Possible fraudulent lending activity increased last year just as the Consumer Financial Protection Bureau prepared to issue new regulations requiring lenders to verify borrowers’ financial records and ability to repay mortgages.
Kroll Factual Data, a provider of risk mitigation and verification services to mortgage lenders, banks and credit unions, reported a 1.1 percent average increase in possible fraudulent activity associated with the loan applications processed by the company in certain metropolitan statistical areas (MSAs). Kroll said that the increase rose from the second to third quarter by more than 50 percent.
On January 10, the Consumer Financial Protection Bureau unveiled new regulations known as the QM rule that requires lenders to review employment status; income and assets; current debt obligations; credit history; monthly payments on the mortgage; monthly payments on any other mortgages on the same property; and monthly payments for mortgage-related obligations. Borrowers also have to have sufficient assets or income to pay back the loan, and lenders must review the borrower’s debt-to-income ratio to determine whether that applicant actually has the ability to take on — and repay — the additional debt of a mortgage loan. The regulations will take effect January 14, 2014.
“While fraud alerts declined in some MSAs,” said Rod Bazzani, President, Kroll Factual Data, “these declines were offset by significant increases in others. This spike in potential fraud is troubling, coming at the same time the mortgage industry is beginning to turn the corner. More importantly, the fact that red flags are rising in every area of the country highlights the continued need for lenders to remain vigilant against fraud. In addition, the new CFPB restrictions—whose ultimate goal is to ensure a borrower can repay a mortgage over its entire term—raise the stakes for lenders to catch fraud or inadvertent errors that might compromise lending decisions or risk buy-back requests.”
Kroll Factual Data examined MSAs with at least 1,000 applications per quarter and isolated certain files that may contain indicators of potential mortgage origination fraud. Flint, Mich., posted the largest quarter-over-quarter increase of potential fraud found within submitted loan applications, with a 50.32 percent increase over last quarter.
The following MSAs comprised the top 10 for increases in potential fraud (Q3 compared with Q2):
1. Flint, Mich. 50.32%
2. Columbia, Mo. 29.77%
3. Lancaster, Pa. 28.83%
4. Tacoma, Wash. 25.68%
5. Santa Fe, N.M. 24.24%
6. Des Moines, Iowa 23.95%
7. Omaha, Neb.-Iowa 22.43%
8. Fort Worth, Texas 20.41%
9. Providence-Fall River-Warwick, R.I.-Mass. 18.04%
10. Appleton-Oshkosh-Neenah, Wis. 17.10%
. The MSAs with the largest decreases in potential fraud were Champaign-Urbana, Ill. (-19.55%); Bridgeport-Milford, Conn. (-18.59%); and San Francisco-Oakland, Calif. (-18.37%).