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."
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.
Another precaution: requiring customers to talk to the mortgage lender directly and to provide an "electronic signature" authenticating their application. "You need to make sure it is the actual applicant who is signing on the bottom line," Smith said.
Mortgage brokers have grown in popularity during the refinancing boom of recent years.
"From the customer viewpoint, is it better to use a broker?" asked Eva Rosenberg, a Los Angeles accountant. "If you don't already have a relationship with a lender . . . who will lend you the money for your new property, a broker is often the best way to go, if they are good at their job."
Rosenberg said brokers can shop around among lenders to get the best rate for you and your particular financial situation.
"Quite often, they will know about special rates and programs that are not often being advertised," she said. "Another advantage is that they will stay with you through the process and do most of your running around for you -- arranging for notaries and other logistical trivia."
Moreover, Rosenberg said, brokers can obtain loans with no points or fees to you. "They'll pick up their money from the lender. Sure, that may mean that they build it into the rate," she said. "But usually the rate is better than you can get yourself."
The mortgage brokerage association says it is concerned about the rogues who are tarnishing the industry's reputation. The group backs legislation that would create a uniform federal lending standard and establish a national registry for all mortgage originators.
"Such a registry will give mortgage professionals an avenue to report unscrupulous actions and eliminate bad actors from our business," Armbruster said in his statement.
But financial institutions are not waiting for legislation. They are acting now. In August, for instance, Reveleus signed a deal with CitiMortgage and CitiFinancial Mortgage Lending to deliver software that will provide cross-functional analytics for credit checks.
A provider of fraud detection technology to the mortgage industry, Sysdome, Inc., in Calabasas, Calif., is also working with brokers who may be duped by unscrupulous customers "to be aware of and participate in the management of their own reputations," said a spokeswoman for the firm, Karri Miliam, in Boston.
Consumers can fight back against potential fraudsters, too.
"How do you know if you have a good broker?" said Rosenberg. "Work from referrals. Ask people you know who've gotten similar loans who they used and who they are happy with. That is the best way."