Mortgage Servicing Fraud
occurs post loan origination when mortgage servicers use false statements and book-keeping entries, fabricated assignments, forged signatures and utter counterfeit intangible Notes to take a homeowner's property and equity.
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The Detection and Deterrence of Mortgage Fraud Against Financial Institutions: A White Paper

https://www.ffiec.gov/exam/Mtg_Fraud_wp_Feb2010.pdf

Produced by the July 13 – 24, 2009
FFIEC Fraud Investigations Symposium

The Detection and Deterrence of
Mortgage Fraud Against Financial Institutions

Mortgage Servicing Fraud
Mortgage servicing typically includes, but is not limited to, billing the borrower; collecting principal,
interest, and escrow payments; management of escrow accounts; disbursing funds from the escrow
account to pay taxes and insurance premiums; and forwarding funds to an owner or investor (if the
loan has been sold in the secondary market). A mortgage service provider is typically paid on a fee
basis. Mortgage servicing can be performed by a financial institution or outsourced to a third party
servicer or sub-servicer.
Mortgage servicing fraud generally involves the diversion or misuse of principal and interest
payments, loan prepayments, and/or escrow funds for the benefit of the service provider. Mortgage
servicing fraud can take many forms, including the following:
• A mortgage servicer sells a loan it services, but fails to forward funds to the owner of the loan
following the sale. The servicer continues to make principal and interest payments on the loan
so the owner is not aware that the loan had been sold.
• A mortgage servicer diverts escrow payments for taxes and insurance for its own use. This
action would jeopardize a financial institution’s collateral protection.
• A mortgage servicer that fails to forward principal and interest payments to an institution that
holds the note and mortgage, could report that loan as past due for a short period of time, and
then use proceeds from other loans to bring that loan current. This would be similar to a
lapping scheme involving accounts receivable. Deliberately failing to post payments in a timely
manner causes late fees to increase which directly elevates the servicers’ income.
• A mortgage servicer makes payments on loans originated for or on behalf of a financial
institution as a means to avoid repurchase pursuant to first payment default provisions.
Examples
o Several insiders of a mortgage company fraudulently sold serviced loans belonging to other
financial institutions and kept the proceeds. An insider modified data in the servicing system
to make it appear the loans were still being serviced and were current.
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o Two executive officers of a mortgage company took out personal mortgage loans in their names
which were subsequently sold to an investor, with servicing retained by the mortgage company.
The executives did not make any payments on their loans and suppressed delinquency
reporting to the investor, allowing them to “live free” for a period of time until the investor
performed a servicing audit and discovered the fraud.
Best Practices
• Perform annual on-site review of loan files and servicer reports.
• Establish internal audit reviews that include a sampling of loans handled by each servicer and
verify collateral lien status for such loans.
• Obtain and reconcile reports to document and verify total amount of loans serviced, payments
and allocation, servicer fees, delinquent loans, etc.
• Verify receipt of funds on loans authorized for sale by a servicer.
• Review, at least annually, the servicer’s registration status, licensing status, financial health
and capability, and compliance with the servicing contract/agreement.
• Establish a contingency plan should the servicer be unable to perform its contractual
obligations.
• Verify current insurance policies and amounts of coverage (flood and hazard).
• Verify payment of property taxes.
• Review, as documented in board meeting minutes, management reports on mortgage servicers
(annual reviews, quarterly performance reports, aging reports, loan modification reports,
delinquency reports, etc.)
• Establish appropriate limitations on access to internal bank systems and records.
• Establish appropriate conflict of interest policies prohibiting compensation/ payments from
service providers to bank employees.
• Review of internal and external audit reports of the servicer.
• Review customer complaint processes, procedures, and reports.
• Review analysis and trend reports comparing a servicer’s operations and statistics with
Mortgage Bankers Association’s statistics.
• Obtain and review samples of original payment documents (e.g., borrower loan payment checks)
to verify that the borrower is the source of payments and that funds from other sources are not
being used to make payments or hide delinquencies.
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Red Flags
A red flag is an indicator that calls for further scrutiny. One red flag by itself may not be significant;
however, multiple red flags may indicate an operating environment that is conducive to fraud.
• Failure of the financial institution to perform an on-site review of the servicer (loan documents,
servicing records, etc.)
• A review of remittance reports provided to the financial institution by servicer finds a:
o Lack of detail within the remittance reports (principal reduction, interest paid, late fees
charged and paid).
o Remittance reports that fail to reconcile with bank records.
• A review of delinquency reports provided to the financial institution by the servicer finds a:
o Lack of detail within delinquency reports.
o High volume of delinquent loans.
• A review of portfolio reports provided to the financial institution by the servicer finds a:
o Lack of detail within portfolio reports (listing of loans owned by the financial institution
being serviced by the servicer including current balance).
o Portfolio reports that fail to reconcile with bank records.
• Annual review reveals detrimental information or deteriorating financial condition of the
servicer.
• County records indicating lien holders are unknown to the financial institution.
• Excessive delay in a servicer’s remittance of principal and interest payments, escrow payments,
or prepayments.
• Cancellation or reductions in coverage on servicer’s insurance policies, including errors and
omissions policies.
• Failure of the servicer to maintain copies of original payment documents (e.g., loan payment
checks) verifying borrower as the source of payments.
• Excessive errors related to payment calculations on adjustable rate loans or escrow calculations.
Companion Fraud
• Fraudulent Documentation
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