AS THE MORTGAGE MARKET shifts away from traditionally low-risk refinances and moves further toward a purchase mortgage driven market, fraud risk is poised to increase.
The strong real estate market the past decade led to a rather stable loss rate, but the pandemic and uncertain economic conditions may challenge that claim’s stability.
According to Len Prescott, division underwriting counsel and the director of agency underwriting for First American Title Insurance Company, there are safeguards title agencies can follow to help mitigate the risk of potential fraud-related claims.
“We’ve got to appreciate the ongoing and increasingly sophisticated threat posed by fraudsters and recognize that fraudsters often have an insider’s knowledge of our business,” said Prescott. “Education, awareness and vigilance are the keys to protecting your customers and your business.”
Prescott shared five important steps to help title agents mitigate fraud risk as market conditions transition.
Identify the Fraud Red Flags
Prescott cited several red flags that title professionals should be aware of and carefully consider in their day-today business to help reduce fraud risk.
■ Power of attorney (POA): “Anytime the POA is used it should raise a red flag and agents should proceed carefully and thoughtfully. Not because use of POA is necessarily bad or fraudulent. In fact, most of the time, a POA is valid, however, it can indicate greater risk of fraud,” Prescott said. “If a POA is being used, ask why the principal can’t attend the closing. Find out if an alternative could be used such as a mobile closer or a drive-thru closing.
When using the POA, make sure it’s scrutinized. As our population continues to age, we must be vigilant as real estate transactions are a prime target for fraudsters,” Prescott continued. “Authority and capacity in real estate transactions must be carefully considered every time to prevent, detect, and respond to the rising financial abuse of elders and vulnerable adults. The risk of financial abuse of the elderly is significant. Carefully consider the caregivers, the family members, religious advisors, anyone that is in a position of trust and power with an elderly person and look for potential issues. Bad feelings or gut instinct should not be ignored.”
■ Mail-away, Remote Online Notarization (RON) and Remote Ink-signed Closings (RIN): “It’s important to have confidence that you’re dealing with the proper party and that the participants have capacity. The fact that you’re doing a mail-away closing or a RON or RIN doesn’t change your ethical, professional and potential liability obligations,” Prescott said.
■ Questionable (or expired) identification: Be mindful when you’re given a questionable ID or the signatures don’t match. If more investigation is required, it’s recommended to stop the closing until you are satisfied,” Prescott said.
■ Seller/borrower is elderly or a business entity: “It could be a legitimate transaction, but it could easily be a fraudster that’s created or modified the entity. Any recent changes or encumbrance just before a property transfer warrant additional investigation and verification. Today, anyone with a computer or smartphone can create or change entity documentation,” Prescott said.
■ Hiding information from lenders or other parties: “If a party to the transaction is telling you, or you have reason to know, that information is being hidden from lenders or the other parties, stop and consult a lawyer or obtain legal advice,” Prescott said.
■ No consideration quit claim deeds: “This could be in the recent chain of title, in the gap, or even be offered to you at the closing table,” Prescott said. “The use of quit-claim deeds can be indicative of identity theft. There may be promises of additional transactions and the seller may try to convince you to just record the quit-claim deed.”
Carefully Examine Use of Unrecorded Instruments:
“We are seeing more transactions where the seller reflected on the contract is not the party of record,” Presscott said. “The seller will tell you not to worry and simply record the quit-claim deed or mortgage. It’s not unusual for these instruments to be forged. But there is no time for the fraud to be discovered if you record the quit-claim deed immediately before you record a deed from the seller reflected in the contract. Agents need to ask why the instrument was not recorded previously, check against other documents signed by the grantor, and to independently contact the grantor to verify that they actually signed and conveyed the property.”
Eliminate ‘Abengoa’ Type Risk
“‘Abengoa’ type risk is where the customer treats a product, such as a property information report, like a title policy. If a title company provides any other products or ancillary services, agents must protect themselves,” Prescott said. “Make sure the limits and liabilities for the product or service are clear to all parties in advance. This risk led to the revision of the 2016 commitment, which now includes the Notice and the Commitment Conditions – in addition to Schedules A, B-I and B-II. Make sure you have the specific amount of insurance requested and the specific proposed insured in the commitment, so that the issuance of the commitment is a contractual offer to insure.”
Strictly Adhere to Wire Fraud Prevention Best Practices
“Agents should include disbursement instructions in the opening package and provide hard copy wire instructions with wet signature instructions. Wire instructions should be verified by phone and not through email. Agents should advise customers that wire instructions will not change and to verbally verify by a known phone number if instructions are revised,” Prescott said. “Working from home creates additional risk that people other than the individual employed, such as spouses or kids playing video games, may use company-provided equipment. Consult an insurance professional that is familiar with the title and settlement business to validate you have proper coverage and confirm your coverage does not have a laptop exclusion.”
Perform Title Updates and Recording
“It’s important to update title as close to the closing as possible, get documents recorded quickly and update title post-recording. Many may under-appreciate how significant this is, how many fraud-related claims can be avoided, and how much fraud risk can be mitigated by assigning sufficient staff and oversight,” said Prescott. “Recording problems, fraud, even defalcations are more likely to be caught by updating the title post-closing to make sure everything was done right.””
JEREMY YOHE is ALTA’s vice president of communications. He can be reached at email@example.com.