Antifraud software and services can help make the mortgage industry more honest, according to the people who market such things. But Michael Boraks isn’t so sure.
Boraks runs a branch office of First Financial Equities in the Trump International Sonesta Beach Resort, a condominium hotel that’s one of several Trump beachfront properties in the Miami Beach area. From there, his firm brokers loans to many Trump buyers and competes in the hot South Florida housing market.
He knows as well as anyone the pressures and temptations that lead some mortgage brokers and agents to cheat in an effort to close more deals and drive up their commissions. What makes it easy is that many consumers come into the process eager to believe in offers that are too good to be true.
“You can open any paper today or listen to ads on the radio and hear all kind of lenders offering 0.95% or 1% interest,” Boraks says. But behind those teaser rates is invariably a more complex adjustable rate loan with risks that consumers may not understand if the broker doesn’t take the time to explain them, he says.
While computer systems may not be able to make all mortgage lenders honest and all home buyers rational, they can govern some of the background processes related to pricing loans, evaluating appraisals, generating paperwork and achieving regulatory compliance.
For example, systems can support the process of printing disclosure documents to be mailed to consumers so they have loan terms spelled out in black and white.
And where the mortgage agent’s behavior veers into active fraud—activities like inflating appraisals or falsifying income documents to win approval for a loan—software products and information services can help a lender’s loan underwriters and internal auditors detect patterns of abuse. Among the tools:
Scoring applications. DISSCO (Data Integrity Search and Score) from Interthinx is an information service aimed at comprehensive analysis of application data. It checks whether the applicant’s address, phone number and employer can be verified, and performs multiple tests on whether the stated property value is consistent with comparable sales in the area. The application boils down this analysis to a score that loan underwriters use to decide whether to grant a loan.
Statistical fraud detection tools. Past examples of fraud can be fed into statistical analysis software from vendors such as Fair Isaac Corp. and SAS Institute. The tools’ analysis can be used to identify other possible cases of fraud, based on similar patterns of loan data that might betray a data manipulation tactic that a dishonest broker or appraiser is using repeatedly.
Regulatory compliance software. Vendors such as Bankers Systems and the Clayton Group offer software aimed at helping lenders comply with laws, such as the Real Estate Settlement Procedures Act, that are designed to ensure accurate disclosure of loan terms and prevent predatory lending practices. Compliance software can help track loan data and trigger the printing of required disclosure documents, for example.
Craig Focardi, research director for consumer lending at the TowerGroup, a financial services industry research and consulting firm, is seeing a surge of interest in software to ensure compliance and fight fraud. After several years of booming refinancing business and soaring home prices, when lenders could get away with relatively slipshod control over the quality of their loans, the industry is now starting to contract, he says.
According to Focardi, Wall Street mortgage investors who perceive their money as being at greater risk will insist on greater scrutiny. And with investors looking over their shoulders, lenders will be forced to tighten up processes for verifying the value of properties and the ability of borrowers to repay loans, he says.
This should help discourage mortgage brokers and agents from coaching customers into telling “little white lies” on their mortgage applications, or blatantly falsifying data, to help win loan approval, Focardi says.
Still, Boraks says much of the dishonesty in the industry never gets recorded in any computer system, such as the broker who conveniently “forgets” to mention little details like the expiration of the “lock” on the interest rate the customer expected to get. Consumers who get unpleasant surprises at the closing table typically “curse the broker or the lender and sign anyway,” he points out.
A computer system can ensure that those details are disclosed in the loan paperwork, Boraks says, “but the problem is people get so many papers, they don’t know what to look for.”
The answer to that problem doesn’t come in a software box. It requires a patient, honest broker who will take the time to help customers navigate the paperwork and understand the real costs and risks of their loan.
