The Financial Crimes Enforcement Network (FinCEN) today released its latest mortgage fraud analysis – titled Filing Trends in Mortgage Loan Fraud – that shows suspicious activity reports (SARs) filed on suspected mortgage fraud increased 44 percent in the 12 months ending in June 2008 compared with the prior year.
“The continued rate of growth in mortgage fraud SAR filings underscores the increased vigilance and awareness of financial institutions, particularly as they continue to try to mitigate possible credit losses,” said FinCEN Director James H. Freis, Jr. “For instance, one of the trends FinCEN spotted in this latest round of analysis is the increase in mortgage fraud detection in connection with mortgage purchasers sending home loans back to originators for repurchase.” Filing institutions referenced repurchase demands in 8 percent of filings.
Overall, from July 1, 2007 through June 30, 2008, the 12-month period examined for this analysis, financial institutions filed 62,084 depository institution SARs reporting mortgage loan fraud, up 44 percent from 43,054 reported from July 1, 2006 through June 30, 2007. The 62,084 figure represents 9 percent of all depository institution SARs filed during the period.
In addition to suspicion triggered in connection with repurchase demands, there were other trends in the growth in suspected mortgage fraud. Filing institutions referenced foreclosures in 13 percent of their SAR filings, insurers in 8 percent and early default payments in 2 percent of filings as indications of suspected fraud. These patterns of filings generally involved the detection of suspected fraud after the mortgage had been granted. That notwithstanding, there also was an increase in the percentage of SARs filed prior to granting the loan (34% as compared to 31% in the prior one-year period, which, as highlighted in FinCEN’s April 2008 report, was an increase from 21% over the preceding decade). The overall SAR filing trend does not necessarily reflect fraudulent activity on current mortgage originations.
FinCEN has issued three public mortgage fraud reports – part of a series released since 2006 -based upon an analysis of SAR filings by depository institutions where mortgage loan fraud is specifically indicated. For the second consecutive year, mortgage loan fraud was the third most reported SAR activity during the reporting period behind the general Bank Secrecy Act/structuring/Anti Money Laundering (BSA/AML) category, and check fraud. Nearly 900 filing institutions submitted SARs reporting mortgage loan fraud SARs over the most recent 12-month period studied.
In 2009, FinCEN is conducting additional analyses to examine the relationship between mortgage loan fraud and other financial fraud, and will further explore reported activities, locations, and subjects. In this context, FinCEN will further examine identity theft, international connections, and mortgage-related activities found in other BSA reports.
Suspicious Activity Reports filed with FinCEN by depository institutions are a critical source of information for law enforcement in investigating and prosecuting mortgage fraud related crimes. In addition to its published analytical reports, FinCEN provides technical expertise and both strategic and tactical support to the law enforcement and financial regulatory communities at the Federal and State levels to investigate and prosecute mortgage fraud and to protect the financial industry and its customers.
Mortgage Loan Fraud SARS
As mentioned above, the volume of SARs reporting suspected mortgage loan fraud increased 44 percent during the 12 months of the period covered under this assessment, with 62,084 SARs filed between July 1, 2007 and June 30, 2008. These reports accounted for 9 percent of all SARs filed during the same period. During this period, mortgage loan fraud was the third most reported activity in SARs.
Comparison to Other SARs
In the last 2 years of the review, mortgage loan fraud was the third most reported activity characterization on SARs. The three most reported characterizations, in order, were (1) the general category of BSA / Structuring / Money Laundering, (2) Check Fraud, and (3) Mortgage Loan Fraud.
The growth rate of mortgage loan fraud SARs outpaced that of all other SARs over each of the past 6 annual periods, often by a considerable amount
In a 12-month period, fewer than 200 depository institutions submitted the bulk of SARs (98 percent) with mortgage fraud as an activity characterization. Although nearly 900 institutions filed SARs reporting suspected mortgage loan fraud between July 1, 2007 and June 30, 2008, more than 700 of these institutions each filed fewer than five SARs with this characterization.
The 25 top filing institutions of mortgage loan fraud SARs submitted 82 percent of the total 62,084 reports during this period.
The top 10 filing institutions of mortgage loan fraud SARs submitted 57 percent of these records. This concentration of submissions among the top filing institutions was notable compared to overall SAR filing trends. In contrast, the top 10 filing institutions for all SARs submitted 30 percent of the total records.
Primary Federal Regulators of Filing Institutions
In terms of total SARs, institutions that identified the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) as their primary Federal regulators submitted 47 percent and 36 percent, respectively, of all mortgage loan fraud SARs from July 1, 2007 through June 30, 2008. In terms of total depository institutions, a third of filing institutions reported the Federal Deposit Insurance Corporation (FDIC) as their primary Federal regulator; however, the number of mortgage loan fraud SARs prepared by these filers was comparatively low. This shows that although mortgage loan fraud was suspected by depository institutions of all charter types, a subset of larger institutions chartered by the OCC and OTS accounted for the bulk of the SARs filed.
Depository institutions reporting the FDIC as the primary Federal regulator comprised a third of all filing institutions reporting suspected mortgage loan fraud during the period July 1, 2007 to June 30, 2008.
Repurchase and Buy Back Demands
Mortgage loan sale agreements typically contain representations and warranties about the loans being sold, and sellers typically promise to repurchase any loan found to be in breach of these representations and warranties under specified circumstances and terms. One common representation and warranty gives the buyer the right to force the seller to buy back a loan that had fraud or specific misrepresentations involved in its origination. Filing institutions often referenced repurchase requirements and buy back demands in SAR narratives. Some of these narratives stated directly that the filing institution had received a demand from the buyer of a mortgage that the filing institution repurchase the mortgage on grounds of suspected fraud or misrepresentations. In the 12-month period ending June 30, 2008, filing institutions mentioned “repurchase” or “buy back” in 8 percent of all mortgage loan fraud SARs.
In addition to references to loan purchasers, some narratives reported that investigations by insurers provided their first indicators of potential fraud. Of the 1,050 mortgage loan fraud SARs reviewed, only a few clearly stated that the filing institution’s first indication of potential fraud arose from insurance investigations. Other mortgage loan fraud SARs referenced insurers but did not elaborate on the role of the insurers in detecting the suspicious activity. FinCEN analysts reviewed SARs to determine if the references to insurers indicated more than a standard reporting procedure. Fewer than 15 percent of filing institutions with SARs referencing insurers routinely made these references. Within this group of filers, only five submitted more than three mortgage loan fraud SARs. These findings suggest that the references are included for some other reason than standard institutional procedures for preparing mortgage loan fraud SARs. As in the case of mortgage loan fraud SARs referencing repurchases, SARs with references to insurers averaged 19 months between the activity and the SAR filing dates, compared to the average of 12 months between activity date and filing date for mortgage loan fraud SARs without these references.
Foreclosures and Early Defaults
Factors such as foreclosure data also appeared to facilitate detection of suspected mortgage loan fraud. Since filers were often silent on the loan status, complete data was not available to determine the total number of reported activities that resulted in foreclosures and early defaults.
FinCEN will continue to monitor SARs to identify mortgage loan fraud trends. Forthcoming analyses will present information on reported subjects and activities. These assessments will examine the relationship between mortgage loan fraud and other financial fraud, and describe reported activities, locations, and subjects. In addition to commonly reported activities, these analyses will include greater information on identity theft, international connections, and related activities found in other BSA reports.