Loan Fraud - BIG Problem

One of the areas receiving more attention these days in light of regulations and losses is our loan office-and loan officers. We can only take an educated guess at how much fraud and loan abuse takes place in financial institutions. The OTS has estimated $60 billion in annual losses on mortgages alone.The FBI has issued bulletins on organized crime's activities in the area of loan frauds. They consider it to be a major problem.

How common is loan fraud? I was teaching a workshop on Bank Secrecy at a small bank not too long ago, and the discussion turned to suspicious transactions. I pointed out that the Suspicious Activity Report (SAR) will be used for more than just suspected money laundering. For instance, if someone lies about their income on a credit application, or alters a copy of their tax return to make it appear that they make more than they actually do, that an SAR would have to be filed on the loan applicant.

One of the loan officers attending scoffed at this idea! "If I had to do that on every applicant that I knew was falsifying their income, I'd never be able to make any loans! We just take that into consideration and factor it in! Every loan officer does that."

After learning what the penalties are for such willful blindness, needless to say, he has since changed his mind about how he will review and report on the information provided on loan applications.

In the past we've cautioned that new accounts people have to become investigators in order to establish the identity and truthfulness of applicants for demand deposit accounts. We know that access to the computer through an account number can do a great deal of damage to a financial institution.

How much more damage can be done through the loan area? Perhaps it's time to concentrate on training our loan officers to also look for fraud-what the red flags are, the methods being used by organized crime-and how to protect against them.

The financial industry has done a good job of training front line people to look for fraud. Loan officers and loan application review will have to develop the same skills in order to protect their institutions from large losses.

Copyright © 1996 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 6, No. 3, 1/96