Mortgage Fraud Trends: Cindi Dixon, Mela Capital Group

How to Identify Fraudsters Inside and Outside the Institution
Mortgage Fraud Trends: Cindi Dixon, Mela Capital Group
There are some great technology solutions to help detect fraud, but none of them are worth a cent if banking institutions don't have the people and processes in place to maximize these solutions.

In an interview focused on current mortgage fraud trends, Cindi Dixon, president of Mela Capital Group of Florida, discusses:

  • How institutions can identify fraudsters;
  • Why credit unions generally are better than banks at preventing fraud;
  • Tips about technology solutions that can help fight mortgage fraud.

Mela Capital Group is a nationally recognized mortgage fraud mitigation and credit risk management consulting firm that has audited $5 billion in high risk mortgage loans for private industry and law enforcement. As a recognized industry expert in mortgage and securities fraud investigation and operational procedure, Cindi Dixon, President, provides expert witness testimony and is a frequent presenter at public speaking engagements. As a private contracting firm, Mela has assisted US Customs/ICE, the FBI, the US Postal Inspector General and other agencies in unraveling complex criminal schemes involving mortgage fraud.

TOM FIELD: Hi, this is Tom Field, Editorial Director with Information Security Media Group. We are talking about mortgage fraud today and it is my privilege to be talking with Cindi Dixon, the President of Mela Capital Group in Florida. Cindi, thanks so much for joining me.

CINDI DIXON: It's my pleasure, Tom; nice to see you.

FIELD: Just to get us started, why don't you tell us a little bit about yourself and your background in mortgage fraud and, of course, what you are doing now with your own organization?

DIXON: I have been in the financial services industry my entire career, getting close to 25 years. The last 15 years probably specializing in mortgage fraud and dealing with mortgage-backed securities companies and the nation's largest lenders. It was from about 2002 to about 2005 when I was brought on board when Morgan Stanley went into the mortgage-backed securities market. I was brought on board as a quality control manager looking at pre-funding high risk loans, and I also worked with our due diligence teams that looked at our product prior to purchase.

Immediately when we started setting up shop and going into the mortgage-backed securities business, we realized that we were getting a lot of aged product from mortgage originators. And generally a mortgage loan turns over in 30 to 45 days, but what we were seeing right out of the gate, being a new player on the block, was that the loans we were getting were about nine months old.

So the need to set up a fraud investigations unit was very immediate, and so I was tasked with that and oversaw that for four years. The first four years that they were actually in the industry.

FIELD: So, give me a sense of the types of fraud trends that you are seeing and tracking right now.

DIXON: What we are seeing right now is a lot of short sale flipping, which is basically the standard flip that we have always dealt with with regard to mortgage fraud, but what is kind of happening is it is in the reverse, where you have an organized fraud scheme, you have the standard players of the appraiser, the realtor, loan originator, real estate attorney, or any parties or members of those groups. What they are doing is they are undervaluing properties that are either in short sale or foreclosures status, and then they are flipping amongst their fraud rings and manipulating the values. We are seeing a lot of the title agents are very kind of up in arms about kind of simultaneous closings on a reverse flip-type scheme now.

FIELD: Now, we have talked previously and you let me know that there are some unique trends to banks as opposed to credit unions. Tell me a little bit about those.

DIXON: That's correct, and it is very interesting because we I also partner with a couple of other organizations that we work with, and we are very involved in legislation. There is a lot going on in Washington, D.C. right now with all of the testifying, but what we are seeing is that the credit unions are actually doing it right, and it is a very good business model for the banks.

This is something that we have seen in the industry for a very long time. It really can be attributed back to this: The credit unions lend on a local level; they tend to know their clients, they are able to set their own policies and procedures and they are lending their own money. They generally hold onto their portfolio, so they have the same policies and procedures in place most often that the banks or larger lenders have. However, they tend to enforce them more, and it is a more of a familiarity with their client and with their local markets that they lend in.

FIELD: So, this means that they know their customer better, and they may be able to cut through some of the first-party deception that you might see if you are a larger institution?

DIXON: That is correct. I mean, if someone's representing an income level or a property value, they tend to know what that is more and they tend to take it a little more seriously because they are, again, generally lending their own money, and they are looking at their own returns. So they are a little more vested in enforcing policies and procedures that they have, whereas the banks are generally a couple of levels removed from the local markets and may not be that familiar.

FIELD: But the advice would be to get closer to your local market, so you can be that familiar.

DIXON: Absolutely. I have worked with organizations where we have set up those policies and procedures, and a good way to do that for banks is to set up teams where if you are marketing certain areas, if you are doing loans in Louisiana or you are doing loans in Hawaii or Las Vegas, there are nuances to those markets both from the income and economic standpoint as well as a property standpoint. There are unique trends with the properties in those markets, so if you are training your underwriting groups and you have your policies and procedures in place, they can become familiar and they can have conversations with local appraisers, they can get to know their markets better and create a better kind of line of defense for risks for the banks.

FIELD: Cindi, let's talk about loss mitigation. What are some best practices that you see financial institutions employing or they should be employing?

DIXON: You know really and it is funny because I have been doing quite a bit of research lately on a national basis with a lot of my colleagues that have been doing this for a lot longer than I have, and there are really no new trends in mortgage fraud. It is kind of the same old thing, and you know it really surprises me that given the market and given the circumstances that I think are undeniable for all of us as this point that implementing basic policies and procedures and enforcing them -- it actually does work.

And I think now utilizing technology, whether it is having internal systems customized or purchasing some very good loss mitigation software packages that are out there for verifications purposes, we have a lot more tools than we have ever had for mitigating fraud. It is just a matter of (a) implementing the proper procedures, (b) continually training with your underwriting and loss mitigation teams, and making use of the technology as a back up to re-verify a lot of the information that is coming from the banks.

FIELD: Interesting that you mention technology because I had a conversation with a couple of authors last week, and you would think that we are talking about sophisticated fraud detection and they would be talking about sophisticated methods, but they were very much talking about facial expressions and reading facial expressions and body language when you are meeting with somebody. So I have got to ask you, what are some of the most effective ways of identifying the fraudsters?

DIXON: I have actually been talking with those trainers as recently as last night, and that is a very good methodology. It is a very good methodology, and I think that that kind of takes us back to the credit unions, where they do know their customers, and they are sitting face to face and they are dealing with this.

I myself haven't seen a greater trend in an electronic format for applications, only because when you are dealing with a bank on the banking level and the originators, the life of the loan kind of begins at the funding table. So a lot of times the loan is being transferred multiple times after it closes, and very few I mean the person that filled out that application isn't present and isn't really a part of the overall big picture when you are dealing with a mortgage loan.

So, technology provides a tremendous backup to that, and that is a very good process for loan originators, but I think the use of technology and now with public records and the availability of information that we have there is just no real substitute for implementing some technology procedures in the process at some point.

FIELD: One of the things I think that has surprised me in talking about mortgage fraud is finding how often the fraudsters depend upon somebody inside the institution.

DIXON: That's correct. I would have to say it is, at least in my experience -- and I have looked at about $5 billion dollars of high risk loans in quite a great detail and on a national level -- and the thing that is amazing to me is that when you have the proper technology systems in place, you can identify from our office in Boca Raton, FL, a notary in Phoenix, Arizona or a loan originator in Seattle, Washington that was at the center of a fraud scheme.

So utilizing the technology is very, very critical. I mean, it is available, but it really allows you to kind of track the fraudsters and the fraud rings as they kind of permeate. With regards to people inside of the banks, that is a critical piece for the banks to have operational procedures in tracking for their verifications. I mean, that is where a lot of the fraud centers around if you are looking at verifications of deposit, those types of documents, accounting histories and the like.

It still amazes me how many banks do not have any type of again, tracking procedures. Because if there were making use of technology -- and they have to have some type of recording process internally -- a lot of that could be prevented. Because I have looked at these fraud scheme where I have had pools of mortgages come in from another state where it turns out through our tracking system we were able to identify that 80 percent of the verifications of deposit were completed by the same person on a trade within a bank, which is obviously a red flag.

So if the banks have their kind of catchall system that they are tracking these verifications that are done, they can catch it internally and they can ask the questions there before the product leaves their institution.

FIELD: What are some of the red flags you want to look for to find those insiders that could be involve din these schemes?

DIXON: I would say that I would highly recommend speaking with experts; that is an aspect of what my company does, and there are other organizations out there that do the same thing, but at some point a knowledgeable operations persons working with their internal IT team to set up these systems that will actually track this information.

Because if you are looking at a monthly operational report, and it is impossible to do with the volume that the banks are looking at know, which is another edge that the credit unions have because they don't have the volume that a lot of the larger banks have or the regional banks. But if you are looking at a monthly operational report and you are seeing who is completing the verification of deposits, who is accessing account information, who is signing off on these requests, you can tell right away whether there tends to be one particular person, if there is one person working with one maybe loan broker in the area, or one loan officer who they are requesting.

But, again, making use of the technology and reporting systems the red flags really will jump out if your systems are programmed properly.

FIELD: Cindi, one last question for you. You talked about technology solutions a couple of times. If you could offer just a couple of tips for how financial institutions can employ technology to help them fight fraud that would be really valuable.

DIXON: That's a good question, and you kind of read my mind on that one. Having the technology is only a very small piece of the process. There is no way to avoid mortgage fraud and not have manual processes and training coupled with that, and that is the one thing that consistently whether I am dealing with risk managers at institutions, whether I am dealing with law enforcement, it is a partnership out there, and it absolutely has to be an ongoing relationship.

So the technology in and of itself is not going to prevent anything, it really the institutions need to rely on ongoing training for their underwriters and fraud mitigation, because underwriters have a tendency ... they are kind of a different breed of people, and they are very focused, and they tend to work more independently, and they kind of get caught up in maybe looking at the day to day in the files.

But when you are looking at fraud trends, it is good to continually refresh them so every 90-days or so have someone come in or have an operational train the trainer type of procedure in place where you are sharing the information with the underwriters and just kind of bringing it back to the forefront of their mind, whether it is a short sale flip, whether it is identity theft.

Again, fraud trends are very regional across the U.S., and so having a good operations person involved in that -- that is very critical to helping mitigate a lot of fraud. And another big piece that I have talked to a lot of lenders on, and it is amazing to me that it is not more utilized, but work with the quality control teams. They actually are the friends of the operations staff and the originating staff because a lot of data from your servicing and default reports and your quality control reports should be brought back to the operational team, the underwriters, and then again to the front lines to the people that are originating the loans.

Everything is a hand in hand process from the minute the loan hits the front door until it exits the back door. It is really, really important that everybody work in partnership with each other.

FIELD: Very good, Cindi. I appreciate your time and your insight today; thank you.

DIXON: Thank you, Tom, I appreciate it.

FIELD: We have been talking about mortgage fraud. We have been talking with Cindi Dixon with the Mela Capital Group. For Information Security Media Group, I'm Tom Field. Thank you very much.

About the Author

Tom Field

Tom Field

Senior Vice President, Editorial, ISMG

Field is responsible for all of ISMG's 28 global media properties and its team of journalists. He also helped to develop and lead ISMG's award-winning summit series that has brought together security practitioners and industry influencers from around the world, as well as ISMG's series of exclusive executive roundtables.

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