Freddie Mac Strengthens Guidelines for Fraud Prevention
by Anna DeSimone
President
On August 21, 2012, Freddie Mac augmented Chapter 57, Fraud Prevention, Detection and Reporting, a new chapter created on June 13, 2012 in Volume 2 of the Seller/Servicer Guide. The new material references previously published requirements regarding fraud prevention published in Volume 1, Chapter 7. Also, in its recent industry bulletins, Seller/servicers were reminded to notify Freddie Mac of any incident where there is reason to believe that fraudulent or possible fraudulent activity has taken place during the origination or Servicing of a Mortgage.
Key Points of Section 57, Fraud Prevention, Detection and Reporting
The Seller/Servicer must have comprehensive practices and procedures to prevent and detect fraud throughout each stage of the origination and Servicing of a Mortgage and in related real estate transactions. This section identifies basic fraud prevention and detection requirements related to employee hiring and training; origination and servicing and the seller/servicer’s in-house quality control program. Freddie Mac encourages Seller/Servicers to implement additional practices and procedures, as deemed necessary, in order to ensure that an effective fraud prevention and detection plan is in place.
The seller/servicer must have screening and hiring practices in place to ensure the integrity of its employees and must train employees in each applicable area of its mortgage business about:
- Common and emerging fraud schemes
- Red flags that may signal fraud and the need for more review
- Procedures for prevention, detection and reporting of fraud and possible fraud
Employees must receive periodic training updates no less frequently than on an annual basis to ensure they are aware of emerging fraud scenarios.
Minimum steps taken to prevent and detect fraud in the areas of origination and servicing include:
- Ensure the information indicating possible fraud that is received from any source, including but not limited to, borrowers and participants in the mortgage and related real estate transactions, such as forbearance plans, loan modifications, foreclosures, deeds-in-lieu of foreclosure or short sales of the underlying property is escalated and internally investigated.
- Ensure the information indicating possible fraud that is received from any source is escalated internally and properly investigated.
- Investigate unusual patterns or discrepancies or other red flags, such as first- and early-payment defaults.
- Comply with Seller/Servicer Guide Sections 2.24 and 51.3(a) regarding screening through Freddie Mac Exclusionary List.
- Ensure proper approval, evaluation and monitoring of mortgage brokers, correspondents, service providers and appraisers.
Quality Control Program
The seller/servicers’ in-house quality control program must include pre-and post-funding reviews as an integral part of fraud prevention and detection in the mortgage process. Specifically, the seller/servicer must:
- Use discretionary samples to evaluate the work of a particular employee or participant to the transaction when there is reason to suspect fraud.
- Target and sample loans to better identify and highlight potential trends such as early payment defaults or other red flags that could indicate possible fraud.
- Comply with all other provisions relating to quality control reviews.
- Periodically update the quality control policies and procedures to address emerging fraud scenarios.
Reporting Requirements
Seller/servicers must have procedures for reporting fraud or possible fraud in connection with a mortgage sold to, or serviced for, Freddie Mac and discovered at any time, including, but not limited to, during origination, quality control reviews, servicing activities, or loss mitigation. Specifically, a seller/servicer must report to Freddie Mac when the seller/servicer has a reasonable belief that one of the following is occurring or has occurred during origination or servicing of a mortgage, including, but not limited to, any loss mitigation activity:
- Misrepresentation, misstatement or omission related to the borrower, including but not limited to employment, identification, income, assets, sources of funds, indebtedness and property occupancy.
- Misrepresentation, misstatement or omission related to the mortgage premises including but not limited to property valuation, property value and property use.
- Misrepresentation, misstatement or omission of any other information related to a mortgage or related real estate transaction, including but not limited to, undisclosed seller or other third-party incentives, loan performance, mortgage purpose, kickbacks, an undisclosed relationship between parties to the transaction when Freddie Mac requires that the transaction is an “arm’s length” transaction.
- Multiple deliveries of the same mortgage.
- Theft of custodial funds or non-remitted payoff funds.
- A person or entity on the Freddie Mac Exclusionary List is involved or was involved in the origination, sale or servicing of the mortgage or in the related real estate transactions in violation of Section 2.24.
- Termination or denial of mortgage insurance based on fraud.
Seller/servicers must report the information identified in Section 57.3(a) to Freddie Mac in writing within 30 days. The seller/servicer must report the information either by submitting Freddie Mac’s Mortgage Fraud Reporting Form-Origination or Freddie Mac’s Mortgage Fraud Reporting Form-Servicing. Freddie Mac must receive immediate notification for any of the following circumstances:
- Theft of custodial funds, lack of collateral, non-remittance of pay-off funds or multiple deliveries of the same mortgage.
- A substantial likelihood that the fraud or possible fraud will receive significant public exposure or publicity.
- A seller/servicer is notified by law enforcement or another governmental authority that such authority is conducting an investigation or prosecution of fraud relating to mortgages owned, or serviced for, Freddie Mac.
- A scheme or pattern of a) more than 25 mortgages sold to, or serviced for, Freddie Mac; or b) with an aggregate unpaid principal balance of at least $2.5 million.
The new regulations also include a section named “Cooperation Requirements” whereby seller/servicers agree to cooperate with Freddie Mac to prevent and investigate fraud. Cooperation includes providing and assisting Freddie Mac in obtaining all information, documentation and records requested by Freddie Mac relating to a mortgage and related real estate transactions, including, but not limited to, closing or settlement agent files, mortgage files, borrower payment records and reverifications of employment, income, occupancy and assets.
Chapter 57 can be accessed through the following AllRegs link:
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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