Much has been written over the past few years about the growing threat of mortgage fraud. Beyond the FBI statistics, MBA workshops, and the burgeoning industry in fraud detection software for loan originations, the threat of closing table fraud is being overlooked. The failure to look at the "back end" of the mortgage loan process is taking place to the detriment of lenders and threatens to derail the many advances made in fraud detection and prevention to date.
Fraud in loan origination is a serious problem, and has been thrust upon the mortgage industry largely due to the zeal of pursuing profits during the housing boom without facing the risk that large volumes of originations, by untrained loan officers, would attract opportunists who see any chance in any booming market to commit criminal acts in pursuit of unbridled greed. Now that fraud in originations is down, thanks mainly to self-policing, increased training, and automated fraud detection software from industry leaders like Interthinx and Corelogic, closing table fraud remains a glaring problem yet to be seriously addressed.
Closing table fraud involves many of the same elements as mortgage fraud at the origination stage, except that those who conspire tend to be off of a lender's radar screen. Realtors, sellers (including builders) and closing agents have little contact in loan origination since they do not participate in the loan application process. However they play an enormous role in real estate transactions that are the basis for purchase money mortgage loan transactions. Improper and illegal collaboration among borrowers, sellers, realtors and closing agents creates as equally a dangerous and costly scenario as any other fraud scheme. Yet does a lender know enough about the seller, the realtor, and most incredibly, the closing agent?
Every day lenders around the Country are wiring hundreds of millions of dollars into the accounts of men, women and settlement companies about whom they know very little. While lenders wait anxiously for their signed closing packages to return, their money lies exposed "on the street", without guarantees of security. Why lenders (and title underwriters for that matter) place universal confidence in the existing loan closing process is a mystery, and a recipe for disaster.
Who are these closing agents? Are they experienced,? Licensed,? Insured? Do we care? Should we care? Of course we should! Lenders who rely solely on closing protection letters, in those states where they are issued, ignore the common practice for agents of title underwriters to issue them without any criteria, and for closing agents to recycle them on their own. It is not unheard of for closing agents to simply "white out" the specific transaction details on a protection letter and use them over and over again.
While there is no fool proof method of preventing fraud, since the fraudsters tend to change their tactics and methods, and since anyone who is determined to defraud a lender and has the cooperation of enough of the parties to a transaction usually can accomplish it, lenders can arm themselves with more data about the closing process and demand that closing agents meet certain minimum levels of experience, insurance, and overall reliability. Shining a light on the closing process, and those who work it, can go a long way towards weeding out the bad operators and defining a better process for the honest and orderly distribution of mortgage loan funds.
Furthermore, having access to real time data about the parties at the closing table, immediate access to key closing documents, as well as the ability to access detailed reports about a closing when audits or loss mitigation efforts are required, is highly desirable in today's fraud-infested environment.
If and when a post-closing problems occurs, whether through fraud or due to some other closing error such as an unsigned document, a lender need only press a button to immediately download a report of the key information about the closing that will allow loss mitigation or post-closing follow-up to be completed in a matter of minutes, and not days or weeks.
The closing ceremony in real estate transactions hasn't changed for years, hasn't kept up with technological advances. Its about time that the industry take a fresh look at how to tighten closing table processes and procedures and have a better handle on the identity of those who are handling their money and their loan documents.