FundingShield Q1 2025: Half of Transactions at Fraud Risk
FundingShield’s Wire Fraud Risk Report revealed that nearly 47% of transactions on a ~$80 billion portfolio of residential, commercial, and business-purpose loans were at risk of wire and title fraud. This significant percentage of at-risk transactions is a cause for concern, as it highlights critical issues in transaction verification, particularly in the handling of loans at the closing stages. The report, which covers a broad spectrum of loans, also noted that on average, problematic loans encountered 2.5 issues per loan, setting a new record for errors in the industry. This pattern underscores the absence of adequate controls by closing agents and lenders, who appear to lack the mechanisms necessary to identify and address these issues.
One of the key drivers of these issues was the growing prevalence of errors in critical transaction data points. These data points included borrower details, property addresses, title information, and borrower vesting details. Fannie Mae, in particular, has acknowledged these challenges, which were evidenced by increased validation requirements for loan sellers. As a result, the government-sponsored enterprise (GSE) has placed a stronger emphasis on ensuring that lenders demonstrate their ability to assess and confirm the risks associated with transactions in real-time.
The increasing wire and title fraud risks have raised concerns for lenders, particularly in light of new guidelines introduced by Fannie Mae. These guidelines urge lenders to perform transaction-specific reviews of the closing agent, title insurance firm, and transaction details at the point of closing. It is not sufficient to have a database of approved agents that may have been last updated months or years ago. Instead, Fannie Mae requires that these checks be completed immediately before the loan is closed and specific to each transaction.
According to FundingShield’s findings, the impact of wire fraud in Q1 2025 was particularly concerning. Wire-related errors were found in 8.4% of transactions, marking the sixth consecutive quarter where wire fraud issues exceeded 8%. License issues, another persistent problem, remained high, with many entities facing issues due to lapsed, suspended, or terminated licenses. These issues persisted from Q4 2024 to Q1 2025, continuing to disrupt the flow of clean, verified data in the mortgage and real estate finance industries.
CPL (Closing Protection Letter) validation issues were another major concern. During Q1 2025, CPL validation errors affected 10.8% of transactions. These issues typically related to inconsistencies in borrower data, vested parties, and non-borrowing parties listed on titles. The report highlighted that the CPL issues hit an all-time high in Q4 2024, with 47.7% of transactions experiencing issues related to invalid or mismatched data. This was a record high and indicated the ongoing difficulty in reconciling data between lenders and title systems, further compounding fraud risks.
Furthermore, issues with insurance coverage were noted in less than 1% of transactions. In these cases, parties involved in the transactions did not maintain adequate insurance coverage, creating an additional layer of risk. The persistence of these problems, particularly in the CPL and title insurance areas, pointed to a clear need for improved data verification in all mortgage workflows.
The situation in Q1 2025 was compounded by rising expectations from Fannie Mae, which has recently heightened its scrutiny on mortgage origination processes. As part of its Mortgage Origination Risk Assessment (MORA) audits, Fannie Mae specifically focused on the risks associated with title and wire fraud. In particular, Fannie Mae has made it clear that lenders must implement robust transaction-level reviews to ensure they are managing risk effectively. Lenders must now ensure that they are using licensed closing agents and title insurers and are thoroughly documenting each transaction’s compliance with relevant insurance and escrow laws.
Fannie Mae’s audit procedures require lenders to demonstrate that they have a clear and actionable framework for assessing closing agents’ credentials and title insurance firm compliance. This process requires lenders to go beyond simply checking for expired or lapsed licenses; they must ensure that their checks are up-to-date and completed at the time of closing. Fannie Mae’s heightened focus on these practices reflects growing concerns about cybersecurity, data security, and other related risks, as these fraud attempts become more sophisticated.
The rise in wire fraud and title fraud is linked to growing cybersecurity risks in the mortgage and real estate sectors. The increasing use of digital tools and automation, while enhancing operational efficiency, also opens the door to new types of fraud. Cyberattacks, including phishing schemes and social engineering tactics, are becoming more prevalent, posing a significant threat to the integrity of financial transactions. For this reason, lenders must ensure that their fraud prevention measures are up-to-date and that they are leveraging real-time data verification tools to reduce the impact of these cyber threats.
To address these mounting risks, FundingShield’s transaction-level reviews have become an industry standard for mitigating fraud risks. These reviews verify critical details, including the validity of licenses, coverage, bank data, title insurance system validation, and other essential data points. By ensuring that these checks are completed pre-closing, FundingShield is able to help lenders reduce their exposure to potential fraud and improve the overall accuracy of their transactions.
The use of automation and artificial intelligence (AI) solutions is also being seen as a key solution to improving fraud prevention and risk management. By incorporating decision-ready data from trusted sources, lenders can streamline the mortgage process and reduce the risk of fraud. AI-driven tools enable real-time verification of key transaction details, such as borrower information and title data, making it easier for lenders to detect and resolve discrepancies before closing.
These technological solutions are critical as the mortgage and real estate finance industries continue to evolve. Lenders are increasingly seeking ways to automate their loan origination systems (LOS) and point-of-sale (POS) processes to improve efficiency and enhance customer experiences. By integrating trusted data repositories and real-time verification into their workflows, lenders can better mitigate fraud risks and stay ahead of evolving market demands.
In summary, the Q1 2025 Wire Fraud Risk Report from FundingShield paints a concerning picture for the mortgage and real estate finance sectors. The continued prevalence of wire fraud, title fraud, and issues related to CPL validation emphasize the need for greater vigilance and improved transaction-level checks. As Fannie Mae’s MORA audits and other regulatory requirements become more stringent, lenders must adopt more robust risk management frameworks. By leveraging trusted data, automation, and AI technologies, the industry can work to minimize these risks and ensure more secure, efficient transactions in the future.
