Wednesday, 19 November 2008

Regulators clamp down on mortgage fraud

In the first of a three part series, Anthony Riem, a specialist in multi-jurisdictional frauds and asset recovery with PCB Litigation, lifts the lid on mortgage fraud, a common problem that the regulators are increasingly taking a dim view of.

On 11 August 2008, the Financial Services Authority (FSA) banned a mortgage broker and fined him £100,000 for submitting false mortgage applications. Omotayo Fawole was an FSA approved broker and the sole controller of Oasis Mortgage and Financial Services Limited (Oasis).

He had obtained a mortgage after submitting an application which significantly overstated the profits of Oasis and his own income; and had submitted another mortgage application on behalf of an Oasis employee which significantly overstated their earnings.

Mr Fawole was the eighteenth broker to be banned by the FSA this year as a result of involvement in submitting false mortgage applications. Although he had been the central figure in the fraud, the severity of the penalty nonetheless serves as a timely reminder of the seriousness with which mortgage fraud is viewed by law enforcement agencies and regulators.

What is Mortgage Fraud?
Mortgage fraud occurs where a borrower defrauds a financial institution or private lender through the mortgage process. Such frauds are typically perpetrated in one of two ways:

The borrower provides untrue or misleading information (as in the above case) or fails to disclose relevant information that bears upon his ability to repay the loan. For instance, the borrower may provide false information about his level of income, employment or other liabilities. He may also provide misleading information about the source of funds to be used in the purchase other than the mortgage or not disclose the fact that more than one lender is financing the purchase price; or

The borrower misrepresents the true value of the property. To give the proposed transaction an air of legitimacy he may conspire with a corrupt surveyor in order to obtain a false valuation. Another typical scam used is known as ‘flipping’. Flipping usually involves back to back sales in which the property is to be sold on to an often fictitious sub-purchaser so as to give the appearance of the property being sold very quickly for a substantially increased price. The fraudster then absconds with the difference between the mortgage advance and the initial purchase price, leaving the lender with inadequate security.

In the next installment we will look at the implications of mortgage fraud for brokers.

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