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Are lenders doing enough to prevent mortgage fraud?
By Jeff Lazerson
What I think: Three dangerous downturns may be heading your way. Last week’s column was about potentially risky business practices at Fannie and Freddie. Today’s topic is subprime loan quality and the Consumer Financial Protection Bureau.
When it comes to validating a borrowers’ income, most all conforming loans have an invaluable quality control component to guard against loan fraud: The 4506 T form. This borrower consent form allows your lender to independently check with the IRS to be certain that the income documentation you are providing the lender is real.
Fast forward to the current version of the subprime world that contributed to the Great Recession, now named non-prime, near-prime and non-qualified mortgage or non-QM.
Instead of income tax returns and W-2’s validated by the IRS, many non-QM lenders are offering bank statement loans and, to a lesser degree, stated-income loans to mostly self-employed borrowers.
The big idea is the deposits are really consistently coming. Therefore, we can calculate the borrowers’ outgo to see if he or she can cover the house payment and other bills.
At this week’s production meeting in my own shop, we counted nearly 30 percent of our loan pipeline as non-QM. A few short years ago it was zero percent.
Typically, your personal bank deposits are added up over a 12- or 24-month period and divided by the same number of months to calculate your income. Or, 50 percent of your business deposits calculate your income in the same manner.
Historically, this fast-growing category of loans attracts cockroaches. That is tax cheaters on steroids and greedy, fraud-friendly loan officers.
How hard is it to provide counterfeit or doctor bank statements? Even with the borrowers’ consent and temporary PIN number, how many banks or credit unions do you think are going to cough up 12 or 24 months of the borrowers’ bank statements?
And, even if the lender independently gets them, the sheer volume of pages can make it difficult to compare and spot altered deposit information.
“There is a higher inclination for fraud. I think the industry is going to get caught with its pants down,” said Raymond Eshaghian, president and CEO of Los Angeles-based Greenbox Loans, a non-QM lender.
The Consumer Financial Protection Bureau (America’s mortgage police) should consider renaming itself: Consumer Financial Production Bureau.
Acting CFPB director Mick Mulvaney has already put the brakes on implementation of updated payday lending rules, updated home mortgage disclosure act reporting and he let the Federal Reserve know he didn’t need any money from them for next quarter.
We really don’t know if Mulvaney and whoever President Trump names as the permanent CFPB director will fairly and reasonably enforce the laws or just roll over.
What I do know is some banks increasingly are allowing its loan officers to charge some similarly situated borrowers less than others through fabricated claims of competitive price matching.
How are others going to behave if they perceive the mortgage cops are asleep at the switch?
If you have questions or comments, please contact Jeff Lazerson by clicking here. For more great insight make sure to check out Jeff Lazerson’s Mortgage Grader Radio Show on Sundays at 10 am on AM830 KLAA.
Jeff Lazerson - Mortgage Columnist since 2011