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Home in on the fraudsters

In the falling property market, mortgage fraud has again been hitting the headlines. A constantly rising property market hides a multitude of sins but when prices start dropping, the chickens come home to roost.

In August, the Association of Chief Police Officers estimated the scale of mortgage fraud in the UK at £700m but this estimate is thought by many to be very conservative. Other commentators have said UK lenders could be sitting on at least £7bn of fraudulently obtained loans.

The US, where the property market collapse has been more serious than in the UK, has also seen rising levels of reported mortgage and property-related fraud, perhaps giving an indication of what is to come over here.

The FSA has been devoting significant resources to investigating intermediary firms which may have been involved in fraud, either knowingly or due to inadequate procedures to detect frauds being perpetrated by their clients. This has resulted in numerous fines and bans being issued to intermediary firms and individuals. Firms need to be increa-singly vigilant when dealing with mortgage clients to ensure they do not become involved with fraud that could have disastrous consequences for their business.

Some more common scams do not seem to be particularly sophisticated but can be difficult to detect and include:

  • False valuations by corrupt surveyors which result in higher loan to value ratios and quick illegal profits.

  • Bogus applications using false identity documents.

  • Applications supported by bogus income documentation, including fraudulent payslips and P60s frequently supplied by criminal websites.

  • Conveyancing professionals assisting organised criminal groups to secure mortgages illegally.

  • Commercial property values being inflated significantly by the use of fraudulent leases.

    It is important to note that many of these common scams are committed by professional criminals with ready access to forged identity documents and other information purporting to prove income. Such criminals may also be colluding with unscrupulous professionals such as solicitors and valuers who help the fraudster to obtain the mortgage they want.

    This is partly what makes it very difficult to detect professional fraudsters but a firm with robust procedures in place concerning the identity of clients and checking of other application details will make itself potentially less attractive to the fraudsters, who may find it easier to go elsewhere. The firm will also have a strong defence against any FSA enforcement action.

    You cannot guarantee that your firm will not be targeted successfully by fraudsters but if you do everything in your power to prevent it, the consequences will be far less severe if they slip through your net.

    It is important to remember that if a lender finds itself sitting on a property worth less than the mortgage secured on it, which was obtained fraudulently, the lender is likely to look to any and all of the parties involved in the transaction to show that their negligence or recklessness contributed to the lender’s loss. Showing that you were vigilant may help to persuade a lender that it should look elsewhere for redress.

    It has been impossible to miss the headlines and press releases from the FSA about the wave of enforcement action that it has been taking against intermediaries found to have been involved with mortgage fraud. Much of this enforcement action has arisen from the FSA’s mortgage fraud initiative which has included:

  • The Information from Lenders’ project where lenders have been encouraged to report to the FSA when they have stopped dealing with certain intermediaries as a result of suspicion that they may be involved with fraud.

  • Targeted visits to 200 intermediaries undertaken during the latter half of 2008.

    Most of the enforcement action taken so far has been directed at intermediaries which have been knowingly fraudulent. Everyone would agree that such intermediar-ies tarnish the image of the whole profession and need to be weeded out but bear in mind that the overwhelming majority of those caught must have known all along that what they were doing was wrong. FSA action taken against them will serve to warn similar bad apples that their chances of being caught are increasing but does not necessarily provide any useful pointers for those firms which are not knowingly engaged in fraud but want to be vigilant against being used inadvertently by fraudsters.

    The FSA’s message to such firms appears to be one of back to basics. The regulator is keen to stress that in a challenging mortgage market, firms cannot afford to drop their guard or lower their regulatory standards.

    Making sure you follow the appropriate procedures when accepting a new client is the starting point. Always obtain original ID documents where possible, be particularly vigilant when dealing with clients that you do not meet face to face and use common sense when considering the instructions you receive.

    If you identify anything that seems out of place with the client’s instructions, then investigate further, bearing in mind that you should avoid tipping off the client that you have suspicions.

    You should similarly be vigilant when dealing with other professionals involved in the process. If something does not look right, question it and investigate further.

    When seeking to weed out individuals who are seeking to mislead on their mortgage applications, one of the FSA’s key messages to date has surrounded the assessment of affordability. The FSA has been keen to stress that the reduction of LTV ratios on offer from lenders does not mean that affordability becomes less of an issue for intermediaries and their clients and there is still a duty to ensure that the client can afford the mortgage they are applying for.

    Increasingly, the FSA expects intermediaries to sit down with their clients and go through their income in detail, including detailed calculation of outgoings and income, to see what disposable income the client has left each month to contribute to a mortgage. It also expects intermediaries to seek some verification of the information given to them by their clients in this respect, ensure the information given to them is up to date and not simply accept the client’s assertions that they can afford the mortgage.

    Good firms will be taking these steps already but it is worth reviewing your procedures to ensure you are doing everything possible to meet the FSA’s requirements, so you have no need to fear if the FSA comes knocking on your door.

    An economic downturn usually results in weaker firms disappearing, meaning opportunities for the stronger survivors when the outlook brightens. Having robust systems and procedures should ensure that your firm is counted among the survivors of the credit crunch, not one of its victims.

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