Tips for avoiding mortgage fraud

In the third part of our series on mortgage fraud, Anthony Riem, a specialist in multi-jurisdictional frauds and asset recovery with PCB Litigation, outlines the warning signs brokers should look for to detect mortgage fraud.

Some of the more obvious warning signs include the following:

• Documents provided in support of an application such as bank statements, utility bills and passports that appear to be forgeries.

• Income or employment details which are not supported by documentation supplied by the customer.

• Inconsistent information provided by the same customer, i.e. various applications made with different incomes/details either to the same lender or lenders within a group.

• Links with other applicants where fraud is suspected, for example shared addresses, purchases on same development, identical loan amounts etc.

• Links between different mortgage applicants, for example shared bank accounts, and addresses.

• Applications cancelled when further information/verification is requested.

The Law Society’s Practice Note on Mortgage Fraud also suggests the following warning signs:

• The customer or the property being purchased is located a long distance from your firm. If bulk long distance instructions are not in your normal work, you may ask why they chose your firm, especially if they are a new customer.

• The customer seems unusually uninterested in their purchase. You should look for other warning signs suggesting they are not the real purchaser

• The seller is a private company or they have recently purchased the property from a private company. You should consider whether the office holders or shareholders of the private company are otherwise connected with the transaction you are undertaking, and whether this is an arms length commercial transaction.

• The customer does not usually engage in property investment of this scale. You should ask why they are undertaking this new venture and where they are getting the financial backing from.

• The current owner has owned the property for less than six months. You should ask them to explain why they are selling so quickly.

• The customer's credit history is shorter than you would expect for their age, when you run a credit check. Fraudsters will often run a fake identity for a few months to give it legitimacy. You should ask your customer about this.

• There are plans for a sub-sale or back-to-back transactions. You should ask your customer why they are structuring the transaction this way and seek information on the identities of the second purchaser, their solicitor and the lender.

• The property value has significantly increased in a short period of time out of line with the market in the area.

• The mortgage is for the full property value. While this is less likely in tighter credit conditions, you should consider it in light of the other warning signs.

• The seller or developer has provided incentives, allowances or discounts. These may include cash back, free holidays, household fittings, payment of legal fees, help with mortgage repayments or rental guarantees, among others. You should consider whether this information has been properly disclosed to the lender.

• The deposit is being paid by someone other than the purchaser. You should ask why, where the money is coming from, and whether this information has been properly disclosed to the lender.

• The purchaser has paid the deposit directly to the seller. You should ask for evidence of the payment and consider whether this information has been properly disclosed to the lender.

• There is money left over from the mortgage after the purchase price has been paid, and you are asked to pay this money to the account of someone you do not know, or to the introducer. You should ask why, and remember that you must not use your customer account as a mere banking facility.

• You are asked to enter a price on the title that is greater than you know was paid for the property. You should ask why the prices are different.

What else can a Broker do?

The first and perhaps most important step in combating mortgage fraud is to ensure that you verify the identity of your customers in accordance with the Money Laundering Regulations 2007. This is particularly important in relation to applications received over the internet. Brokers should not act for customers who are unable or unwilling to produce sufficient proof of identity.

The implications of mortgage fraud for brokers

In the second of our third-part series on mortgage fraud, Anthony Riem, a specialist in multi-jurisdictional frauds and asset recovery with PCB Litigation, outlines the implications for brokers who can easily get caught up in fraudulent applications.

An individual who intends to commit a mortgage fraud will generally seek to involve one or more professionals in the fraud to provide the transaction with an air of legitimacy in the eyes of the lender. Brokers may therefore find themselves targets of the fraudster.

Fraud is defined in the UK Fraud Act 2006 as including fraud by false representation and by failure to disclose information where there is a legal duty to disclose. A broker who makes representations to a lender on behalf of a customer may therefore find himself unwittingly committing a criminal offence if he has reason to believe that the representations being made might be misleading or untrue.

Proceeds of mortgage fraud are criminal property. Under Section 328 of the Proceeds of Crime Act 2002, a broker may commit a money laundering offence by being involved in an arrangement that facilitates the acquisition of criminal property. Where a broker has knowledge or suspicion that a customer intends to use him to perpetrate a mortgage fraud on a lender he may avoid liability by refusing to undertake the work.

Alternatively, if the broker decides to proceed with the application in such circumstances, his only defence to a money laundering offence (under s.338) would be to make the appropriate disclosure to the Serious Organised Crime Agency (‘SOCA’). If nothing further is heard from SOCA within seven days of making the disclosure then the broker may proceed with the transaction safe in the knowledge that he has a defence to any possible money laundering offence.

If, however, consent is withheld within the initial seven day period, then the authorities will have a further 31 days in which to take further action. No further steps may be taken by the broker during this period. If upon the expiry of the 31 day period nothing further has been heard, then the broker may proceed with the transaction once again safe in the knowledge that he has a defence to any possible money laundering offence.

The broker must not tell the customer (or any other person for that matter) that a disclosure concerning them has been made to SOCA. This may be difficult whilst applications are delayed pending SOCA’s consent, but to do otherwise will result in the broker committing a ‘tipping off’ offence under Section 333.

The Financial Services Authority operates a system with lenders under which they can confidentially pass to a Mortgage Intelligence helpline at the FSA details of loan applications received from brokers which they suspect to be fraudulent. The information received may be the catalyst for an investigation by the FSA. This is turn may result in proceedings of the nature of those brought against Mr Fawole and Oasis.

Finally, a broker may face the prospect of civil proceedings being brought against him by a defrauded lender.

In our next installment on mortgage fraud we will tackle the warning signs brokers should look out for.

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.