RISMEDIA, March 24, 2008-(MCT)-It’s the equivalent of a body cavity search, but for home loans. The 1003 AppScan, an automated Web-based filter, subjects mortgage applications to more than 150 tests designed to extract both little white lies and criminal schemes used to defraud lenders.

It is the signature service developed by Miami-based Verification Bureau, a fraud prevention and detection firm founded by three Florida International University students-before mortgage fraud reached epidemic levels during the real estate boom.

Now, with financial institutions facing more than $100 billion in losses from failed loans, batches of them poisoned by fraud, the company is watching business pour in.

When it opened six years ago, Verification Bureau joined a niche industry of companies that help lenders filter out fraud during the underwriting process. Nationally, fewer than a dozen such firms offer an extensive set to tools to weed out bad apples.

Esteban Reyes, 27, co-founder and chief executive, said he spotted the opportunity while working part-time at a mortgage company in graduate school.

“They had a need and they didn’t know how to do it,” Reyes said. With the help of classmates-turned-colleagues Juan Carlos Perdomo and Diego Espinosa, the three Colombian nationals set out to create a technology answering the need. Verification Bureau employs 12, several of whom staff a customer-service call center in Colombia.

Through its 15-second screening process, customers upload application information into a proprietary system that compares the information against numerous databases for authenticity. Services encompass background screenings; income verification directly with the Internal Revenue Service, for which Verification Bureau had to go through a stringent approval process; identity verification with the Social Security Administration; criminal background checks; credit reports; and employment and education checks, among other facts. Loans are scored for risk and a report is generated with any red flags.

The service costs about $20 a loan, Reyes said.

Although the company’s clients cover a wide range of industries prone to identity and financial fraud, including insurers, human-resource departments and healthcare providers, its more than 2,500 accounts come mainly from the lending industry.

While other credit-related sectors founder in the housing downturn, Verification Bureau has found itself in the rare position of having profited from the lending wave and profiting even more from the bottoming.

At the height of the frenzy, interest rates were low and property values were rising. Borrowers flooded the markets, driving up business volumes for lenders. Underwriting standards were loosened to speed the processing of applications by lenders who felt protected by appreciating property values.

“Even if you had to foreclose on a property and sell it, you were still making a profit as a lender,” said Jeff Moyer, senior vice president for Interthinx, a company that provides fraud detection services from California. “The risk exposure itself has shown itself in a much more ugly manner now because you are no longer able to sell yourself out of it.”

But in the lending heyday, the use of so-called “no doc” and “low doc” loans, requiring little supporting documentation from borrowers, became widespread. Relatively small percentages of new loans were closely screened for inaccuracies.

As a result, inside players, street criminals and homeowners quickly learned how to cheat the system. Schemes involved falsifying documents, inflating appraisals, stealing identities, and the use of stand-in buyers. In 2007, the FBI opened 1,210 mortgage fraud cases, triple from 2003.

After a decline in his business attributed to the bankruptcy of dozens of subprime lenders, Moyer expects sales to rebound this year.

Interthinx, Texas-based Rapid Reporting and California-based First American CoreLogic are among the largest fraud prevention companies in the market.

“A couple of years back lenders were so focused on the numbers and the numbers game, and getting the most sales and the most loans through. They weren’t really worried about quality,” Reyes said.

Yet, lenders who maintained quality control programs also sought companies like Verification Bureau to lighten the underwriting load.

The unusual market conditions allowed Verification Bureau to rake in more than $800,000 in revenue its first year. Marketing involved cold calling, mailings, and visiting trade shows to lure new customers.

Since then, growth has been vigorous. Reyes said the company verified almost 40,000 loans last year, ringing up $3 million in sales. Currently, loans are coming in at a pace that will likely exceed that amount by 25% at year’s end, he said.

Expansion plans include developing a tool to verify immigration status, which they will market to the hiring industry. The company has also developed a small niche of Latin American clients who lend to foreign nationals in the United States.

When it comes to loans, the bump in current sales signals a return to caution by financial institutions, Reyes said. “Even though the market has slowed down and will continue to slow down, we will still have a considerable volume increase … Before they were verifying 5 or 10 percent of their loan pipeline; now we’re seeing lenders do 100 percent,” Reyes said. “Even if their loan volume goes down by 50 percent or by 70 percent, we’re still going to be getting more requests from them.”

In another grim trend, there appears to have been no decline in the number of would-be fraud artists.

Between 25% and 30% of loan applications screened annually by Verification Bureau register a “no-match” when Social Security numbers are cross-checked with the Social Security Administration’s database, Reyes said.

One of Verification Bureau’s most dramatic saves involved a “straw borrower” ring in Coconut Grove, Fla., he said. A crooked appraiser was using comparable sales from expensive homes on affluent streets to arrive at values for property on far less desirable streets only blocks away. This allowed him to procure loans inflated by $600,000 or more.

After catching a suspect loan, Reyes said they advised the California-based lender to vet their entire portfolio of South Florida loans. In the Coconut Grove area alone, 30 applications ended up being tossed.

“We saved them close to $25 million in loans,” Reyes said.