The Freud of Fraud: The changing face of the Liar’s Loan Application

Fraud in the mortgage lending US Market

Sheer fabrication of borrower’s financial information was at the epicentre of the 2008 subprime crisis. Fast forward to 14 years, the economics of deception has further evolved garnering a particular level of sophistication, that deserves much more than manual attention. This has severe ramifications for reputational damage, and detrimental impact on bottom line in an already difficult economy.

2022 has its own unique challenges in a hyper-competitive mortgage market fuelled by rising rate regime, a hard housing supply and constraints of a burgeoning inflation. This often attracts abusive and malicious intentions to exploit individuals, banks, and intermediaries, often conducted by uninformed applicants or as part of serious organised crime. Correctness, completeness and consistent data that is also compliant to the regulation-intensive industry, are fundamental to accurate and sustainable lending decisions.

While lenders are becoming more astute to detect falsification by maintaining high standards of due diligence and increasingly exploring technology in areas like KYC, income and employment misrepresentation on documents or deposit fraud continue to require cumbersome manual interventions and often plague such institutions if not spotted in time. As lenders continue to transform processes to deliver a seamless mortgage journey and flexibility to their borrowers, their battle strategy to quickly identify and respond and build operational resilience when volumes pick up, needs to be reimagined. The phenomenon is further exacerbated by the new normal of hybrid working.

Evidentiary documents once provided physically to the broker or the advisor are now exchanged online, making the broker unintentionally susceptible to fraudulent activities of document tampering, counterfeit or forged evidence. Such opportunistic fraud, often not a “fraud for profit”, maybe perpetrated by an otherwise innocuous applicant misstating, misrepresenting or omitting information, looking for favourable terms to lower rates on increase advances. Another instance, is when the genuine purpose of the property is misstated, again for favourable terms. Although residential mortgages continue to witness such cases infrequently, commercial mortgages saw a significant jump in fraudulent activities reported during the Government BBL scheme tenure. The consequences to the perpetrator are severe if detected, but as the old adage goes, prevention is better than cure.

Albeit heavy duty compliance teams and seasoned underwriters are in the front line to diagnose fraud risk, screening and document analysis led technology remains a core defense strategy for any lender’s preventive approach against fraud. Lenders and intermediaries need to work close to keep a close watch on the creativity that entails fraud and educate through dialogue. If you are curious to know more about the industry leading techniques in affordability fraud detection or learn about how Digilytics AI can help make the journey with documents smoother, reach out.

Author: Reetwija Chakraborty, Head of UK Distribution

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