Mortgage AML Insights

Preventing Mortgage Fraud: The Power of Robust KYC Practices

Feb 09, 2024

In the world of Know Your Customer (KYC) protocols, the essence lies in building trust with your business allies—be they partners, counterparties, correspondents, brokers, or borrowers.

This encompasses the fundamentals of verifying identities, corporate ownership, industry track records, and references, with various services available to assist in these tasks.

However, for those versed in mortgage operations, the balance between internal demands for volume and the external pressures from third parties is all too familiar.

A Cautionary Tale from the Field

Let me share a personal story from my time as a loan officer, which underscores the importance of intuition in KYC practices.

The Seminar Revelation

At a mortgage origination seminar in Palm Springs, a panel featuring four high-volume producers was a highlight. Among them was "Jason," a recent college graduate boasting extraordinary numbers. His approach was the epitome of "fake it till you make it"—maxing out credit cards for the right wardrobe and leasing a luxury car to match. In a mere six months, he claimed to have dominated the Realtor business in San Diego.

The Doubts Creep In

Sitting in the audience, seasoned professionals, including myself, exchanged skeptical glances. The rapid success Jason described didn't align with our collective experiences. It was hard to believe that a newcomer could so quickly secure the loyalty of top Realtors in a competitive market like coastal San Diego.

The Fall

Our instincts proved correct. Six months later, the FBI intervened, arresting Jason and seizing his loan files for fabricating income and asset documents to illicitly win business and close challenging files. This wasn't a case of succumbing to pressure; it was outright dishonesty.

The Role of KYC in Preventing Fraud

Jason's story raises a critical question: Can KYC protocols catch such fraudulent activities before they result in funded loans? It's essential for organizations to critically assess their top producers, scrutinizing the quality of their originations, delinquency rates, and loan defects, rather than simply being grateful for their production volume.

Trusting Your Instincts

Wilford Brimley's line from The Firm encapsulates a valuable principle for anyone in the KYC field: "I get paid to be suspicious when I've got nothing to be suspicious about." This underscores the importance of being guided by both instinct and a deep understanding of your business sector.

KYC Measures are Fundamental 

While KYC measures are fundamental in establishing trust and ensuring compliance, they are not foolproof.

The case of Jason illustrates the critical role of intuition and experience in detecting and preventing fraud. It's a reminder that, in the complex interplay of verifying trustworthiness and ensuring regulatory adherence, our instincts can be just as valuable as the procedures we implement.

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