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This the feature article from our Fall, 2009 FIRMA FORUM Newsletter. Members can view the entire issue, and past issues, in our archive

Bringing Mortgage Fraud Under Control

By Dennis M. Lormel with John J . Byrne
Reprinted with the Authors’ permission

Under scrutiny by the FBI, The Financial Crimes Enforcement Network (FinCEN), and Congress through reports, enforcement actions, and new laws, the financial sector must adjust its programs and policies to ensure detection and prevention of future financial crimes. But with current priorities on money laundering, terrorist financing, and other forms of illicit finance, this may not be an easy task. This article brings compliance, security, and operational risk officers up to date on the mortgage fraud issue, with advice on how to keep this crime in their sights.

The financial crisis has exposed a plethora of frauds. While business scandals like Enron’s and Ponzi schemes such as those perpetrated by Madoff and Stanford have garnered considerable attention and notoriety, mortgage fraud has grown at a consistent and alarming annual pace. FinCEN reported on February 25, 2009, that for the year ended June 30, 2008, 62,084 suspicious activity reports (SARs) of mortgage loan fraud were filed—an increase of 44 percent from the prior year. On July 7, 2009, the FBI issued its 2008 Mortgage Fraud Report (MFR); for fiscal year (FY) 2008, the agency received 63,713 mortgage fraud SARs—an increase of 36 percent from the prior year. While the dollar loss attributable to mortgage fraud is unknown, financial institutions reported losses of at least $1.4 billion in FY 2008, an increase of 83.4 percent over FY 2007.

To date, industry and government have not demonstrated the capacity to control the mortgage fraud problem. Businesses dealing in all aspects of mortgages have allowed profits to trump compliance, thereby facilitating fraud, and government has not dedicated the resources necessary to adequately investigate, prosecute, and deter mortgage fraud.