MADISON, Wis. – Mortgage fraud among credit unions may not have yet reached what one law enforcement official described as the "potential for epidemic" levels seen in other parts of the mortgage lending industry fed by low interest rates and a booming mortgage market. But credit union mortgage professionals agree that it's only a matter of time before it starts to show up on CUs' radar screens as CUs increasingly get involved in mortgage lending. "Credit unions would have to be incredibly nave to think they're immune to mortgage fraud," says Tom Pisapia, VP of secondary marketing, CUNA Mutual Mortgage who goes so far as to caution that "if credit unions are not proactive when it comes to mortgage fraud, they'll pay the price." Pisapia opines that credit unions have increased their chances of becoming victims of mortgage fraud because of their charter expansions to include larger communities and geographic areas. But Joe Brancucci, VP, chief lending officer of BECU and president of Prime Alliance Solutions says the increasing number of credit unions with community charters isn't the only cause of CUs' increased exposure to mortgage fraud. Brancucci is also chair of the CUNA Lending Council and chair of Fannie Mae's Credit Union Advisory Council. "Increased incidence of mortgage fraud is the result of more credit unions getting involved with mortgage lending. It's a trade off," he says. He agrees though with Pisapia that credit unions would nave to think none of their members would perpetrate mortgage fraud against them. "Credit unions have to know mortgage fraud is there. I wholeheartedly believe our members love their credit union, but there's always someone out there who is dishonest," says Brancucci. He offers that one of the reasons why credit unions haven't become victims of mortgage fraud to the same level as other mortgage lenders is because of the stringent application validation process potential members have to go through before they're allowed to become members of a credit union. "With other mortgage lenders, when a prospective borrower comes to them for a loan, that's the initial relationship. There's no process in place to verify the person is who they say they are other than the normal credit check process," says Brancucci. "At BECU, even when someone joins the credit union because of our loan offerings, we won't even consider their loan application until we're sure the person is who they say they are," he adds, referring to the "extreme qualification process" BECU and all credit unions complete on new members that includes verifying their Social Security number and checking for criminal background. CUs may consider themselves fortunate to have been spared the brunt of mortgage fraud, but unfortunately the same cannot be said for the rest of the mortgage industry. According to the sixth annual report by the Mortgage Asset Research Institute Inc. to the Mortgage Bankers Association that examined the composition of mortgage fraud and misrepresentation, during the last four years there has been in a shift in the states that have the greatest problems. Georgia, Nevada, and South Carolina have overtaken California and Florida as the states with the highest fraud scores. California and Florida continue to have high scores, but Florida now ranks only third – tied with South Carolina – and California has dropped to sixth place behind Utah. The report further showed that mortgage fraud problems are increasing in the Midwest. As an indication of just how prevalent mortgage fraud has become, the House Financial Services Subcommittee on Housing and Community Opportunity held a hearing on the problem in October. Among those testifying was Chris Swecker, assistant director, Criminal Investigative Division of the FBI . In his statement to the Subcommittee, Swecker explained that although there is no specific statute that defines mortgage fraud, the FBI has determined that mortgage fraud schemes share something in common – they contain some type of "material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a loan." Swecker went as far as warning that if the "rampant fraud" in the mortgage industry isn't curtailed, "it could become the next S&L crisis." The FBI compiles data on mortgage fraud through Suspicious Activity Reports (SARs) filed by financial institutions, and Department of Housing and Urban Development Office of Inspector General (HUD-OIG) reports. The FBI also receives complaints from the mortgage industry. Despite the FBI's efforts to get its arms around mortgage fraud, Swecker told the Subcommittee that "a significant portion of the mortgage industry is void of any mandatory fraud reporting. In addition, mortgage fraud in the secondary market is often under reported. Therefore, the true level of mortgage fraud is largely unknown. The mortgage industry itself does not provide estimates on total industry fraud. The industry provides incomplete or inconsistent fraud data. Based on various industry reports and FBI analysis, mortgage fraud is pervasive and growing." The FBI investigates mortgage fraud in two areas: * Fraud for Housing represents illegal actions perpetrated solely by the borrower. According to the FBI, the motive behind this kind of fraud "is to acquire and maintain ownership of a house under false pretenses. This type of fraud is typified by a borrower who makes misrepresentation regarding their income or employment history to qualify for a loan." * Fraud for Profit, sometimes referred to as "Industry Insider Fraud" is motivated, said Swecker, "to remove equity, falsely inflate the value of the property or issue loans based on fictitious property(ies)." According to the FBI, based on existing investigations and mortgage fraud reporting, 80% of all reported fraud losses involve collaboration or collusion by industry insiders. These schemes, Swecker explained, involve industry insiders to override lender controls. In June, Swecker authorized the consolidation of the FBI's national mortgage fraud program into the Financial Crimes Section of the FBI's Criminal Investigative Division – previously mortgage fraud affecting government programs was managed by the Integrity in Government Section, and fraud affecting financial institutions was managed by the Financial Crimes Section. He said the consolidation provides the FBI a more effective and efficient management over mortgage fraud investigations. Among some of the other initiatives of the FBI to address mortgage fraud, said Swecker, are encouraging a strategy to proactively address mortgage fraud by using partnerships with federal agencies, state and local law enforcement, regulatory bodies, and private industry; and adopting "an overall strategy to focus on insiders harming the industry in order to disrupt and dismantle entire criminal enterprises." "Zero tolerance within the industry combined with a mandatory system of reporting fraudulent activities to the FBI and HUD will be a major step in addressing mortgage fraud," Swecker told the Subcommittee. "If fraudulent practices become systemic within the mortgage industry and mortgage fraud is allowed to become unrestrained, it will ultimately place financial institutions at risk and have adverse effects on the stock market.," he added. As part of its efforts to combat mortgage fraud, Swecker said the FBI is collaborating with the mortgage industry to develop a more efficient mortgage fraud reporting mechanism for those not mandated to report this type of activity. He said the Suspicious Mortgage Activity Report (SMARt Form) concept is being considered by the Mortgage Bankers Association. The FBI, said Swecker, "supports providing a "safe harbor" for lending institutions, appraisers, brokers and other mortgage professionals similar to the provisions afforded to financial institutions providing SAR information. The "Safe Harbor" provision would provide necessary protections to the mortgage industry under a mandatory reporting mechanism." This mechanism, he explained, would better enable the FBI to provide reliable mortgage fraud information "based on a more representative population in the mortgage industry." CUNA Mutual Mortgage's Pisapia said while the company hasn't done anything on the training side yet to address mortgage fraud, "the topic is ripe for internal discussion on ways credit unions can protect themselves." The company currently uses a third party firm to do quality control checks on mortgage loans after closings, but Pisapia said CUNA Mutual Mortgage is "looking into" moving those checks to the front of the mortgage application process and integrating it into the process before a loan closes. "Using a third party firm for post-closing quality control checks is important, but it's after the fact. It's a great tool, but we need something that's more proactive," he says. "We want to move it to the origination part of the loan." To better stay ahead of appraisal and collateral fraud, Pisapia recommends CUs take advantage of companies that offer databases that do revalidations of collateral. One of the advantages CUs have over other mortgage lenders is that because they generally serve a restricted geographic area, CUs tend to use local appraisers they're familiar with. When a lender serves borrowers nationwide, Pisapia said "it's difficult to know which appraisers are good and which aren't." CUNA Mutual mortgage typically looks at information from HUD or the FHA's Limited Denial of Privilege (LDP) list which includes names of appraisers who have had their ability to do business with the FHA pulled because of violations or criminal activity. As credit unions increasingly partner with realtors and mortgage brokers, BECU's Brancucci advises them to "pick their partners carefully. If something doesn't smell good, duck." -

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