REQUIRED READING: Depending on your perspective, the industry may soon be poised for the arduous task of recovery, and in some cases, a re-invention might also be appropriate. If you feel, as many mortgage industry leaders do, that fraud and abuse fueled the mortgage crisis, then you may be actively seeking best practices to prevent, detect and deter fraud.Â
To avoid history repeating itself, it will be crucial to develop or acquire powerful strategies to combat these abuses before they threaten us further. Balancing this re-building process with new strategies designed to reduce fraud and abuse in your particular organization will not be easy.Â
No single approach will solve all the problems. However, armed with an honest appraisal, you can begin the task of creating a custom-tailored solution. Here are just a few of the strategies and best practices that may have a significant impact in the next 18 months.
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You may say to yourself, ‘If I could just blow it up and start over from scratch, I wouldn't have these problems.’ That statement may sound familiar to managers and supervisors in the originations world. However, that solution is rarely feasible.
In fact, sometimes it feels like you are building the same highway on which you are driving. Worse still, it may feel like the road is crumbling from decay beneath your wheels. While we can't just stop production to retool, there are some constructive steps that we, as an industry, can take today to position ourselves for a safer journey down the road.Â
We must identify the weaknesses in our current system; whether they are people, processes, or both. Assessment is the crucial first step on the road to recovery. We need to know just how bad it really is. Often, just by stating the problem clearly, new options will emerge.Â Â Â
Goal + Process + Risk = What?
Goals and processes should already be very familiar to management, so the key becomes assessing risk. Keeping in mind that it is much easier to prevent loss from fraud than it is to recover losses from fraud, we want to focus on issues such as the following:
- Are we using compensation in the form of bonuses to motivate quality decisions?Â
- Have we taken steps to de-couple incentives from production quotas?Â
- Have we made training a priority?
- Are we satisfied with performing loans, regardless of how they were originated?
- Have we taken steps to insulate our quality efforts from profit pressure?
Once we have made our assessments, asked all the pertinent questions and generated a list of potential resolutions, we can then set about putting some positive steps toward remediation and recovery. The next stage will be communicating needs and obtaining resources. Without follow-through and commitment throughout the organization, our efforts will not bring the results we seek.Â
People and places
Fraud in the mortgage originations world is what happens when opportunity and motivation intersect. In training, it must be stressed that fraud is about people, and it follows that fraud prevention is also about people, and further still, it is about people in the right places. It is far more productive to limit the opportunity to commit fraud than it is to address motivations.Â
However, it is possible to take positive steps to impact both, knowing that the combined efforts will pay off. By approaching this proposition on an organizational level, we can limit opportunities and reduce perceived benefits of fraud.
Here are some questions to consider as we craft strategies for the changing landscape:
- Do we deliver strong, repeated communication that fraud prevention is an accountability issue shared throughout the organization at every level? Does this message start at hire date and continue, affirmed with a signed acknowledgment?
- Do training efforts clearly illustrate that the organization has zero tolerance for fraud?
- Has the organization considered a team of risk-prevention specialists reporting outside the normal hierarchy? This can be outsourced or in-house, if properly insulated.
- Do we actively encourage and reward whistle-blowing and staff-level intelligence? Most inside frauds are uncovered in this manner.Â
- Do we conduct irregularly scheduled audits of processes and departments?Â
- Have we leveraged our technology appropriately to spot indicators of ongoing fraud in the workplace?Â
- Have we clearly corrected any misperceptions on the part of stakeholders, so they understand that lost productivity is far outstripped by the savings offered through robust detection and adequate training?Â
Tool kitsÂ Â
Sometimes, all you really need is a better tool kit – how long would Gilligan have been stranded on that island if the Professor had something better to work with? Again, prevention of loss is, by far, less time-consuming and less expensive than attempts to recover preventable losses.
So, what steps can be taken to get the right tools in the right hands? Does your company have a dedicated program of pre-funding analytics? This will contribute the most to originating sound loans with the least impact on productivity.Â
Also, does your staff have a full range of audit tools? In order to expeditiously address risk in real time on the front end of the mortgage cycle, the right tools must be in the right hands.Â
The next act
Implementing the strategies outlined here should result in a net reduction in the risk of loss. It is worth noting that the extent to which an organization embraces these tactics is crucial to its future success.
Having seen many originators close their doors in the recent mortgage crisis, we are left to ponder these questions:Â
- How many of those organizations might have been saved if the infrastructure and tools were available to limit the impact of fraud?Â
- How many of the survivors would be better off today if they chose the right path?Â
- Have we done all that we could to protect our organizations and educate our people?Â
It is a very simple proposition: Either we, as an industry, take advantage of this opportunity to learn from the mistakes of the past and change our approach to fraud or we must be prepared to accept the consequences, because we know the bully always returns to the playground.Â
Matthew Merlone is director of investigations at Interthinx, based in Agoura Hills, Calif. He can be reached at (800) 333-4510.