New Coalition Fights Insider Fraud

by Michael J. Kling
on August 03, 2006 No Comments
Categories : E-Features

A Indy mac group of mortgage firms has decided it has had enough of insider mortgage fraud. The companies have banded together to create the Coalition Against Broker Fraud, an organization that will keep tabs on brokers.

Insiders are responsible for the bulk of mortgage fraud. In a May 2005 report, the FBI estimated that insiders accounted for 80% of the $86 billion in mortgage fraud losses in 2004. The problem is that brokers committing fraud can simply go work for another company once they come under suspicion, explains Mitch Freifeld, co-founder of the coalition and president of Global Branch Solutions, a net branch company based in Clearwater, Fla.

Freifeld had noticed that when net branch lenders gathered, the names of familiar brokers tended to come up in conversations. If a company shut down a branch, the broker would open a branch with another company and create the same problems. The only difference would be that the broker had become more experienced at committing fraud.

‘There's no way of protecting yourself a hundred percent,’ Freifeld says. ‘We catch fraudulent files, but I'm sure some get through.’

The coalition aims to put a stop to that by creating a database of ill-behaving brokers.

The registry includes ‘not eligible for rehire’ lists of coalition members, plus exclusionary or disciplinary lists from public records of regulatory agencies, licensing boards, government-sponsored enterprises, credit bureaus and other mortgage industry organizations. So far, coalition members have merged data from those sources to produce about 10,000 records. A search function enables member companies to find names of suspected fraudsters.

The database lists where and when brokers worked, Freifeld says. Because legal issues prevent the coalition from saying why brokers were terminated, companies won't report why brokers left – only that they ‘were not able to work under the company's platform,’ he explains. SME

That alone could give prospective employers reason to pause. They can also look for questionable employment gaps by comparing the information to the broker's resume.

‘We're keeping tabs on people in the industry,’ Freifeld says, ‘We're trying to clean up an industry that's competing with banks and is going to be around a long time.’

Constrained by legal issues

Legal issues can be touchy. Because coalition members can't say why brokers were terminated, he notes, they could have any number of reasons for leaving, including simply being a low producer, notes Ron Litt, president of Advantage Credit, a coalition member and a credit agency based in Pensacola, Fla.

‘There's not a good network of sharing of information going on, partly because of the liability,’ Litt says. ‘It's a very difficult situation that lenders are in.’

The lender's contact with the broker may require the broker to purchase a loan found to be fraudulent, but in reality that doesn't work. Most brokers don't have a few hundred thousand dollars on hand. They'll just close shop and then reopen under another name.

Some background checks are not effective. Searches of electronic databases can be done online for $20, but are not thorough. More extensive research is more expensive and difficult to obtain, he says, explaining that much information, scattered among counties, is not in electronic form.

‘Fraud awareness is expanding from lenders to originators, who are getting hit first-hand more often,’ he says. ‘The growth of the net branch model, lenient loan packages and the influx of mortgage crime rings has pushed fraud to almost $100 billion per year, and all mortgage professionals are subject to fraud attempts.’

Net branch companies have much more at stake than a single net branch or individual broker. If one of their branches commits fraud, their operations in an entire state could lose licensing. Indy mac

‘It's in their best interest to control this problem,’ Litt says. ‘I think a lot of them are sick and tired of being painted by this brush that brokers are all bad.

‘We're trying to put a stake in the ground and say, 'Look, we're not going to put up with this.'’

Open to new members

The list is available only to coalition members, but the organization is open to new members, particularly net branch companies, Freifeld says.

‘We're getting calls from all sorts of companies,’ he notes. ‘We're getting a pretty good mixture. We're looking for the guys in the trenches. That's the branch companies.’

In addition to Global Branch Solutions and Advantage Credit, coalition members include American Pacific Mortgage (co-founder), BNC Mortgage, NFM, Freedom Mortgage, American Home Mortgage, AllFund, Home Capital Funding, America's Mortgage Broker, American Home Loans, Radian, Challenge and Apex.

Few systems exist to record attempted fraud, and although the concept of such a resource has been long-sought, no usable method has been available before, according to the coalition. The National Association of Mortgage Brokers, Freifeld adds, tried to launch such a database a few years ago, but the project didn't get off the ground. The Mortgage Asset Research Institute (MARI) maintains a ‘bad boy’ database, but that list is open only to lenders, he says.

‘It's not as close to things as we are,’ he comments.

Initially, Freifeld says, the coalition will focus on brokers, but it will expand to cover title companies and appraisers down the road.

For more information about the coalition, visit www.fraudcoalition.com.

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