How Chain of Custody Makes Lenders Vulnerable to Mortgage Fraud


As a famous bank robber Willie Sutton When asked why he is robbing banks, he replied, “Because that’s where the money is.” Nowadays, in a world of digital banking, criminals are more likely to say “because that’s where the cracks are”. As mortgage lenders succeed in curbing the ever-increasing number of fraudulent loans, the focus must continue to be on closing those cracks or loopholes in order to stop the flow of attacks.

Compliance with Know Your Client and anti-money laundering regulations means demonstrating that there are solid procedures in place to detect and deal with criminal activity. But while lenders have structured data verification processes in place, it is the vast amount of customer data that creates a massive vulnerability – the crack in the system.

Nowadays, in the digital age, the chain of custody can get more complicated. While manual surveillance is beneficial, the volume and speed of transactions, human error, staff updates on criminal techniques, and staff engaging in financial crime themselves all add to the constant flow of attacks. Here we will discuss inefficiencies and weaknesses in the custody chain that can prevent banks from adapting to KYC, AML and CFT regulations and from adapting to changing conditions.

The multi-channel dilemma

Multi-channel institutions offer customers many banking options. Mortgage lenders can email documents to a customer, but the customer can then reply, capture or scan a document, or start a chat with the agent over their phone. But these multiple channels are often incoherent. Each has their own department with their own solutions and further increases the complexity of channel alignment.

Although you want and need to offer multiple channels, this can be problematic. Using multiple channels can lead to further loopholes and make it difficult to track the product chain. Without the right protection and insight into the chain-of-custody processes, customers’ digital files can be lost, deleted, changed and even fabricated. This can also expose sensitive data to fraudulent activities. Lenders may be forced to sacrifice customer channel preferences to reduce this risk, which often has a negative impact on customer satisfaction.

Failure to understand data leads to compliance problems

Compliance and fraud prevention are constantly changing as new regulations and approaches to combating fraud emerge. While many lenders have verification processes and systems of record for their structured data in place, they lack digital solutions capable of addressing the amount of customer data from documents that they consider to be a broad vulnerability. They lack the link that would help authenticate the identity and customer and transactional behavior of customers derived from documents.

When it comes to documents, tracking the chain of custody can cause problems because the documents are not understood, the processes they go through are not understood, and there is insufficient visibility of who touched the documents – all of these can lead to compliance problems.

Gaps in the chain of custody process

Tracking documents and data in the product chain is also an essential part of compliance. The chain of custody is really about everyone who touches the processes, including outsourcers. As soon as customer data enters a financial institution, be it through documents or digital sources, it flows into many processes, including customer onboarding, compliance checks, loan approvals and more. Often times, there is a discrepancy between the way processes should work and the manual workarounds that employees must use to execute them – and these workarounds can open up opportunities for fraud and leave room for the ability to be billed per risk. The average cost per exposure varies between $ 110 and $ 336 per record. At $ 274 per record for financial firms, violating 87 million records could cost nearly $ 24 billion in fines.

For example, you request an update on a loan application and the loan officer failed to realize that you need to share a file with him that is delaying the process. Lenders need to be able to see the life cycle of customer and transactional data as they move between processes with critical documents. It makes it easier to provide precise chain of custody documentation – if a compliance officer so requests – and takes every point of contact into account.

Failure to properly pursue chain of custody can result in penalties for non-compliance with KYC / AML with total fines totaling billions worldwide. Executives and process owners must ensure that they monitor these processes so that they are automatically notified when problems arise so that they can take immediate action. Ultimately, this can benefit businesses – from improving customer satisfaction and operational efficiency to saving revenue by retaining long-term customers.

While there is no foolproof way to prevent fraud, lenders need to have complete visibility into their custody chain and every process it goes through.


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