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Mortgage-loan docs fraud insurance launched
MADISON, Wis. (8/6/09)--CUNA Mutual Group is introducing the credit union industry’s first fraudulent mortgage loan documentation coverage as part of a new release of its Bond policy. This new coverage will help credit unions manage losses from increasing fraudulent acts committed by residential mortgage borrowers, CUNA Mutual said. Fraudulent Mortgage Loan Documentation (FMLD) coverage applies to material misrepresentations, through alterations by the borrowers, on certain residential mortgage lending documents used by credit unions to make lending decisions. These include verifications of income and employment, offers to purchase and/or appraisal reports. U.S. mortgage fraud is escalating, according to the Federal Bureau of Investigation (FBI). Mortgage fraud reached an all-time high in 2008, with more than 64,000 reported incidents, said a recent report by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). “When it comes to mortgage lending, even the most vigilant credit unions can be duped by their members,” said John Wallace, product executive for CUNA Mutual’s Credit Union Protection division. “Whether the loan is a first or second mortgage or a home equity line of credit, today’s technologies make it easier than ever for members to create or alter documents that credit unions rely on for their lending decisions.” Here is a typical loss scenario: A member seeking to purchase a home alters documents to represent her employment status to secure a mortgage loan beyond her means. Eight months later, after the member defaults on the payments, the credit union discovers the documents were altered fraudulently. The credit union is forced to foreclose on the property and incurs a loss. The analysis of FinCEN’s suspicious activity reports filed between 2007 and 2008 indicates a 23% increase in the number of mortgage fraud reports filed. Two categories contributed primarily to the increase:
* Misrepresentation of income, assets and/or debt; and * Forged or fraudulent documents.
Amid the current mortgage crisis, fraudulent activity that goes undetected can cause devastating losses for credit unions, said CUNA Mutual. “Even if credit unions sell their mortgages into secondary markets, they’re still at risk,” Wallace said. “When fraudulent documentation is used as the basis for the original lending decision, buyers such as Fannie Mae or Freddie Mac can require the credit union to repurchase the loan and absorb the loss.” A robust mortgage loan underwriting process is the most effective way to avoid fraudulent loans altogether, Wallace said. CUNA Mutual’s risk management group recommends taking several steps to help avoid such losses:
* Request verification of employment directly from the borrower’s reported employer(s); * Request verification of deposit directly from the borrower’s reported financial institution(s); * Request tax history directly from the Internal Revenue Service using Form 4506 or 4506-T (two-year history for self-employed borrowers); and * Secure current credit scores from a third-party credit reporting agency.
FMLD is part of CUNA Mutual’s Bond program, a key component of the Credit Union Protection insurance and risk management portfolio designed exclusively for credit unions to manage their financial, operational and personal risk exposures. In addition to the Bond, other Credit Union Protection policies include:
* Plastic Card; * Management & Professional Liability; * Property & Business Liability; * Business Auto; and * Plus, additional policies.
The Bond program is underwritten by CUMIS Insurance Society, Inc., a company of CUNA Mutual Group. More information is available at the link.
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