The OCC, Board, FDIC, OTS, NCUA and FTC (the Agencies) are jointly issuing final rules and guidelines implementing section 114 of the Fair and Accurate Credit Transactions Act of 2003 (FACT Act) and final rules implementing section 315 of the FACT Act. The rules implementing section 114 require each financial institution or creditor to develop and implement a written Identity Theft Prevention Program (Program) to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. In addition, the Agencies are issuing guidelines to assist financial institutions and creditors in the formulation and maintenance of a Program that satisfies the requirements of the rules. The rules implementing section 114 also require credit and debit card issuers to assess the validity of notifications of changes of address under certain circumstances. Additionally, the Agencies are issuing joint rules under section 315 that provide guidance regarding reasonable policies and procedures that a user of consumer reports must employ when a consumer reporting agency sends the user a notice of address discrepancy.

The final rules become effective on Jan. 1, 2008, and compliance is mandatory by Nov. 1, 2008.

Click here for: Strengthening Federal and State Mortgage Fraud Prevention Efforts Report.

The FBI recently released its 2006 Mortgage fraud report, detailing the top areas for mortgage fraud, emerging schemes, and efforts the FBI and the industry are undertaking to combat mortgage fraud, including the Mortgage Fraud Warning Notice developed in conjunction with the MBA.  

The full FBI report is available here.  The Mortgage Fraud Warning Notice can be found here.

Lender Technologies Corporation (LTC), a wholly owned subsidiary of the Mortgage Bankers Association (MBA), has publicly issued a Request for Information (RFI) regarding the creation of a national database to help prevent fraud against lenders.

Read the press release announicng the RFI here.  The RFI can be found here.

In response to growing concern over the fraudulent use of authorized user tradelines, which can be used to boost individuals' credit scores, Fair Isaac announced it will adjust its FICO scoring model and no longer consider authorized user tradelines when calculating FICO scores beginning with FICO 08, which is scheduled for release in September.

Read more here.

NEW YORK — Comptroller of the Currency John C. Dugan said today he is increasingly troubled by the growing use of unverified “stated income” in subprime lending, and said he believes the federal agencies should address the practice in pending guidance.

“Sound underwriting – and, for that matter, simple common sense – suggests that a mortgage lender would almost always want to verify the income of a riskier subprime borrower to make sure that he or she had the means to make the required monthly payments,” Mr. Dugan said in a speech to Neighborhood Housing Services of New York.

“But the norm appears to be just the opposite: nearly 50 percent of all subprime loans last year accepted stated income,” he said.

Mr. Dugan noted that in a market where house prices are rising, the risks of stated income loans are masked, since borrowers can refinance if they run into trouble.

“As a result, the rapidly rising housing market of 2003-2005 was the perfect Petri dish to incubate the widespread practice of stated income loans,” he said. “At a very fundamental level, it was a bet that the increasing value of a borrower’s collateral would offset any inadequacy of the borrower’s income.

” However, he added, we are now seeing the results of stated income loans in a market where house prices are falling or failing to increase, and the consequences have been rising delinquencies and foreclosures, with serious costs for families and communities. While reliance on stated income is not the only cause of today’s problems, Mr. Dugan said, “I do find it telling that, when faced with new housing market conditions, lenders have responded first by tightening standards on stated income.” In addition, he said, one of the first things loan servicers do when trying to decide whether to restructure or foreclose on a mortgage is to seek verification of income. “Apparently verified income is viewed as a critical factor in determining whether a loan can be saved, which of course begs the question: if loan verification is such an important predictor of the borrower’s ability to repay in the current environment, why wasn’t it equally important when the loan was first made?” Mr. Dugan asked.

The Comptroller said there are clearly some circumstances in which reliance on stated income is appropriate, such as a straight refinancing that doesn’t involve a cash take-out and which is underwritten by the same lender. The lender not only has experience with the borrower, but knows that the new mortgage will be more affordable, and hence more secure, than the one it replaces.

But he said such uses of stated income lending should be the exception, rather than the rule, for three key reasons:

1. Stated income is too great a temptation for misrepresentation and, in its most extreme form, outright fraud.
2. The practice also undermines transparency: “How can lenders seriously talk about debt-to-income ratios, for example, if the denominator of ‘income’ is really an unknown variable that can be whatever the borrower says it is?” he asked.
3. It is not a safe and sound underwriting practice to make mortgage loans that substitute future house price appreciation for borrower income as a key source of repayment, as appears to have been the case in many subprime loans underwritten in the last few years.

Mr. Dugan noted that the use of stated income has been addressed by the federal banking agencies in guidance on home equity lending and nontraditional mortgages.

“Now we must decide whether to address the practice even more strongly in the context of finalizing the guidance on subprime lending,” he said. “For the reasons described above, I believe we should, although how we do so and the extent to which we do it are of course decisions that should only be made after careful consideration of the comments we have received.”

 

On February 9, 2006, DeKalb County Superior Court issued an Order enjoining Sonya Brown of 5245 Biffle Road, Stone Mountain, Georgia, from further violation of the Georgia Department of Banking and Finance's (“Department'sâ€) order requiring her to cease and desist from brokering mortgage loans. Although the Department's cease and desist order became final on September 11, 2004, the agency received evidence that Ms. Brown was still brokering mortgage loans in direct violation of state law.

 

The full article can be read at Mortgage Fraud Blog:
http://www.mortgagefraudblog.com/index.php/weblog/permalink/broker_enjoined_after_violating_cease_and_desist_order  

 

Fraud Type: Appraiser Identity Theft/Fraudulent Appraisals  

Scheme Outline: The Georgia Attorney General's (AG) office has submitted a letter to MBA warning mortgage lenders about appraisals that have a fraudulent signature of a certified Georgia appraiser whose name, signature and license number was stolen.

To view a copy of the letter with the person's name and tips on identifying fraudulent appraisals from this person, go to the Resource Library and click on Miscellaneous.

The AG's office is concerned that there are possibly dozens of fraudulent appraisals that have been circulated.  At least 69 fraudulent appraisals have already been identified.

The AG's office is asking lenders to notify him if they find fraudulent appraisals related to this person in their portfolio to help him in building his case.  Additionally, he is seeking help in clearing the appraisers name who was the victim of alleged identity theft.

 

Fraud Type: Fake paycheck stubs
 
Scheme Outline: A product is being promoted, via the Internet, that offers "novelty" paycheck stubs. The website, NoveltyPaycheckStubs.com, offers buyers a fake paycheck stub for a variety of purposes, such as:

• Your spouse thinks you've been at work and you need proof
• You want to look like you make some big bucks
• You would like something to put on the wall in your new home

Although the website's disclaimer states that the fake paycheck stubs are for entertainment purposes only, it offers the "novelty" service as a way to prove income to others. In the "Frequently Asked Questions" section of the website, it is stated that "anyone can be fooled by the paycheck stubs."
 
The service is offered for a price of $89.95. When buyers are filling out the order form, they are required to provide information, including their company's name and address, annual income, paycheck issue date, marital status and date of hire. Social Security numbers are not required, but are recommended to make the paycheck stubs look more realistic.
 
To learn more about the website, go to: http://noveltypaycheckstubs.com/

Fraud Type: Straw Buyers  Scheme Outline: The FBI has issued a warning about Internet-based advertisements for straw buyers to act as "investment partners" in mortgage loan transactions. Click here to read the full document. (PDF)

 Fraud Type: Bank Fraud Scheme Outline: The FBI has issued a warning about criminals who are committing bank fraud through the exploitation of an Internet-based check printing company. Click here to read the full document. (PDF)  

Date: August 19, 2005  

Location: National

Fraud Type: Potential False Asset and Employment Verifications

Scheme Outline: As of early August a group of Nevada companies were promoting programs that offered to rent assets and establish purported employment for purposes of third-party verifications by lenders and others.  Based on the companies' on-line literature and program applications it appears these programs would result in false or misleading asset and employment verifications.

The "Asset Rental" and "Employment Verification" programs were promoted by Independent Global Financial Services, Ltd. or IGFS (http://www.igfsltd.com/), Morgan Sheridan (http://www.morgansheridan.com/), and Zexxis Company (http://www.zexcorp.com/).  Company literature identifies IGFS, which lists an address in Las Vegas, as a "sister" company of Morgan Sheridan.  Morgan Sheridan and Zexxis list the same address in Mesquite, Nevada.  As of last checking by MBA staff, the on-line application forms and web pages detailing these programs were no longer accessible, although company home pages were still up. 
 
According to information obtained before the application and program description documents were pulled from the web, the companies' programs worked as follows: 

ASSET RENTAL-According to IGFS's Asset Rental Application, in exchange for a 5% "origination fee" IGFS would place cash or other assets in a sub-account of an IGFS master account in the applicant's name for a period of time (30 day initial term).  IGFS would "verify [applicant's] funds and/or other assets" to any inquirer authorized by applicant.  The funds would not be available to the applicant for withdrawal or use as collateral. 

EMPLOYMENT VERIFICATION-Morgan Sheridan and Zexxis apparently offered the ability to obtain a Verification of Employment for a fee.  Morgan Sheridan's "Transmittal Form" allowed applicants to specify monthly income and request a VOE from Zexxis. Applicants were instructed to submit an independent contractor application to Zexxis and pay a fee to Morgan Sheridan of one percent of the annual income specified by the applicant.  The Morgan Sheridan Transmittal Form noted that credit card transactions for payment for the VOE would be processed by IGFS.
 
Based on the text of the companies' materials, lenders should be concerned about the potential for false or misleading representations of assets and employment.

Steps to take to alert your company about these programs:
The recommendations below are of a general informational nature only and are not intended as legal advice.   MBA strongly recommends you contact an attorney experienced in dealing with fraud matters in deciding how to handle fraud and potentially fraudulent situations.
 
You may want to establish criteria for having staff check unfamiliar financial service entities through an internet search engine or other means and for checking independent contractor status.

You also may want to alert staff to look for the following names on applications, Verifications of Deposit or Verifications of Employment:

• Morgan Sheridan (Mesquite, Nevada)
  
• IGFS Ltd or International Global Financial Services Ltd (Las Vegas, Nevada)
   
• Zexxis Company (Mesquite, Nevada)
  
• Allen Paule (Resident Agent for all three companies according to Nevada state corporate records)<