PERSON OF THE WEEK: Ivan Garces And The Continuing Fight Against Fraud

Written by Phil Hall
on September 16, 2008 No Comments
Categories : Person Of The Week

How does the industry fare in its efforts to stamp out mortgage fraud? MortgageOrb queried Ivan Garces, principal for the forensic service department of the Miami-based accounting firm Kaufman Rossin & Co., to determine where the battle lines are currently drawn.

Q: This summer, the federal law enforcement agencies coordinated Operation Malicious Mortgage, which resulted in the highly publicized arrests of about 300 people on mortgage fraud charges. Do you believe the federal law enforcement agencies will continue to pursue mortgage fraud investigations and arrests with the same depth and scope that they brought to this endeavor?

Garces: Mortgage fraud continues to be problem and poses a growing risk to financial institutions and the stability of our markets. The downward trend in the housing market provides a number of opportunities for perpetrators to commit mortgage fraud. In response to this risk, the government and law enforcement agencies have taken steps to deter mortgage fraud.Â

Congress has recently introduced legislation to address mortgage fraud. Some states – such as Georgia and Florida – have introduced legislation that makes mortgage fraud a crime. Some cities have even created mortgage fraud task forces to address the issue locally. The FBI's mortgage fraud investigations in 2007 increased 47% from 2006.Â

I think that Operation Malicious Mortgage demonstrates law enforcement's commitment to combating mortgage fraud, and I believe that we'll continue to see coordinated efforts to deter this activity.

Q: In view of the rising number of foreclosures, what are some of the fraud schemes that mortgage bankers need to be aware of when dealing with foreclosed properties?

Garces: With the increase in foreclosure rates, many banks are agreeing to short sales: the sale of a property for less than what is owed to avoid the time and expense that comes with foreclosing on a property. These short sales provide fraudsters with the opportunity to buy property below its value. In this scenario, the fraud is generally perpetrated by obtaining an under-valued appraisal. Â

Mortgage bankers should make sure they control the appraisal process, and they should only accept appraisals from a list of pre-qualified professionals. Mortgage bankers should review the assumptions used by the appraiser for viability. For example, are comparables used and adjustments made by the appraiser reasonable?

There are many Web sites that provide sales information that will help a banker determine whether the comparables are reasonable. Other typical schemes in a depressed housing market include builder bail-out schemes, seller assistance schemes and identity theft.

Q: What policies can mortgage banks put into place to ensure their risk management and due diligence operations will successfully weed out fraud?

Garces: Due diligence is as critical as ever. Bankers should implement robust Know-Your-Customer and Know-Your-Vendor policies. Â

Banks must know who they are doing business with, including the agents, brokers, appraisers, sellers and buyers. Are the parties inter-related? Is there excessive use of a particular agents, brokers and appraisers? The industry needs to review documents carefully and be mindful of red flags. All transactions should be scrutinized, and unusual or inconsistent information should be followed up, investigated and resolved prior to closing, and pre-closing file audits should also help identify and prevent potentially fraudulent transactions.

Q: There is a wealth of antifraud and risk mitigation technology available. Without endorsing or criticizing specific brands, how can mortgage bankers determine which technology solution best suits their operations?

Garces: Each institution is different and must consider the specific risks posed to that institution by its customers, the products offered, the geographies where they operate, and how they do business. Identifying the appropriate mitigating procedures – including utilization of software – begins with performing a risk analysis and identifying the risks posed to your institution. Â

Q: On the flip side of the previous question, do you feel that too much emphasis on technology solutions and less emphasis on person-to-person communications and direct research contributed to the mortgage fraud problems in recent years?

Garces: The increased use of automated loan processing over the past few years has probably contributed to loan fraud because of the lack of face-to-face contact and general low or little documentation requirements.

While automated systems are useful and very helpful in identifying potentially fraudulent transactions, the first line of defense is your people. Institutions should ensure that their staff is properly trained in identifying red flags that could be indicative of a fraudulent transaction and what to do when they encounter them.

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