New York Association of Mortgage Brokers Wholesale Conference
February 2008
Our industry is under attack from many directions. Mortgage brokers are being blamed for everyone’s financial problems.
Well it’s nice to think that we are so influential that we make or break economies all over the world but in reality we know that’s not the case.
We are targeted because we are the small fish in a very large pond. We’re small businesses without the political clot or the deep pockets of the Citibanks or Bank of Americas of the world.
Today we’re going to focus on the one thing we do have control on. That is the quality of our loan submission packages. The liberal underwriting standards we have been working with over the last few years have made us sloppy and to survive today we need to make drastic changes in the way we conduct business.
The FBI has told us that that fastest growing white-collar crime in America is mortgage fraud. Its definition of mortgage fraud is, “a material misstatement, misrepresentation, or omission relied upon by an underwriter or lender to fund, purchase, or insure a loan.”
The FBI identifies 2 different types of mortgage fraud; fraud for property and fraud for profit, with the following definitions:
Fraud for Profit involves industry professionals. There are generally multiple loan transactions with several financial institutions involved. These frauds include numerous gross misrepresentations including: income is overstated, assets are overstated, collateral is overstated, the length of employment is overstated or fictitious employment is reported, and employment is backstopped by co-conspirators.
Fraud for Property, also known as Fraud for Housing, usually involves the borrower as the perpetrator on a single loan. The borrower makes a few misrepresentations, usually regarding income, personal debt, and property value or down payment problems. The borrower wants the property and intends to repay the loan. Fraud for Property/Housing accounts for 20 percent of all fraud.
As business people that want to protect the integrity of their own companies we are already sensitive to Fraud for Profit scams involving the real estate industry. We need to remember that when the FBI used the term “industry professionals” they are also addressing professionals that are outside the industry but are still using the industry for personal gain.
For example, an investor structure’s a sale with a silent second or through the use of a straw buyer. He doesn’t necessarily need someone inside the business to execute the plan. They can bring this well orchestrated purchase to any one of us. If we’re not careful we become scammed. To make matters worse, the fraud now gets discovered at a later date. How can we prove that we were not a part of the fraud but a victim?
In our attempt to do right by our applicants we can become blinded to the fact that an applicant may not be as truthful to us as we think. We need to develop the same level of sensitivity to applicant fraud as we are to business fraud.
The attitude of “Why should we care?” or “ We’re not underwriting the file, the lender is and therefore takes responsibility for it.” is only going to make the current bad situation even worse. Perception is more important than reality, especially when you’re the little fish. Lenders are taking every opportunity to make their TPO channels responsible for every non-performing mortgage. It’s not their underwriter that missed something; it is the broker that didn’t supply it.
The FBI views the originator as their first line of defense against fraud. They expect us to be professional enough to detect a fraudulent application before it develops into a fraudulent mortgage.
Our lenders are now taking every application package we submit and putting it under a microscope. I can assure you that if one of your wholesalers finds a pattern in your submissions reflecting mistakes or oversights you will not be submitting packages there much longer.
If you originate a mortgage application that turns out to be fraudulent you can easily find yourself in the position of having to prove that you are an innocent party. This is time consuming and under certain circumstances, expensive. It’s always better to avoid problems than be forced to prove yourself innocent.
Remember, even if you are successful in proving yourself innocent there is no guarantee that you will be able to find a wholesaler willing to do business with you in the future. The only real thing you have to offer is your creditability. Once that’s in question you’re effectively out of business.
In order to stay in business we are going to have to change the way we do business. Our mindset needs to move away from being a salesman to being an underwriter. Inconsistencies need to be addressed before they evolve into problems.
The way to do this is to maintain an ongoing awareness of “Red Flags.” A “red flag” is nothing more than a signal telling you that additional questions need to be asked and/or additional documentation will need to be provided.
As the originator you are assembling a profile of the applicant and of the details of the transaction. You are not making a value judgment of any kind. You are supplying all the information for the underwriting staff to make an intelligent decision.
Depending on the nature of the flag you will either add an explanation of the question in your package or request additional documentation from your applicant. As long as you take the time to explain to your applicant the reason for your question, you will get a complete answer. You need to earn the right to ask the question first before you can expect to get the answer. If you don’t take the time to justify your need to ask, you will not get answers that are acceptable to you.
An uncooperative applicant either has an attitude problem or is hiding something. Your job is not to make this call; your job is to get all the information you need to complete the application package.
What are some of the flags we need to look out for?
Applicant won’t give you a straight answer: To me this is the most obvious flag and it’s almost a guarantee that this particular file will be a nightmare. You need to assume that all responses you get from this applicant will be incomplete. Be sure to be as specific as possible with all your questions and take nothing for granted.
Applicant keeps asking the same question over and over: If the applicant truly doesn’t understand your answer that’s one thing. Take the time to discover what’s missing in your answer that’s preventing a clear understanding. If you’re paying attention to your applicant, this situation is easy to spot. Even if the applicant feels too embarrassed to ask a question another time, the “deer in headlight” look on his face is proof enough. The applicant you need to be concerned with is the one who keeps asking the same question over and over hoping to hear the answer he wants to hear. He is doing this for one reason. He wants to be able to blame you when something goes wrong. This individual will most likely have a problem with giving you direct answers to your questions.
Buyer currently lives in property: Your applicant is buying from his current landlord or a family member. You will need to address this issue, which is no longer an arms length transaction (a purchase transaction between two disinterested parties) and therefore may be at a sales price that is not truly reflective of market values. There will also be a question regarding the down payment.
Down payment is a gift or promissory note: Additional documented proof will be needed to meet secondary market requirements.
Unrealistic commuting distance to work: If your applicant is purchasing a home that will extend his commute to work excessively, he could be purchasing an investment property and simply claiming that it will be his primary residence.
Borrower holds stock in employer or holds an executive title: You need to determine if this applicant needs to be considered self-employed.
Payment shock: Is the proposed housing expense in excess of 150% of the current rent?
Unreasonable relationship of income to assets: You would expect individuals with a substantial annual income to have a substantial net worth and vice versa. It should raise a question if there is no relationship here.
Liquid assets: There is a significant change in the liquid asset of the applicant over the last 2 months. We usually focus in on large deposits but you also need to check for large withdrawals or a series of relatively small deposits or withdrawals that historically are out of character.
Verification of Employment: Applicant brings copies of pay stubs (instead of originals) and numbers don’t line up properly, numbers seem to be round numbers or the withholding tax for social security is based on the wrong percentage or based on the wrong maximum income for that particular year. Borrower doesn’t receive (or keep) computerized pay stubs and brings a letter from his current employer instead. Borrower is hesitant to sign a 4506 at application.
Tax Returns: Is the magnitude of the dividend and interest income in line with the assets shown on the application? Is there a deduction for mortgage interest or property tax and the borrower claims he is currently renting? Are there properties listed on the return that don’t appear on the application. Does a professional tax preparer sign the return or did the applicant file it himself?
Contract of Sale: The seller is a realtor or a relative of the buyer. Contract is subject to seller acquiring the property. Contract references riders that are not supplied with the contract.
Anything that raises a concern in your mind should be addressed before submitting the package. Being thorough shows you are a professional, shows respect to your lender and your applicant. Most importantly, it will enable you to continue in business while the industry recovers.
There are certain things you should consider adding to your standard operating procedures that will help highlight potential issues before they become problems.
· Require all applicants sign a 4506 at application, even on stated income programs. If an applicant doesn’t want to sign one, it’s in your best interests to find it out now instead of at the closing table.
· With everyone using cell phones, we tend to contact our applicants on their cells instead of using their home or work numbers. Make a habit of calling them at work at least one time early in the process. Your wholesalers are routinely doing telephone verification of employment just prior to closing. I don’t know about you, but I hate surprises the morning of a scheduled closing. Wouldn’t it be nice to know what response the employer is going to give the lender before the call is placed?
· On purchases, get the sales contract directly from the attorney instead of the applicant. In this way you know you have all the riders as well as any last minute changes that were done on the contract. The applicant may not have the final version of the contract.
· On refinancing, always get a recent mortgage statement. Besides the obvious confirmation of the outstanding balance you’ll be able to see if there are any outstanding late charges, which may be caused by a recent late mortgage payment that hasn’t made it to the credit bureaus. You will also see the escrow balance . With a declining market you need to know exactly how much money needs to be available to close. A negative escrow balance could be a deal killer at closing if the borrower is tight.
· Look for mortgage inquiries on the credit report. Multiple inquiries could mean you applicant has been shopping for credit or applying for mortgages on multiple properties. Multiple inquiries for an applicant with unusual activity in his bank accounts can mean he’s trying to buy 2 or more properties simultaneously.
Before we finish I want to highlight one more thing we need to constantly aware of. When we’re working with applicants we are invading their personal financial lives. We are not just writing a letter or stacking paper into a file folder, we are handling all the details of our applicant’s personal information. If that file ends up in the wrong hands, our applicant’s identity will be stolen. This is a tremendous ethical responsibility as well as a legal one. You are the custodian of your applicant’s financial life.
You are responsible to do whatever is reasonably possible to insure the security of this data. Should anything happen, they will be looking at you as the responsible party. If your company doesn’t take security seriously, it is an accident waiting to happen.
Identity theft is one of the fastest growing white-collar crimes. The profits are high and the risks of getting caught are small. This is the perfect combination for a professional thief.
You need to look at the way you conduct your day-to-day business with the same critical eye that you look at a mortgage application package. Once you identify the opportunities you’re providing, you can adjust your daily routine in such a way as to minimize your exposure.
The first thing you need to be conscious of is how easy is it to tell the wrong things to the wrong person. You need to make it a point never to talk to anybody about the details or status of an application. Your applicant’s personal business is exactly that, personal. Where he works, what he makes, what kind of car he drives, etc is nobody’s business.
If you are arranging financing on a purchase, the only people you should be talking to regarding the status of the application are your applicant and his attorney. Unless otherwise instructed to do so by your applicant, you cannot release information to the real estate broker, seller, seller’s attorney or any other party.
You don’t discuss the details of an application with the applicant’s brother, uncle or neighbor. Never assume that your applicant has granted permission to discuss his transaction with anybody unless specifically instructed.
Look around your office.
· Is your computer password protected?
· Is there any other level of security when you access the company’s processing software?
· Do you leave files on your desk when you’re out of the office, or lock them in a draw?
· What happens when you leave at the end of the day, are all files locked up?
· When you meet with an applicant outside your office, do you take the application on your laptop?
· Is the laptop password protected?
· Does it have wireless access?
· What level of encryption are you using?
· Do you use your laptop at home?
· What level of security do you have on your home network?
· Do you always take your laptop (along with whatever customer information that is stored on it) with you wherever you go?
· Are you backing up your data onto you home network and is that storage protected?
· What protocols do you follow to keep the laptop from being stolen?
· What protocols do you follow to keep the backed-up data that’s stored at home from being stolen?
· What do you do to protect documents that you have taken from your applicant from being lost, stolen or damaged?
· Do you always ship documents via messenger or some other method that produces a signed receipt?
· Do you use any other portable devices that can possibly contain your client’s personal information?
· Do you delete that data from the handheld immediately after you’re finished using it or do you just assume you won’t lose it or have it stolen?
· Do you return all documents to your clients and shred any copies that are in your possession after you’re done with them?
You need to treat all documents, both hard copies and electronic, as if they are yours. Would you casually leave your bank statements around for anyone to pick up and read? Would you leave your social security number with your home address on your desk for the maintenance people to see? Of course not! Handle your applicant’s paperwork as if it is your own and you will stay clear of trouble.
Our industry is going through a major evolution. If you plan to continue working in it you will need to accept a new level of responsibility. You cannot exist as an order taker. You will need to conduct yourself as a professional, take responsibility for your actions and supply the level of service that your clients expect from you.
If you’re not willing to do this then find a new profession now before either the market or the regulators force you out.
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