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.It s a positive step, but given the timing of the an-nouncement, which coincided with the House of Representativesnearly passing a no-YSP provision in their lending bill, it looks morelike a public relations strategy than a real effort at accreditation.Since the approval process takes only six weeks and the require-ments are relatively simple to meet hold a state license, completea background check, attend educational courses it scores pointsfor style, but comes up short in the substance department.The recent debacle has given brokers a reputation similar toused car salesmen.Although the bankers and brokers associationsdon t have a history of working together on issues, a collaborativeeffort to accredit loan originators would be a key step to rebuildingcredibility for the industry.One day a CLO (Certified Loan Origi-nator) designation could hold the same distinction as being a CPAor CFP.Allowing loan originators to earn a designation that recog-nizes their expertise not only improves their professionalism butccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182.qxd 5/29/08 1:44 PM Page 165Tackling Fraud Thinking Outside the Box 165also separates and identifies the strong performers from the averageor weak ones.Tackling Fraud Thinking Outside the BoxWith the recent upheaval in the real-estate market, the courts haveshown a willingness to punish violators.In August 2006, a formerAmerican Home Mortgage Investment Corp.branch manager inAlaska was sentenced to two years in prison, fined $50,000, and or-dered to pay $140,000 in restitution for wire fraud.He pleadedguilty to falsifying documents to secure stated income loans for cus-tomers while working for American Home Mortgage InvestmentCorp.and Countrywide Financial.This is the first known case inwhich an originator received jail time for increasing a borrower sincome on the application, a common industry practice.While advancements in technology have improved the indus-try s effort at detecting fraud, there s still a long way to go.By mostestimates, lenders lose tens of millions of dollars each year as aresult of fraudulent activities.For our purpose, the subject of fraudis addressed at the broker level.Even though borrowers, title com-panies, and other industry professionals contributed to the prob-lem, they require a separate analysis and go beyond the scope ofthis book.Though my company encountered fraud on a daily basis, therewas little we could do to help other lenders.Without a mechanismfor sharing the information with other mortgage companies, fraud-ulent brokers could easily move from one lender to another.Thesolution is to develop a national scoring system that tracks fraudu-lent activities for all loan originators.Just as borrowers are scored based on their total credit profile, loanoriginators would earn fraud scores based on how they performed rel-ative to certain measurements.If lenders took the raw data from eachloan (without the borrower name and Social Security number) andsubmitted it to a central repository, a group of skilled statisticianscould use the information to develop a scoring model.ccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182.qxd 5/29/08 1:44 PM Page 166166 How to Fix a Broken IndustryIn order for it to work, the system would require a gatekeeper.Whether the score was developed by a private company or throughan industry-wide effort (coordinated by the Mortgage Bankers As-sociation, for example), the system would be dependent on lendersproviding the gatekeeper with data to develop a scoring model.Any lender that wanted access to the scores would pay a sub-scription for the service.Ideally, lenders that contributed datato the service would pay less for the subscription than lendersthat didn t.The key to making it work is to insure that the methodology isunderstandable to lenders and brokers.The reason goes back tomotivation and behavior.If a loan officer realizes that his fraudscore worsens if a large percentage of his deals are closed as statedincome loans, he will be motivated not to take the easy way out.Conversely, if loan originators know certain behaviors will improvetheir score, they will be more inclined to act in that manner.Once enough information has been compiled to create a reliabledatabase, lenders will develop their own policies on how to use thescores.A loan officer who consistently received a poor fraud scorewould quickly find himself looking for a new career.A scoring sys-tem that potentially threatens an originator s livelihood becomesan enormous deterrent to fraudulent activity.If the use of fraudscores gained widespread acceptance among lenders, the agenciescould eventually use them in rating securities.AppraisersChapter 4 conducted a thorough examination of the appraisalprocess, detailing how a property s value can be manipulated.While today s problems resulted from a multitude of issues, overval-ued appraisals caused significant economic damage.The solution tofixing the appraisal process comes with reducing the ability of bro-kers and realtors to influence an appraiser.The best idea would be to completely overhaul the system andassign appraisers on a random or rotational basis, similar to the sys-ccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182.qxd 5/29/08 1:44 PM Page 167Appraisers 167tem used by the VA and thus eliminating the pressure to inflateproperty values.But the enormity of this task makes it difficult toenvision, and a more realistic solution should be considered.In the early days of the industry, lenders provided brokers with alist of approved appraisers.If a broker submitted a loan and the ap-praiser wasn t on the list, the deal was rejected outright.As brokersgained a larger share of the market, lenders loosened the require-ment, believing it created an obstacle to attracting the broker sbusiness.In time lenders went from having an approved list toidentifying only appraisers they wouldn t accept, usually the worstviolators.Letting brokers choose the appraiser may have reducedthe barrier, but it also gave birth to a flawed process.Of all the solutions discussed in this chapter, this one may be theeasiest to implement: Reverting to the previous system would de-crease the broker s ability to influence the property s value.The dif-ference between having a list of approved and a list of unacceptableappraisers may seem minor, but it s actually significant.Sincelenders develop the list, an appraiser has to apply to them in orderto make the cut.Having to earn and keep a lender s confidencemeans thinking twice before giving in to the wishes of a manipula-tive broker.The threat of being removed from the list serves as anatural deterrent to massaging property values.What are the negatives? If a broker moves a loan from one lenderto another and the appraiser isn t approved by the second lender, asecond appraisal must be ordered, which costs money and createsdelays.This issue, although minor, will eventually fix itself.Oncelenders develop their own lists, brokers will start choosing apprais-ers that are sanctioned by multiple lenders or encourage their pre-ferred appraisers to get signed up with multiple companies.Since lenders set their own appraisal policies, it s inconceivablethat an industry-wide requirement could be mandated.Each lenderwould need to implement its own standards policy and develop alist of approved appraisers.Given that the total number of whole-sale lenders has dropped by more than 60 percent over the last year,now is the best time to make this change.With brokers no longerccc_bitner_151_182_c07
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