BLOG VIEW: Fraud methods and trends are always evolving. But while the ways that borrowers misrepresent their income, employment and more come and go, the strategy for detecting it stays the same.
Loan officers and loan processors are the first line of defense against fraud. Simply by asking questions when something that doesn’t add up, they can identify misrepresentation and prevent problems down the road.
In order to do this more effectively, they must look in the right places and ask the right questions.
There are many different ways borrowers can misrepresent employment. One that is being seen more recently is what is called “shiny new paystubs.” This is when the borrower gets a new job, and a substantial pay increase, only a few months before loan application. There are legitimate scenarios where this can happen: maybe someone was going to school at night, now has their degree, and is obtaining a job in that field. Other times, the new job is not real.
In cases like this, a loan processor must ask if the change in employment makes sense. If it doesn’t, they must be prepared to ask questions. Did the borrower recently change fields? Does their new job require additional education? It’s not abnormal to get new jobs or change fields, but make sure the pieces fit together for those career changes. A quick conversation now can save the company thousands of dollars down the line.
Additionally, some people get a new job within days of closing, not realizing the potential implications of a change in employment. A different income base or going from a base salary to 100%-commission affects how the borrower qualifies for the loan. There’s no perfect solution for this, but reverify as close to closing as possible to ensure the borrower still qualifies.
When it comes to verifying employment, look closely at the documentation. Look for alterations on any documentation or determine if there are differences in the font type or size. Paystubs and W-2s are basic documentation provided in loan files, but they can be vulnerable to misrepresentation as well. There are companies out there that create customized fake documents and these documents can often look legitimate, but they’re not necessarily flawless. Compare dates and other information to check for accuracy and pay attention to fonts and spacing on these as well.
Also, make sure to independently verify the employer’s phone number. As part of their loan application, the borrower will provide contact information for their employer, and it is critical to call the appropriate contact for the employer, and not speaking to a friend, family member or unauthorized coworker. This is doubly important when there are red flags that pop up. For example, asking that the lender call to verify at specific times could be an indicator that some type of misrepresentation is occurring.
Another important element to consider is whether the employer could be a family member. Compare the last names of borrower and employer and cross-reference documents like the gift letter to see if any names are the same. Working for a family member alone is not an issue, but these scenarios do require different documentation to verify employment and income.
The self-employed borrower is another scenario that can be tricky, and due to the limited ability to reverify documentation, these files sometimes require extra time to ensure there is no misrepresentation. When working with self-employed borrowers, look to see if their tax returns make sense. Compare expenses year-to-year – if there’s a significant change in these expenses, there’s a need to dig deeper. Compare tax transcripts with the returns provided by the borrower. If there are concerns or questions about the documentation provided, consider requesting the borrower sign a Form 4506. This gives one access to tax transcripts so one can verify self-employment and the provided returns.
The opportunities for misrepresentation don’t end with employment and income. There are other ways borrowers can misrepresent their financial status.
Be sure to review any credit inquiries that appear on the credit report. There may be new, undisclosed debt that will affect their ability to qualify. Have they been shopping at car dealerships but didn’t disclose a car loan?
Other undisclosed loans or child support and other debts can appear on paystubs, so check for any deductions that don’t make sense. The borrower may have financial obligations they didn’t disclose, and this will affect their debt-to-income ratio, which may affect whether they qualify for the loan.
Also, compare paystubs and bank statements. A loan processor may see on the paystub that the borrower has direct deposits, but they are not showing on their bank statements. This is a red flag that there may be misrepresentation present.
The type of property a borrower is buying also can signal fraud. For example, moving from a single-family home to a multiple occupancy property that they will own/occupy is rare – it usually works the other way around. This is often a red flag that they may be misrepresenting an investment property.
Similarly, downsizing can sometimes be a red flag. A borrower may be aging and has decided to downsize, while others may be trying to hide a second home or investment property, which comes with higher interest rates due to the increased risk. There may be legitimate reasons for the change, but it’s the loan processor’s responsibility to ask the question.
Another type of occupancy fraud can occur when one has co-borrowers. It is important to determine the co-borrowers’ relationship and if they are currently living together. Maybe they are moving in together, which is not cause for concern, but one could also have a non-occupant co-borrower, which can come with additional guidelines.
Even the location of the property can raise red flags about misrepresentation. Consider the following: What do their current and new commute times look like? Is it reasonably close to their employer? If the location is far away, it may mean their employment has changed, or it could mean they are hiding the fact that this is a second home or investment property. Again, it’s necessary to dig deeper to confirm there is no misrepresentation.
There are many types of mortgage fraud, and the methods are ever-changing. While loan processors may be aiming at a moving target, staying on guard is the best strategy. Remember: any sudden changes are worth looking into, and one should use logic and ask questions when something doesn’t make sense.
Asking questions won’t hurt a legitimate transaction, but it can catch a bad one. Those few minutes a loan processor spent asking questions can have a huge financial impact for his/her company. Ultimately, the details they miss are the details they didn’t ask about.
Stay curious and stay vigilant.
Donna Trione is the investigations manager at Enact Mortgage insurance where she leads a team responsible for reviewing delinquent files to determine if there is evidence of noncompliance or misrepresentation.
The statements in this article are solely the opinions of Donna Trione and do not necessarily reflect the views of Enact or its management.