As a mortgage lender, you are probably no stranger to fraud. In fact, nearly 1 in 120 mortgage applications contain fraud1.
Fraud can come in many different forms, but with the increasing digitalization of the loan application process, mortgage lenders need to be especially watchful of potential fake employers and pay stub scams.
That’s why Verification of Employment (VOE) for mortgage lending is vital. VOE is an easy and reliable way to confirm the employment of a borrower. This can either be done manually (which can be time consuming and difficult) or using a rules-based system such as our Cascade VOE to control the flow of vendor ordering, providing consistency and allowing you to cut processing time while maintaining loan quality.
Think of closing on a mortgage with a buyer like bungee jumping. Before you leap, experts check and then double-check all carabiners, rope systems, and harness loops. They weigh the participant and communicate with the team at the base before the person even steps to the edge. This intensive safety protocol enables the company to mitigate the risk of a malfunction that could result in injury or death to the jumper and financial liability to themselves.
Just as the bungee companies that perform safety checks on every participant’s equipment, every jump are significantly are less likely to encounter a disastrous situation, lenders who are consistent and meticulous with background checks and employment verifications are less likely to experience losses due to fraudulent behavior or unexpected changes in a borrower’s employment status.
Credit lenders should have a process in place to ensure a borrower will be able to make payments on time and in full. To check this, they need to verify the applicant:
- Is who they claim to be (Assessed through SSA-89 Verification)
- Works where they claim to be employed (Assessed through VOE)
- Has a steady income (Assessed through VOE and Verification of Assets)
In the past, it was standard for lenders to require pay stubs as VOE for mortgage applicants to check that they meet these criteria. However, with the emergence of modern technology, there are multiple ways a pay stub that appears legitimate may, in fact, be misleading. Incorrect information can be the result of changes to an applicant’s employment status, errors or omissions in the forms, or dishonesty to procure a loan. For all these reasons, VOE is a vital step in processing a loan application.
So, how can you detect these employment scams and anomalies? Here are some indicators you can look for to determine if a borrower’s documentation is legitimate.
Does the employer exist?
One way to determine whether a borrower’s employer exists is by verifying their physical address. Even online companies have a physical location where a handful of employees work or where mail and packages are delivered. Those seeking a loan with fraudulent documents may provide a legitimate phone number that gets answered regularly. However, it is much harder to fake an office building that does not exist.
Self-employed borrowers can be especially difficult to verify. In these cases, their income history and tax documents may be a source of more reliable information.
Does their income make sense?
A border security checkpoint compares a person’s travel itinerary and history to their stated travel plans. Suppose the story presented by an individual does not line up with the documentation provided. In that case, the border patrol can flag the person as a potential risk and investigate further before allowing them to enter the country.
Similarly, VOE compares an applicant’s employment history to their reported income. Should the income they report far exceed the average salary for a person in their industry, or the payments do not seem to follow a typical salary or wage payment schedule, this information would merit investigation. Verifiers pick up problems like these (and more) as a potential red flag, allowing credit lenders to avoid offering loans to dishonest applicants.
Are tax calculations accurate?
Calculating tax is relatively complicated, and many borrowers pay accountants to do it for them. Fraudulent borrowers often do not go through the trouble of calculating the correct tax figures on their documents because it can be time-consuming. Lenders who remain focused on the employer and income statistics may overlook the incorrect tax numbers on a pay stub, exposing themselves to potential fraud. Third-party VOE will dive into the tax numbers and establish whether the tax returns listed are reasonable and accurate.
Do the pay stubs have the customary withholdings?
A pay stub should display withholdings from a borrower’s accounts in addition to taxes such as their 401k or health insurance premiums. Withholdings on accounts are typical, and the absence of these types of withdrawals makes the paystub an outlier. A detailed VOE will provide an alert to this and similar issues.
Enlisting the Experts
Fraudulent mortgage applications make the lending landscape into a minefield, and bypassing quality verification protocols can have disastrous consequences. That’s why working with the data analysis expertise at a third party is often the best way to verify a potential borrower’s validity. Consumer credit report resellers specialize in efficiently gathering employment data on individuals to safeguard mortgage brokers and lenders from the repercussions that can come from relying on inaccurate or incomplete information. The right partner can help you accurately verify an applicant’s current employment and longevity utilizing automated tools that save you time, effort, and money to protect your business from mortgage fraud.
1CoreLogic. CoreLogic Annual Mortgage Fraud Report: Fraud Risk Tops Pre-Pandemic Levels