Selling Guide

Published June 5, 2018

A3-4-03: Preventing, Detecting, and Reporting Mortgage Fraud (02/23/2016)

This topic contains information on preventing, detecting, and reporting mortgage fraud, including:

Overview

Fannie Mae takes mortgage fraud very seriously and seeks to work with its lenders and servicers to prevent and detect mortgage fraud.

There are two primary motivations for committing mortgage fraud. Fraud for house is motivated by a desire to get a marginal borrower into a house and may involve misrepresentation of information on loan applications. Fraud for profit is motivated by a desire of mortgage participants to improperly acquire mortgage loan proceeds for personal gain. Often fraud for profit schemes involve a pattern: two or more mortgage loans, multiple parties in various roles within the mortgage industry, and no true intent to repay the mortgage. Participants in fraud schemes can include borrowers, originators, appraisers, brokers, real estate agents, closing agents, builders, lenders, and title companies.

Types of Fraud

There are a variety of types of mortgage fraud. These include:

  • undisclosed liabilities,

  • misrepresentation of income or employment,

  • misrepresentation of credit,

  • identity theft and/or Social Security number discrepancy,

  • misrepresentation of assets,

  • misrepresentation of occupancy,

  • misrepresentation of property value,

  • property flips based on inflated appraisals or other false characteristics,

  • misrepresentation of the subject property characteristics or comparables,

  • sale of fraudulent loans or double selling of loans,

  • mishandling of escrow funds or custodial accounts, and

  • diversion of sales proceeds.

Lender Fraud-Prevention Measures

Fannie Mae works closely with lenders to combat the growing problem of fraud in the mortgage industry. Fannie Mae assumes that the information and processes on which loan decisions are based are honest, accurate, and credible, and that lenders are striving for information and process integrity at every stage in the life of a mortgage—from application through servicing.

To prevent and detect fraud, it is critical that lenders know their business partners, aggressively sample their loan populations, carefully review transactions, and consider using outside resources. Specifically, lenders must:

  • Have proper hiring practices in place, including careful reference checks. See Lender Hiring Practices below.

  • Before engaging the services of any contractor or vendor or other individual involved in activities related to the origination or servicing of loans owned by Fannie Mae, confirm that the individual does not appear on the Federal Housing Finance Agency’s Suspended Counterparty Program list. See Lender Hiring Practices below.

  • Aggressively sample loans that have a high risk for fraud as part of the quality control process. This includes loans that are early payment defaults or that involve problematic business sources, loans in high-risk areas (such as areas with high levels of early delinquencies or defaults), or those that have characteristics in common with previously detected fraudulent transactions.

  • Evaluate appraisers and get references. Confirm that the appraiser is currently classified and has not been the subject of disciplinary action.

  • Be selective in choosing closing attorneys and settlement agents, and communicate concerns about suspicious files to these individuals.

  • Modify closing instructions to prevent flips without lender consent.

  • Report suspected fraud to proper authorities.

  • Report suspected fraud to Fannie Mae.

Lender Hiring Practices

The lender is required to document and implement as part of its hiring process a procedure for checking all employees, including management, involved in the origination of mortgage loans (including application through closing) against the U.S. General Services Administration (GSA) Excluded Parties List (EPL), the HUD Limited Denial of Participation List (LDP List), and the Federal Housing Finance Agency’s (FHFA) Suspended Counterparty Program (SCP) list.

Allowing individuals on these lists to manage or perform origination functions may increase the lender's and Fannie Mae's exposure to fraud. Therefore, Fannie Mae requires that if, at the time of hire, the lender has determined that an individual is on the GSA, LDP, or SCP list, the lender may not permit that employee to manage or perform origination functions on loans sold to Fannie Mae.

Note: An individual confirmed to be on one of these lists for any reason may not be permitted to manage or perform origination functions on any loans sold to Fannie Mae. For example, an individual who is excluded from participating in HUD multifamily programs should be excluded from involvement in the origination of any Fannie Mae loans.

Furthermore, if the lender obtains third-party originated loans, the lender must confirm that the third-party originator has a documented procedure for checking their potential employees against the lists.

Lenders can access the GSA, LDP, and SCP lists via the links provided below:

The GSA and LDP lists are also available via AllRegs.

Life-of-Loan Representations and Warranties Related to Misstatements, Misrepresentations, and Omissions

Even if a mortgage loan has met the requirements for enforcement relief set forth in A2-3.2-02, Enforcement Relief for Breaches of Certain Representations and Warranties Related to Underwriting and Eligibility, the lender remains responsible for representations and warranties for the life of the loan related to misstatements, misrepresentations, and omissions as set forth in A2-2.1-07, Life-of-Loan Representations and Warranties.

Lender Reporting Requirements

A lender must notify Fannie Mae if it learns about any misrepresentation or fraud. It must do so regardless of who committed the act or whether the lender believes that the act resulted in an actual breach of its selling warranties. Before notifying Fannie Mae about any misrepresentation or fraud, a lender should conduct appropriate due diligence to determine whether a reasonable basis exists to conclude that misrepresentation or fraud may have occurred. If such reasonable basis exists, a lender must notify Fannie Mae within 30 days via the Lender Self-Report Mailbox (see E-1-03, List of Contacts). This includes any fraudulent or dishonest activities by lenders, contractors, or brokers. A record of activity under the internal audit and management control systems must be maintained and made available to Fannie Mae upon request. Fannie Mae may perform additional audit procedures as needed.

For information about a lender’s responsibility for reporting other possible breaches of selling warranties, see A2-2-01, Contractual Representations and Warranties. Lenders that have information concerning possible mortgage fraud or misrepresentation must contact the Lender Self-Report Mailbox (see E-1-03, List of Contacts). Indications of potential mortgage fraud may also be directed to Mortgage Fraud Reporting (see E-1-03, List of Contacts).

Tools and Resources

Fannie Mae has resources for help in preventing and detecting mortgage fraud at Mortgage Fraud Prevention. Fannie Mae also has anti-fraud tools available to registered lenders with DU.

Related Announcements

The table below provides references to the Announcements that have been issued that are related to this topic.

Announcements Issue Date
Announcement SEL-2016–02 February 23, 2016
Announcement SEL-2014–11 August 26, 2014
Announcement SEL-2014–10 July 29, 2014
Announcement SEL-2013–06 August 20, 2013
Announcement SEL-2013–03 April 9, 2013