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Mortgage Loan Fraud: An Update of Trends based Upon an Analysis of Suspicious Activity Reports, April 2008. Published by Financial Crimes Enforcement Network.

Introduction:

Following a large increase in depository institution Suspicious Activity Report (SAR) filings on mortgage loan fraud, the Financial Crimes Enforcement Network (FinCEN) issued a report in November 2006 describing trends and patterns shown in SARs reporting suspected mortgage loan fraud filed between April 1, 1996 and March 31, 2006.1 FinCEN has continued to monitor these reports. This analysis updates the previous report by reviewing SARs filed between April 2006 and March 2007.

Executive Summary:

In calendar year 2006, financial institutions filed 37,313 SARs citing suspected mortgage loan fraud, a 44% increase from the preceding year, compared to a 7% overall increase of depository institution SAR filings. One reason for this increase may be that lenders are increasingly identifying suspected fraud prior to loan approval and reporting this activity. Suspected fraud was detected prior to loan disbursements in 31% of the mortgage loan fraud SARs filed between April 1, 2006 and March 31, 2007, compared to 21% during the preceding ten years.

Total SAR filings in 2006 on suspected mortgage loan fraud, when divided by the subject’s state address, showed the greatest increases in Illinois (75.80%), California (71.29%), Florida (53.04%), Michigan (51.50%), and Arizona (48.73%).

Mortgage brokers initiated the loans reported on 58% of the SARs sampled for this report. SAR reporting includes examples of brokers acting both as active participants in the reported fraudulent activity, and as intermediaries that did not verify information submitted on the loan application.

Reports of suspected identity fraud and identity theft4 associated with mortgage loan fraud continued to increase for the period reviewed. Reports of suspected identity theft in conjunction with mortgage loan fraud increased 95.62% over the previous study. Cases of suspected identity fraud were predominantly associated with fraud for housing.5 Victims of identity theft have had their properties encumbered with loans or property titles fraudulently transferred, effectively having their homes stolen.

Filers specified that loans were subprime in 79 SARs (0.19%) for the reviewed period. Without this specification, it is not possible to determine whether mortgages described in the remaining SARs were subprime loans.

Conclusion:

A review of SARs suggests that although reports of suspected mortgage loan fraud continue to grow, the filers appeared to be initiating more stringent practices to prevent it. Although reports of mortgage loan fraud increased, a higher percentage of filers over previous years indicated detection of potential fraud earlier in the loan process. Reports that were reviewed demonstrated due diligence measures strengthened, at least in part, by practicing a thorough verification of data received from third parties. Consequently, the reviewed SAR filings showed a pre-funding fraud detection rate of nearly 31%, an improvement of ten percentage points over the previous years.

Narrative details in the reviewed SARs identified mortgage brokers as the loan originators for the majority of the suspected fraudulent loans; 1,025 of 1,769 narratives (nearly 58%) disclosed that the loans were originated by mortgage brokers.

Details from sampled narratives identified depository institution filers as loan originators in 179 SARs (10%). Of those SARs, the fraud was detected prior to loan financing on 60 SARs (nearly 34%). Since mortgage brokers are not required to file suspicious activity reports, the number of applications rejected by mortgage brokers for suspected mortgage fraud can not be estimated from SAR filings.

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TABLE OF CONTENTS:

Introduction 1
Executive Summary 3
Vulnerabilities Identified 5
Filings on Mortgage Brokers 5
Appraisal Fraud 5
Vulnerabilities in Specified Mortgage Products 6
Trend for Suspected Fraud in Cash-Out Refinance Loans 6
Trend for Suspected Fraud in Stated Income/
Low or No Document Loans 7
Home Equity Lines of Credit 8
Fraudulent Activities and Red Flags 9
Overview of Fraudulent Activities 9
Commonly Reported Variations of Mortgage Fraud 12
Elaborate Mortgage Fraud Schemes 14
Protective Measures 19
Effective Fraud Detection Measures Used by Filers 19
Other Protective Measures 20
Trends and Patterns in Total SARs Reporting
Mortgage Loan Fraud 21
Characterizations of Suspicious Activity 24
Primary Federal Regulators 26
Top Filing Institutions 27
Fraud Locations 27
Individual Taxpayer Identification Number (ITIN) 34
Findings Observed from Sampled Narratives 37
Types of Fraud 37
Loan Types 40
Early Payment Default 41
Stated Income/Low Document or No Document Loans 43
Fraud Detection 43
Securities and Futures Industries (SAR-SFs) 45
Conclusion 47

Visit Financial Crimes Enforcement Network Website

The Financial Crimes Enforcement Network (or FinCEN) is a bureau of the United States Department of the Treasury that collects and analyzes information about financial transactions in order to combat money laundering, terrorist financiers, and other financial crimes.

As reflected in its name, the Financial Crimes Enforcement Network (FinCEN) is a network, a means of bringing people and information together to fight the complex problem of money laundering. Since its creation in 1990, FinCEN has worked to maximize information sharing among law enforcement agencies and its other partners in the regulatory and financial communities. Working together is critical in succeeding against today's criminals. No organization, no agency, no financial institution can do it alone. Through cooperation and partnerships, FinCEN's network approach encourages cost-effective and efficient measures to combat money laundering domestically and internationally.

The mission of the Financial Crimes Enforcement Network is to safeguard the financial system from the abuses of financial crime, including terrorist financing, money laundering, and other illicit activity.

It was established by order of the Secretary of the Treasury (Treasury Order Numbered 105–08) on April 25, 1990. In May 1994, its mission was broadened to include regulatory responsibilities and the Treasury Department's Office of Financial Enforcement (OFE) was merged with FinCEN in October 1994. On September 26, 2002, after Title III of the USA PATRIOT Act was passed, Treasury Order 180-01 made it an official bureau in the Department of the Treasury. (Wikipedia.org)

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