Wire Fraud at Closing: The Controls Every Private Lender Should Have
Fraudsters target the moments when money moves, such as loan fundings, draws and payoffs. A few simple controls stop most attempts.
Why it matters
- Private lenders send and receive large wires often, which makes them a target for email-based fraud.
- A single redirected wire can cost more than a year of profit on a small loan book.
- The most effective controls cost almost nothing and depend on habits, not software.
Explainer: background on how this part of the market works.
Real estate transactions move large sums by wire, often on tight deadlines and through a chain of parties: borrowers, title and escrow companies, brokers, contractors and lenders. That combination makes closings a favorite target for wire fraud.
The most common scheme is business email compromise. A criminal gains access to, or imitates, an email account belonging to someone in the transaction. Then, at the right moment, they send new wiring instructions that route money to an account they control.
Where private lenders are exposed
- Loan fundings. Instructions from a title or escrow company can be spoofed.
- Construction draws. A message that appears to come from a borrower or contractor may ask that a draw be sent to a new account.
- Payoffs. A borrower or title company may receive a fake payoff letter with altered wiring instructions, so the payoff never reaches the lender.
- Investor distributions. Fund investors and note buyers can be targeted with fake changes to their payment details.
The controls that work
Verify by phone, using a number you already have. Before sending any wire, confirm the instructions by calling a phone number from your own records or the party's official website. Never use a number in the email that contains the instructions.
Treat any change as a red flag. Make it a firm rule that wiring instructions are never changed by email alone. Any change requires a call-back and a second approval.
Require two people. Use dual control for outgoing wires, with one person entering and another approving after verification.
Protect payoffs. Send payoff letters through a secure portal or encrypted email, and tell borrowers and title companies in writing that your wiring instructions will not change.
Secure email. Turn on multi-factor authentication for every email account, and set up domain email authentication (SPF, DKIM and DMARC) so it is harder for criminals to send messages that look like they come from your domain.
Train the team. Urgency, secrecy and last-minute changes are the classic signs. Staff should feel free to slow down any wire that does not feel right.
If a wire goes to the wrong place
Speed matters most. Call your bank immediately and ask it to request a recall of the wire from the receiving bank. Then report the incident to the FBI's Internet Crime Complaint Center at ic3.gov, and notify everyone else involved in the transaction.
Sources
- FBI Internet Crime Complaint Center, ic3.gov
- This explainer describes common industry practice and is not legal or security advice. Lenders should review their controls with their bank, title partners and counsel.
