need to conduct a risk assessment of each of those organizations."

Smith said fraudulent organizations use the Web to bolster their images, swiping graphics and trademarked images from major lenders and placing them on their pages so they appear to have a relationship with the lenders when they actually do not.

"We can use Web crawlers to search out these sites and see what they are up to," said Smith.

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