The Financial Crimes Enforcement Network (“FinCEN”), a bureau of the U.S. Department of the Treasury, released its full-year 2011 update of mortgage loan fraud suspicious activity reports (MLF SARs) on April 23rd, 2012. The update shows that financial institutions submitted 92,028 MLF SARs last year, a 31 percent increase over the 70,472 submitted in 2010.
SARs do not establish that a crime was actually committed, but the reports reflect how many potential fraud reports were filed by banks and financial firms.
In particular, the report shows that financial institutions are recognizing activity that appears to be fraud early in the mortgage loan process, often helping to prevent the fraud. For example, 40 percent of MLF SAR narratives indicated the filing institution turned down the subject’s loan application, short sale request, or debt elimination attempt because of the suspected fraud reported in the SAR.
This suggests a significant improvement in mortgage lending due diligence since the height of the housing bubble – a time period when major banks had greatly relaxed their lending and due diligence standards, and promulgated loan programs that eliminated the need for loan originators to verify, or in some instances even consider, various aspects of the borrower’s creditworthiness.
By contrast, in the majority of 2011 income fraud-related SARs, the entities filing the reports detected a misrepresentation through the underwriting process before funding a loan request, and thus declined the application.
Interestingly, despite the significant year-to-year increase in MLF SARs, the number submitted in the fourth quarter of 2011 actually dropped nine percent over the same period in 2010. This was the first time since the fourth quarter of 2010 when filings of MLF SARs had fallen from the previous year.
We will need to wait for future reports to determine whether this is a trend, and if so, confirm our current belief as to the cause of the trend.
Interestingly, the states with the most SARs per capita in 2011 were California, Hawaii, Florida, and Nevada.