Industry Thoughts

How mortgage lenders can reduce fraud and loan defaults

July 12, 2023

minute read

  • Brianna Valleskey
    Head of Marketing, Inscribe

Mortgage companies play a significant role in the housing market.

They provide both individuals and families with the financial means to purchase homes. As the mortgage industry continues to evolve and embrace digital processes, it becomes increasingly important for companies to ensure that applicants and borrowers are both trustworthy and creditworthy. 

According to the FBI, there is a strong correlation between mortgage fraud and loans that result in default and foreclosure. What’s more? More than 70% of payment defaults can be linked to a significant misrepresentation on the original loan application. Defaults and buybacks are especially painful for mortgage lenders: Not only do they result in financial losses, but also have a negative impact on their reputation and relationships with investors.

But if companies can better detect this fraud during the application process, they can reduce losses from defaults and buybacks, while earning more revenue from trustworthy customers who pay their loans back in full. 

And the time to act is now: Signals of income fraud, when a potential homebuyer lies about their income, increased by 27% in 2022. Income fraud can manifest in various forms, including overstating income, fabricating employment or self-employment history, and providing false or forged income documentation. These schemes aim to inflate the borrower's income to qualify for larger loan amounts or more favorable terms. Identity fraud, where an applicant uses a stolen, altered, or fabricated identity, also continues to be a challenge as risk signals increased by 5% last year alone. 

Why is mortgage fraud difficult to catch? 

Detecting mortgage fraud can be challenging due to the complexity of income and identity verification. With modern technology, traditional verification methods, such as driver’s licenses, passports, pay stubs, bank statements, and tax returns, can easily be manipulated or falsified.

By strengthening underwriting and quality control processes, however, lenders are able to address these challenges. Implementing thorough and diligent underwriting practices, including robust income and asset verification, comprehensive credit analysis, and strict adherence to loan program requirements, enables lenders to reduce the likelihood of originating loans that are later subject to buybacks. 

We work with some of the fastest-growing leaders in the mortgage industry. Here are the steps they’re taking to reduce mortgage fraud risk and, ultimately, grow loan revenue. 

4 effective steps for detecting mortgage fraud and reducing loan defaults 

1. Ensure strong documentation requirements 

The applicant verification process begins with the collection of necessary documents from the borrower, but emphasizing accurate and complete documentation throughout the entire loan origination process is critical. Mortgage lenders should require the following documentation from potential borrowers: 

  • Proof of identity: Borrowers are required to provide government-issued identification documents such as a driver's license, passport, or social security card.
  • Proof of income: Lenders need to verify the borrower's income sources and stability. This may involve collecting recent bank statements, pay stubs, tax returns, and employment verification documents.
  • Asset verification: Borrowers must provide documentation to verify their assets, such as bank statements, investment account statements, and property ownership records.
  • Property-related documents: For mortgage applications, borrowers must provide property-related documents, such as purchase agreements, property appraisals, and insurance information.

By having a list of required documentation, lenders can make informed decisions about loan approvals, ensuring compliance with regulations and protecting their financial interests. 

2. Seamlessly collect the correct documents

Collecting documents from potential borrowers can be tedious and insecure. Not only does requesting and retrieving the correct documentation often require a lot of back-and-forth via email, but emails can be intercepted by bad actors or even sent to an unintended recipient in error. 

Mortgage lenders can increase application success rates and reduce risk exposure with seamless document collection software. Solutions like Inscribe’s Collect provide a secure and encrypted portal for your customers to upload and share their documents. 

They even ensure that the correct documents are submitted (and immediately alert customers if they need to re-submit the correct documentation). Once documents have been uploaded, lenders receive an alert so they can keep the application process moving quickly.

3. Review documentation for signals of fraud 

Falsifying identity and income is easier than ever. In addition to the widespread adoption of sophisticated tools like Adobe Photoshop, borrowers can easily fake documents online from marketplaces and social media sites. 

These instances of manipulation can be found in the metadata, embedded text, and file history — details that are invisible to the human eye. Lenders can identify these fraud signals by utilizing advanced document fraud detection solutions like Inscribe.

Inscribe will not only tell underwriters if there's suspicious evidence in the metadata, but they can use the X-ray feature to compare what a document looked like before it was tampered with. They can see things like the original name, date, address, and bank balance of a document before a fraudulent manipulation. 

Artificial intelligence solutions like Inscribe benefit from network effects — the more data they ingest, the smarter they get. And they can remember millions of data points. A manual reviewer may not be able to recognize that the bank statement they are looking at today has the same 100 transactions with the same dates, same transaction descriptions, same transaction amounts as another bank statement they looked at six months ago. But a computer can. 

4. Analyze documentation to determine creditworthiness

Assessing financial data allows lenders to evaluate the borrower's ability to repay the mortgage loan. By reviewing income, employment history, and debt obligations, lenders can determine if the borrower has sufficient financial capacity to make regular mortgage payments. 

But extracting these details from documents can be time-consuming and error-prone. Inscribe helps underwriters save time on manual reviews for bank statements and pay stubs with instant credit insights. In a matter of seconds, lenders can understand key financial details like credits, debits, number of days with a negative balance, minimum balance, average daily balance, transfer details, salary, business revenue, and more. 

Mortgage companies that implement these steps will also meet their compliance obligations. By verifying the authenticity and accuracy of borrower documentation, lenders can demonstrate due diligence and adhere to legal requirements, such as the Truth in Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA).

Reduce mortgage fraud and losses with Inscribe 

Investing in advanced technologies and processes that enable efficient and accurate document verification is essential to reducing risk and growing revenue. By doing so, mortgage companies can navigate the evolving landscape of the housing market while ensuring the continued trust and confidence of borrowers.

Inscribe helps lenders reduce fraud and credit losses while increasing revenue and employee efficiency. Want to learn more about our Risk Intelligence solution? Request a demo with a member of our team. 

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