Mortgage fraud is threatening businesses across industries, with banks and other financial institutions being no exception. In recent years, this has increased with a CoreLogic report estimating 1 in 134 mortgage applications indicated fraud in Q2 of 2023 in the United States.
This alarming statistic underscores the pervasive nature of the issue, and professionals in the financial sector must stay ahead of these challenges. But how exactly can lenders get in front of these frauds?
In this blog, we will go through what mortgage fraud is, the telltale signs, and the intelligent document processing software available for lenders to prevent mortgage fraud and protect their organizations.
What is Mortgage Fraud?
Mortgage fraud refers to illegal activities that involve misrepresentation or deception in the mortgage lending process, committed by borrowers or professionals in the mortgage industry. This fraud can span across all stages of the lending process.
Mortgage processing is a time-consuming and extensive process, so finding ways to streamline the processing of relevant documents including validating them should be an important goal for businesses. In addition, spotting mortgage fraud early can also be a key step in protecting your business against non-compliance fines including KYC (Know Your Customer) and AML (Anti-Money Laundering).
But what types of fraud are there and what are the signs to look out for? The following sections will detail what these are and how to get in front of them.
Types of Mortgage Fraud
Mortgage fraud comes in many forms, each designed to deceive lenders and manipulate the application process. Here are some common types of mortgage fraud:
Identity Theft: One of the most alarming mortgage fraud types is identity theft. Fraudsters may use synthetic identities or manipulated identities, during the application process. Not only is this illegal in the application process but it also poses significant risks to the individual whose identity is stolen.
Income Fraud: With income fraud, an applicant falsifies their “stated income” to appear more financially stable and qualify for larger loans than their actual financial standing allows. These deceptions can jeopardize the lenders’ ability to accurately assess a borrower’s repayment capacity.
Occupancy Fraud: This refers to a misrepresentation of the intended use of the property. Borrowers may claim a property as their primary residence when, in reality, it serves as an investment property. With this fraud, if the lenders are unaware of the true purpose of the use of the property, they do not provide accurate loan terms such as interest rates.
Appraisal Fraud: Property values play a pivotal role in determining loan amounts. Appraisal fraud involves inflating or deflating property values to secure more favorable loan terms. This tactic can lead to unjust financial gain or, conversely, place borrowers at a disadvantage.
Top 4 Signs of Mortgage Fraud
The mortgage application process is intricate and complex, opening doors for fraudsters to take advantage of. It’s therefore important to be able to spot the signs when confronted with them. So here are the top five red flags that should raise the suspicions of industry professionals:
- Unusual Documentation: The documents needed in the mortgage process include income, employment records, or bank statements. These documents may have discrepancies or irregularities that may suggest that the lender is trying to mislead the financial institution. Be sure to inspect financial documents, cross-check payslips, proof of income statements, employment records, and bank statements.
- Identity Red Flags: Stolen and fraudulent identity documents pose a risk to the application process. Scrutinize personal information, flag inconsistencies, and cross-verify with official records. Equip your organization with tools to combat mortgage fraud, such as such as AI-driven software for spotting fake IDs.
- Property Flipping: Frequent property transactions at unusual price points can be indicative of attempts to manipulate property values for financial gain. Keep an eye on the property’s transaction history, especially rapid buying and selling, and assess whether the prices align with market trends.
- Suspicious Financial Behavior: Sudden changes in financial behavior or credit history of the loan applicants should raise a red flag. During the mortgage processing, look out for shifts in financial patterns, sudden large transactions, etc, and scrutinize the source of funds to ensure KYC/AML compliance.
In the face of these red flags and the hectic error-prone nature of manual mortgage processing, Intelligent Document Processing (IDP) emerges as a formidable tool to enhance the efficiency of document management in your organization, detect fraud, and avoid fines. IDP excels in document fraud detection and verification, leveraging Optical Character Recognition (OCR) and advanced AI technologies.
How is Mortgage Fraud Detected?
Human eyes alone may not catch subtle discrepancies, so leveraging advanced technologies such as Intelligent Document Processing (IDP) is essential. Here’s how IDP can enhance document fraud detection in mortgage processing:
- Identity Verification: Manual identity verification can leave the door open to fake identity documents slipping through the cracks. The human eyes are not able to detect fraud or digital manipulation and inconsistencies in documents. IDP solutions use advanced AI algorithms to detect anomalies in ID documents frequently undetectable during manual checks.
- Bank Statement Verification: Verify the accuracy and legitimacy of financial documents submitted in a mortgage application. IDP solutions can automatically extract and analyze data from bank statements within seconds. It can also check for anomalies or inconsistencies ensuring the presence of security features like watermarks, holograms, or specific patterns that are difficult to duplicate.
- Pay Slip Verification: As one of the most important documents needed in the lending process, spotting fake pay stubs is of the utmost importance. IDP solutions confidently analyze these documents to verify their authenticity and legitimacy before they harm your organization using advanced AI algorithms.
- Document Verification: Using advanced document verification tools, cross-check application documents (eg. payslips and bank statements) with internal and external sources such as databases to ensure the authenticity of the documents or to validate the data.
The good news is that there are smart document processing solutions like Klippa Dochorizon to confront these frauds before they put your business at risk.
Avoid Mortgage Fraud with Klippa DocHorizon
Klippa DocHorizon offers financial institutions and mortgage lenders the ability to fortify mortgage lending processing against fraud risks. The system ensures meticulous examination of IDs, pay stubs, and financial documents minimizing the chances of human error.
With the DocHorizon platform, you easily build custom workflows to optimize mortgage processing in your organization while saving time and money spent on mortgage and loan processing.
By leveraging Klippa DocHorizon to automate all mortgage document processing workflows, you can securely verify documents and safeguard your business against harmful fraudulent actors. In addition, you can focus on your core business and leave behind repetitive tasks for the software to handle.
Ready to safeguard your business from mortgage fraud? Book a demo with our experts today!