Preventing commercial mortgage fraud: to prevent commercial mortgage fraud, financial institutions should focus on internal controls, supporting financial documents and loan covenants

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Date: Dec. 2010
From: Bank Accounting & Finance(Vol. 24, Issue 1)
Publisher: CCH, Inc.
Document Type: Report
Length: 1,806 words
Lexile Measure: 1390L

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When the Federal Bureau of Investigation (FBI) adds a special section to its Web site dealing with mortgage fraud, it is safe to say that this activity has come into its own. Since 2006, the FBI has published annual reports on mortgage fraud and compiled statistics and information to educate the public and lenders about fraud trends and emerging fraudulent practices. Today, these crimes result in estimated annual losses of $4 billion to $6 billion.

The terms used under the mortgage fraud section to describe the plethora of schemes currently in practice include equity skimming, builder bailout, foreclosure rescue, property flipping and short sale. Given the evolving nature of such schemes, the FBI must continually monitor and identify emerging efforts by criminals to exploit new loopholes as existing ones are closed or addressed.

The FBI monitors two primary and distinct categories within the world of mortgage fraud: fraud for housing and fraud for profit. Fraud for housing is generally defined as fraudulent activity perpetrated by an individual to obtain personal housing. Given this limited scope, fraud for housing receives less of the FBI's scrutiny. Fraud for profit, also referred to as "industry insider fraud," is the primary focus of the FBI's mortgage fraud efforts.

To protect against coordinated and concerted criminal efforts, financial institutions should focus on the following four areas: general internal controls, specific internal controls, supporting financial documents and loan covenants.

General Internal Controls

The tone at the top is a critical aspect of the control environment, and the workplace should allow underwriters and senior credit officers the freedom and latitude to speak up and question files, even at the expense of production goals if necessary.

Good internal control environments function much like the 20 questions game that children play. In a few key questions, an organization can process transactions, such as mortgage applications, and advance the majority of those applications onward to a successful closing. But as questions become more and more focused, an internal control system should hone in on the objective, in this case, the identification of an application to be denied.

Auditors frequently hear from senior lenders and experienced executives at financial institutions that information in the file was ignored, overlooked or overridden, and the senior staff and lenders who have seen problematic files before are few in number.

An effective control environment is designed to balance the detailed processing and minutia of complete and accurate files with the tone-at-the-top attitude that senior lending professionals have the time and access to select files. Included in this balance should be the assurance that employees at all levels can say no when necessary without repercussions.

Specific Internal Controls

Although the mortgage lending staff puts significant work into...

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Gale Document Number: GALE|A248093677