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New Tools Are Helping Lenders and Servicers Catch Hard-to-Detect Owner-Occupancy Fraud

November 16, 2023  //  BY Paul W. Harris

In this three-part blog series, we’re looking at ways lenders can reduce risk and improve loan quality. Part 1 focused on identifying military status, and Part 2 looked at senior lien risk mitigation. Now, in Part 3, we’ll look at owner-occupancy status and new tools that are improving quality control and helping servicing staffers uncover fraud.

Among the various types of fraud risk, occupancy misrepresentation has traditionally been one of the hardest to identify, monitor and mitigate….until now. And the timing is just right for a more robust solution to address not only occupancy misrepresentation, but also other types of fraud, given that loan buyback demands from Government Sponsored Enterprises (GSEs) have been increasing. Occupancy fraud historically hasn’t been the most frequent type of fraud, until recently. Trends, like work from home and fear of missing out (FOMO) during the real estate boom, combined with the FHFA recently adding higher Loan-Level Pricing adjustments, may be encouraging this type of misrepresentation. This is in addition to the earlier increase in LLPA for invest and second homes and increased underwriting scrutiny from both agencies.

The proliferation of short-term rental platforms, such as VRBO and Airbnb have significantly increased opportunity for average homeowners to rent out a spare room or even their entire home. Vantage Market Research estimates that the global short-term rental market, valued at more than $100 billion in 2022, is projected to reach a value of more than $228 billion by 2030. That’s a lot of rentals that may or may not get flagged by lenders and servicers, and with that comes the potential for increased occupancy fraud. That’s why borrowers must sign affidavits and declarations at closing saying the purchase is their primary residence and they will live in the property for a certain period of time – often a year – before they can rent it.

To improve lenders’ and servicers’ ability to identify potential fraud, First American Data & Analytics has introduced its Occupancy Verification API. The stand-alone API, part of the Digital Gateway API library, provides automated occupancy verification, from application through post-closing reviews, to reduce repurchase demands and mitigate risk during MSR acquisitions and portfolio reviews.

Owner-occupancy status can also help servicers make more informed decisions regarding loss mitigation when borrowers are in default. If, for example, a distressed borrower is consistently renting a property, chances are it is not their primary residence but an investment property or second home. Some loss mitigation options, for example, are only available to owners living in the property.

The Occupancy Verification API removes the various – and frequently manual – steps and verification processes involved in a post-close review and replaces it with a single aggregated report. The resulting streamlined process reduces operational costs, enhances compliance, and improves the overall efficiency of the lending process. The report includes multiple data sources with accompanying analytics that feed seamlessly into whatever LOS the lender is using.

In addition to the stand-alone Occupancy Verification API, First American Data & Analytics has also enhanced its FraudGuard® solution to include an occupancy module that provides the same streamlined multi-data report. This module can also be customized to meet specific servicer policies and guidelines. Beyond monitoring short-term rental platforms, both occupancy solutions tap dozens of data attributes a range of private, public and proprietary data and analytics. This can include assessor records to determine if the property is identified as owner-occupied, Department of Motor Vehicle records and even utilities, phone, licensing information and more, that requires verification of a borrower’s primary residence. Additionally, both solutions can also layer in additional premium data that ties the subject property to the borrower by verifying occupancy through credit agency reporting.

To learn more about data-informed analytics that identify, monitor, and mitigate occupancy fraud, check out our FraudGuard solution.

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