How technology can help stay one step ahead of fraudsters
Mortgage fraud continues to be a growing problem across the entire industry, but it has been especially problematic in the commercial and multifamily segments.
Private lending trade groups like the National Private Lenders Association (NPLA) have put together a fraud watch list to identify and root out fraudsters from the private lending space. This has become even more important after fraud issues were detected in both Baltimore and Philadelphia, among other metro areas.
This has been a point of discussion with another private lending group, the American Association of Private Lenders (AAPL). At a recent event, they examined how rapidly growing technology is making fraud harder to fight. To combat tech, the mortgage industry is unleashing rapidly improving technology to try to stay one step ahead.
Ben Fertig (pictured top), president of Constructive Capital, discussed the topic at the AAPL event. He told Mortgage Professional America that while tech doesn’t take the place of strong human underwriting and fraud detection, it can help make it more effective.
“Technology doesn’t replace judgment, it reinforces it,” Fertig told Mortgage Professional America. “Strong data, transparent processes, and real feedback loops allow lenders to identify risk earlier and manage portfolios more effectively at scale.”
Major technology advances
Mortgage fraud used to be a very manual process. The days of whiting out values are largely behind the industry. Most of it occurs in computers with rapidly improving technology. So the technology behind finding and eliminating this fraud must try to stay ahead of the fraudsters.
The new tech is allowing humans to identify potential fraud points more effectively than ever before. The first place those tools have helped is in identifying issues with valuation.
“The one thing I'll tell you is that I think that the evolution of that is digital,” Fertig said. “You’re seeing a lot of things in relation to straw buyers. I think there are some pretty good tools regarding valuation that allow you to really assess the condition of a property versus the comps.”
Another area where fraud shows up is PDF alteration. Some of these alterations are very well done, to the point where they are hard to spot with the naked eye. However, AI technologies have helped modernize optical character recognition (OCR) readers.
“The one thing that we've run into in terms of, I think we've solved for it now, using the new OCR,” Fertig said. “It's not called OCR anymore. It's an AI-driven Google product. It was always difficult to get the OCR products to be able to detect fraud past one generation of PDF. So if you were dealing with a borrower, it was fine.
“If you were dealing with a third-party originator, who is going to save that PDF and then send it to you and upload it to your system? It was hard to get a confidence level as to whether you can purge that out.”
Unique challenges in non-QM, commercial
Another issue that non-QM and commercial lenders face when it comes to fraud is the wide range of documents required and accepted for these types of loans. Traditional consumer mortgages typically involve individuals with W-2 statements and uncomplicated tax returns. While they can be forged, it tends to happen less often.
Fertig said that’s why getting technological help in this space is so important to make sure good loans are closed and bad actors are thwarted in their efforts.
“I think some of the other things where you're getting some digital help, we don't have the luxury of continuity of title that you see in a conventional loan,” he said. “Because LLC membership interests can get amended. I think there are some unique challenges in our space that really do have pretty good digital solutions right now.”
Not only are these loan types typically more complicated, but they are often for larger dollar figures than a standard conventional mortgage. This makes the risk involved with them greater, and of course, it makes them more of a target for fraud because the potential payoff is much greater.
It’s why investors putting their money into the space want to know that everyone is doing their part to eliminate fraud as much as possible.
“I think that it's on the mind because you saw some concentrated defaults in Baltimore, and you saw some issues in Philadelphia,” Fertig said. “The capital that is fueling the space wants to know what you are doing to prevent this. Some of those things can be organically with internal policies, and some of them you really need to, in terms of your risk management, really focus on the digital footprint there.”
Stay updated with the freshest mortgage news. Get exclusive interviews, breaking news, and industry events in your inbox, and always be the first to know by subscribing to our FREE daily newsletter.
