The Fraud Blog with Tracy Kitten

Are Banks Missing the Fraud Mark?

Apathy Allows Low-Tech Crimes to Drain Billions

We spend a lot of time talking about Zeus and international computer crimes, and sure, cyberthreats are increasingly worrisome. They also get a lot of attention because they possess a certain mystique or intrigue with which old-fashioned counterfeit-check fraud and loan-origination mortgage fraud can't compete.

But has our attention focused so much on technological threats that we've forgotten to lock the garage, through which low-tech schemes sneak in and steal millions upon billions of dollars every year? Sadly, yes.

Why do these schemes continue to net fraudsters billions, while flying under the radar of detection? 

Last week, the Federal Bureau of Investigation issued its 2010 Mortgage Fraud Report, which offers a comparison of annual mortgage fraud losses from 2008 to 2010. According to the FBI, though losses in 2010 were down $4 billion from 2009, they still account for a phenomenal amount.

More than $10 billion dollars was reportedly lost to mortgage schemes in 2010. Relative to 2006, when mortgage fraud losses exceeded $27 billion, the industry has made some headway. But why do these schemes continue to net fraudsters billions, while flying under the radar of detection?

L.T. Lafferty, a white-collar criminal defense attorney and former federal prosecutor, says criminals are just more motivated to work loopholes than institutions are to invest in fraud prevention strategies.

"Why does mortgage fraud continue to be such a problem?" Lafferty asks. "Opportunity, reward and relatively low risk of detection. The environment of the depressed real estate market, which is projected to continue well into 2012, provides an area ripe for fraud, due to the significant number of foreclosures, the contracting financial markets and tighter lending practices by financial institutions. Yet perpetrators can earn high profits through their illegal activities with relatively low risk of detection, due to limited law enforcement resources, priorities and the sheer number of potential targets."

Despite its low-tech nature, mortgage fraud remains one of the fraudsters' most profitable fraud schemes. Gartner Analyst Avivah Litan says apathy, on the parts of banks and other mortgage lenders, is the problem. "I don't know why no one seems to be paying attention to this, or why they don't care," she says. "Dollar-wise, it has a much bigger impact than a lot of the high-tech stuff," such as phishing attacks and ACH and wire fraud, "everyone seems to be focused on."

Last week, Litan blogged about a mortgage scam that exploits property foreclosures. The scheme, which was accidentally uncovered during a data-integration project at one of the country's top institutions, is not small. In fact, it's not even contained to a specific geographic region. And it is estimated to have cost home lenders and banks between $7.5 billion and $15 billion in 2010.

The scheme relies on the artificial reduction of a home's value and sales price. While a property's value and sales price are reduced, the mortgage goes into default, which then allows the realtor, broker and others involved with the scheme to turn profits through the sale of the property, a property transfer or a new mortgage, which comes in for what the property is actually worth.

A third-party systems integrator picked up on the suspicious pattern during an unrelated data-management project. The pattern: Sleazy real estate deals on foreclosed properties repeatedly involved the same realtor and broker. Once identified, it was discovered that more than 1 percent of subprime sales, where portfolio values ranged between $100 billion and $2 trillion, was being skimmed from the system.

The fraud was easy to see after the pattern was recognized. But it was stumbled upon by accident. Most lending systems banks rely on today don't look for fraudulent patterns.

Litan says banks need to figure out how to get their hands around their lending data. "It's hard to do pattern integration, but it's very easy to ask the question."

The depressed economy is making this kind of fraud easy for criminals, and until banks put in measures and systems to thwart these schemes, there's little doubt they'll continue. Haven't U.S. consumers and financial institutions lost enough to the mortgage crisis?

I'm not suggesting we steer attention away from the cyberfight. Cyberthreats are definitely a growing concern. But we can't leave windows of fraud opportunity open to low-tech schemes, either. Banking institutions have to find a balanced way to address the fraud threats of the past, while consistently tweaking their systems to prepare for the emerging threats of the future.



About the Author

Tracy Kitten

Tracy Kitten

Director of Global Events Content and Executive Editor, BankInfoSecurity & CUInfoSecurity

A veteran journalist with more than 20 years' experience, Kitten has covered the financial sector for the last 13 years. Before joining Information Security Media Group in 2010, where she now serves as director of global events content and executive editor of BankInfoSecurity and CUInfoSecurity, she covered the financial self-service industry as the senior editor of ATMmarketplace, part of Networld Media. Kitten has been a regular speaker at domestic and international conferences, and was the keynote at ATMIA's U.S. and Canadian conferences in 2009. She has been quoted by CNN.com, ABC News, Bankrate.com and MSN Money.




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