Fraud in the non-qualified mortgage market is escalating, and some Non-QM Lenders are responding decisively. Several lenders have begun issuing exclusion lists naming borrowers, appraisers, and even specific regions as ineligible for loans.
For lenders, brokers, and underwriting teams, this development is more than news. It is a direct call to strengthen compliance practices and risk controls before exposure becomes litigation.
What’s Happening
In recent months, many lenders have started publishing “do not use” lists, which include dozens of appraisers and hundreds of borrowers. Loans tied to these names are rejected outright, leaving little room for negotiation or appeal. Certain geographic areas are also under heightened scrutiny, such as parts of Maryland, New Jersey, and New York, where patterns of questionable practices have emerged.
These exclusions are not arbitrary. They stem from identifiable fraud indicators: inflated appraisals, last-minute deed transfers to LLCs, circular ownership structures, and undisclosed ties between borrowers, appraisers, and settlement agents.
By cutting off these risks at the source, Non-QM lenders are signaling they will no longer tolerate exposure which threatens both capital and reputation.
Why It Matters for Every Non-QM Lender
The risks of ignoring these red flags are significant. Loans connected to blacklisted borrowers or appraisers can trigger repurchase obligations, costly litigation, and reputational damage.. Operationally, lenders are forced to implement additional audits, enforce stricter documentation, and conduct deeper reviews of third parties.
Regulatory scrutiny is also intensifying. The Consumer Financial Protection Bureau (CFPB) has warned lenders failing to detect misrepresentation in loan files could face enforcement actions.
Key Warning Signs for Non-QM Lenders
Patterns which frequently trigger exclusion lists include:
- Property transfers to LLCs immediately before loan applications — a tactic often used to obscure true ownership.
- Borrowers or entities appearing in multiple roles in related transactions, such as acting as both buyer and seller.
- Manufactured lease agreements are designed to artificially inflate rental income for qualification.
- Title commitments with undisclosed liens or claims, creating unrecorded liabilities.
- Appraisals showing sharp, unexplained increases in value, especially in distressed or high-risk markets.
- Borrowers with undisclosed ties to appraisers or settlement agents, raising questions about collusion.
Identifying these red flags early is essential to protect lending portfolios and avoid costly disputes later.
How a Non-QM Lender Can Protect Its Business
Strengthening controls requires a proactive approach:
- Maintain and review exclusion lists to track known high-risk borrowers, appraisers, and entities.
- Enhance third-party due diligence by carefully vetting title companies, appraisers, and settlement agents.
- Define fraud policies clearly with strict consequences for misrepresentation or document manipulation.
- Train underwriting, compliance, and closing teams to spot irregular ownership structures or suspect documentation.
- Audit closed loans regularly to identify exposure to excluded parties or flagged geographies.
- Collaborate and report by sharing intelligence with peer institutions and reporting suspected fraud to regulators or industry watchdogs.
Industry research underscores the value of these steps. A 2024 CoreLogic report found that mortgage fraud risk increased by 3.1% year-over-year, with income and occupancy misrepresentation being the most common red flags.
The Bottom Line
Fraud in non-QM lending is increasingly sophisticated, and Non-QM lenders are adapting by proactively excluding high-risk borrowers, appraisers, and regions. Strengthening due diligence, compliance, and internal controls is no longer optional. It is essential to protect your portfolio, your investors, and your reputation. The message from the market is clear: prevent risk at the source rather than trying to address it after the fact.
If you need guidance on how these changes affect your lending practices or want advice on implementing effective fraud prevention strategies, contact the Fortra Law Litigation & Bankruptcy team. Our experienced attorneys can help you assess risk, review your policies, and develop practical measures to safeguard your business.
