FRAUD DETECTION AND PREVENTION RED FLAGS

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Natalie Moody
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1 Fraud Detection and Prevention FRAUD DETECTION AND PREVENTION RED FLAGS!1

2 At Chase, we recognize that in today's market, taking advantage of every opportunity to minimize the risk of mortgage fraud is the key to prevention. As an industry leader, we feel strongly about the actions we are taking and are dedicated to the prevention of fraud. As part of our fraud prevention initiatives, we have developed a list of red flags that may indicate fraud. You can enhance the Chase experience by closely reviewing the completed Loan Application (1003) and supporting documentation for consistency, accuracy and the presence of mortgage fraud red flags prior to submission. Mortgage fraud red flags do not necessarily indicate fraud, but they help identify the need to perform a heightened review of the loan file for data integrity. It's important to note that this list is not intended to be all-inclusive and that everyone in the lending space must stay current on potential fraud risks and red flags. Application Documentation Loan Application (1003) An unrealistic or significant commuting distance (compare the distance between the employer and the new property vs. the distance between the employer and the former residence) Inconsistencies in the borrower s age and the number of years employed An unrealistic professional position for the age or education of the borrower Job title and responsibilities inconsistent with salary Identical business and home phone numbers when borrower is not self-employed An unreasonable accumulation of assets compared with the borrower s income, or a lack of accumulated assets compared with income Post Office Box is only indicated address for employer Borrower cannot be reached at place of business Stocks and bonds (liquid assets) are not publicly traded (may be closely-held corporation) Borrower holds stock in employer (may be self-employed) Borrower is buying investment property but does not own a primary residence Borrower has acquired an excessive amount of real estate in a short period of time Borrower owns excessive amount of real estate but has limited property management experience Borrower is downgrading to a smaller or less expensive home without reasonable explanation Borrower is intending to rent current residence with no lease provided, or lease provided is incomplete or inaccurate Borrower intends to sell current residence, but no documentation is provided Information on the loan application and supporting documents in the loan file do not support each other Signatures on the loan application are not consistent with other documents provided or eventually signed by the borrower!2

3 Social Security Numbers and Social Security Cards The formatting of the Social Security number should always be nine digits and appear as xxx-xx-xxxx. Invalid Social Security numbers are any numbers that: Begin with three or more zeros ( ) Have both fourth and fifth digits of zero ( ) End with four zeros ( ) Lead with numbers of ; these numbers were issued to railroad employees and were discontinued July 1, 1963 Lead with number 8 Lead with number 9; this indicates an Individual Tax Identification Number Since 1973, Social Security numbers have been issued by the central office of the Social Security Administration. The first three (3) digits of a person's Social Security number are determined by the ZIP Code of the mailing address shown on the application for a Social Security number. Prior to 1973, Social Security numbers were assigned by the field offices of the Social Security Administration. To access the chart showing the first three digits of the Social Security numbers assigned throughout the United States, visit Occupancy Borrower owns rental property and the value of their current residence is greater than the value of current residence being purchased Within the twelve months, borrower purchased property that was later rented Within the last three years, borrower purchased similar property and occupied that property for less than one year Borrower is moving from 1-unit property into a 2- to 4-unit property Within the last twelve months, borrower purchased a property represented as owner-occupied in the same or a similar neighborhood Home being purchased is an excessive distance from primary employment Home being purchased does not appear to be a desirable alternative to existing primary residence Borrower has no commitment to selling or leasing borrower s current primary residence (i.e., no listing or purchase agreement on the current residence) Inconsistencies between question L of the Declarations Section and the Property Information Section of the 1003 Subject section of the appraisal shows occupant to be a tenant but application states property will be owner-occupied Borrower is first time home buyer, but is purchasing investment property!3

4 Income Documentation - Red Flags IRS Form W-2 and Form 1099 Employer is large, recognizable company, but there are no deductions for benefits (insurance, 401k, etc.) W-2 appears typed but pay stubs are computer-generated Different type or font appears within W-2 or 1099 Federal Employer Identification Number does not appear on document. Every partnership, corporation and proprietor paying wages to one or more employees must have a Federal Employer Identification Number Employer Identification Number is not formatted as XX-XXXXXXX (two digits, hyphen, seven digits) Employer and employee names and addresses are inaccurate and/or do not match the 1003 W-2 or 1099 reflects even dollar amounts for wages and/or taxes Income reflected on the W-2 or 1099 is different than income reported on loan application, Verification of Employment and tax returns Social Security tax and Medicare wages/taxes and local taxes, where applicable, exceed ceilings or set percentages Tax withholdings are inconsistent with pay stubs provided W-2 or 1099 copy submitted is not Employee s Copy (Copy C) Borrower s Pay Stubs Form is handwritten Employer is large, recognizable company, but there are no deductions for benefits (insurance, 401k, etc.) Company name or employee name not shown Document contains spelling or typographical errors Types or fonts are inconsistent throughout document Check numbers do not increase chronologically Paycheck was issued on a Sunday or a holiday Document shows even dollar amounts for earnings, taxes and/or deductions Amounts withheld for Social Security, Medicare and other government programs are inconsistent with the level required State tax is not deducted, where applicable Debts reflected as deduction from pay (credit union loans, etc.) are not disclosed on application Year-to-date earnings do not total accurately from paycheck to paycheck Social Security number is not consistent with number provided on other loan file documents Employee s address does not match address on 1003 IRS Tax Form 1040 Name, address, Social Security number or occupation is not consistent with application Number of dependents does not match 1003 Tax returns do not total correctly Wages are not consistent with W-2 or Verification of Employment Business income does not match net income found on Schedule C Unemployment compensation was claimed but the file does not indicate a gap in employment or seasonal employment Deductions were made for one-half of self-employment tax or for self-employed health insurance for a borrower who is not self-employed Deduction for one-half of self-employment tax on page one of 1040 is not one-half of total self- employment tax listed on page two of 1040!4

5 Borrower files Schedule G (Income Averaging) for taxpayers with fluctuating annual income Borrower shows extensive common stock, preferred stock or bonds on the 1003, but little dividend or interest income reported on tax return Borrower claims to own no real estate, but tax return reflects real estate taxes or mortgage interest There is evidence of correction fluid or other alterations to type Type of handwriting varies within the return Tax returns are not signed and dated by borrower Paid preparer handwrites tax return Lease/Rental Income Borrower is shown as landlord prior to owning property Lease is dated prior to the revision date found on the lease form Names on lease are the same as or related to other parties involved in the transaction Borrower is first time home buyer or has no landlord experience, but is qualifying using rental income. Asset Documentation - Red Flags Asset Account Statements Statement reflects large, unexplained transactions Deposits do not support amount of income claimed by applicants Direct deposits from someone other than the employer are shown on statement Statement shows someone in addition to the applicant(s) as an account owner Address on the bank statement does not match other address information in the file Statement shows an address other than borrower s address Statement shows checks written for same amount each month that do not correspond with debts shown on application Statement does not show monthly checks for rent or mortgage amount shown on the loan application Statement does not total properly Ending balance on statement does not match beginning balance on subsequent statement Account was not listed on 1003 Statement dates are inconsistent with activity shown on statement Date on the statement is a weekend or holiday Statement does not reflect earnest money checks Qualifying asset statements contain no deposit or withdrawal activity Account balance does not commensurate with the borrower s represented income Gift Funds Gift Letter appears to have white-out or other alteration Gift funds are coming from a non-u.s. bank Credit Report Documentation - Red Flags Credit Report Employment information and history varies from loan application or Verification of Employment Residence information varies from 1003 and other documents in the file Credit history is not available or length of credit is not consistent with the applicant's age!5

6 Report shows recent inquiries from other mortgage lenders (borrower may have multiple loans in process simultaneously or may have recently closed on other undisclosed mortgages) Social Security number is not consistent with application and other documents in file Social Security number was issued prior to year of birth Accounts have recently been paid in full with no evidence of source of funds for payoffs Credit explanation letter indicates unemployment not consistent with Verification of Employment in the file Report shows outstanding balances on debts that were not disclosed on initial loan application Report date is prior to date of the initial loan application Fraud Alerts, Consumer Victim Statements, Hawk Alerts, CreditScan or SafeScan warnings appear on report All trade lines opened at the same time with no apparent reason Report shows borrower as an authorized user on multiple trade lines, but personal credit is limited Collateral Documentation - Red Flags Appraisal Review Client on page one of the report must be the lender. An appraisal not ordered by the lender should never be used to establish value Tenant is shown to be the occupant on an owner-occupied refinance transaction Information is left blank (borrower, client, occupant, etc.) Address and legal description are inconsistent with file information Photographs do not match the property description Photographs of comparable sales reflect properties that are superior to subject property For Rent or For Sale signs appear in photographs on owner-occupied refinance transactions Photos reveal items not disclosed in appraisal (commercial property next door, railroad tracks, etc.) Comparables do not bracket the subject property relative to size of dwelling and size of lot Comparables are more than one mile from subject property (except rural properties) Comparables are all adjusted in the same direction Overall adjustments are in excess of 25% Map reflects that the distance between subject property and comparable sales is greater than disclosed in the description of the comparable sales Map reflects that major barriers are crossed to obtain comparable sales (i.e., divided highway, water way, railroad tracks, etc.) Subject property and/or comparables are not listed in the MLS or comparable open market service Purchase Agreement or Sales Contracts Contract is incomplete and/or not executed by all parties Contract addendums are referenced but not included Multiple versions of the contract exist Contract reflects corrections to purchaser or late insertion of an additional borrower Sale is contingent upon seller acquiring title Contract indicates excessive real estate commission Contract reflects excessive concessions or inducements (e.g., seller offers new car, $10,000 gift card, large decorator's credit, etc.) Seller is a relative of the buyer, real estate agent or employer indicating a non-arm s length transaction Borrower is not shown as purchaser on the contract Purchase price is substantially below the appraised value!6

7 Earnest money deposits are odd dollar amounts Name or address on earnest money check is not borrower s address No earnest money deposit referenced on sales contract Secondary financing is offered by seller or other parties Title Commitment/Chain of Title Title indicates a recent transfer of property Title indicates that subject property owner s name is not the same as the seller s name on the purchase contract or the owner s name on the appraisal report Owner of property per title commitment appears to be related to other parties involved in the loan transaction Chain of title includes familiar names (e.g., buyer, real estate agent, loan officer, etc.) Title commitment does not list lien holders yet preliminary Closing Disclosure shows lien payoff entries Title commitment calls for multiple deeds to finalize the transaction (evidence of possible flip) Title commitment reflects a Lis Pendens, but there is no indication of a distressed property Owners that have been in title for short periods of time Owners that are corporations or LLCs and the property is not new construction Judgment against borrower, but it is not shown on credit report Buyer has pre-existing financial interest in property Date and amount of existing encumbrances are not consistent with known facts in the loan file Distressed Property or Short Sale Financing - Red Flags While mortgage defaults and foreclosures are currently down relative to past years, mortgage servicing continues to see mortgage rescue scams and other questionable home sale practices. As a result, red flags may be present when financing a distressed property or short sale that may indicate additional diligence is needed to understand the true terms of the transaction. Subject property was not listed on MLS, which may be an indicator that the buyer, transaction and bid were arranged between parties. Avoiding free market indicates true value may be manipulated Closing Disclosure or sales contract indicates cash back to seller and/or title reflects outstanding liens higher than amount to be paid on the Closing Disclosure, or all liens on the title are not reflected on the Closing Disclosure Seller is not on title or shown as owner on the appraisal report Title is held by a business, LLC or trust Sales contract has specific verbiage stating the purchaser has the right to immediately sell the property for profit, which may indicate the property is being purchased as an investment or to flip Borrower is related to or associated with the seller or listing agent Borrower is a real estate professional Borrower's assets have recently accumulated rapidly Property is located in a volatile market with a high foreclosure rate and a wide range of comparable values, which indicates that property value should be evaluated carefully For real estate and lending professionals only and not for distribution to consumers JPMorgan Chase & Co. JPMorgan Chase Bank, N.A. FDP-RedFlags 12/ !7

Mortgage Screening Process: Red Flags For Single-Family Mortgage Fraud. March 2016

Mortgage Screening Process: Red Flags For Single-Family March 2016 Table of Contents Introduction... 3 Seller/Servicer Requirements... 3 Red Flags... 4 General Red Flags... 4 Mortgage Loan Application...