Legitimate finding or mortgage fraud?

Conveyancers throughout the land will be acutely aware that in the current economic climate, many residential properties are sticking on the market. This is largely due to a lack of confidence among prospective buyers, stemming from job insecurity among other reasons. However a significant factor is the cautious approach now being adopted by the major mortgage lenders, who are no longer prepared to lend a high proportion of the value of any property. This is resulting in a severe shortage of funding for house purchases.

Necessity is the mother of invention, and a number of loan companies have sprung up recently offering short-term funding of deposits, commonly known as rebate schemes. Many conveyancing practitioners have been seeking guidance from the Professional Practice Department about the legitimacy of such arrangements.

How does a rebate scheme work? The purchaser offers a very full price, well above the seller’s realistic expectations. At the same time the purchaser arranges a mortgage with a mainstream lender (on the basis of a questionable valuation), and signs a contract with a loan company for a facility to fund the gap between the mortgage and this price. Missives are concluded on the basis of the full price and the transaction proceeds as normal. At settlement the purchaser’s solicitor sends the seller’s agent a cheque for the full amount. Then the seller’s agent pays back the deposit (and a fee) to the loan company in terms of an irrevocable mandate from the seller. This mandate removes any need for the company to have a postponed security over the property. The source of funding is not disclosed to the mortgage lender by the purchaser’s agent, so that the lender is effectively induced to lend the whole of the net price received by the seller.

It is obvious that this arrangement is a form of mortgage fraud. It is also constitutes a fraud on the register, as the gross price appears in the disposition. The scam clearly relies on collusion between the parties. Although it is the buyer who signs up to the loan agreement, the seller has to grant the mandate to ensure repayment. As a result the buyer obtains a 100% loan to buy the property and the seller achieves the true market value. The losers are the mortgage lenders. They are unwittingly exposed and in the event of default by the borrower are likely to face a shortfall on repossession.

The success of the ruse is dependent on the agents involved turning a blind eye. It is difficult to see how they can legitimately do so. Here is an extract from Part 1 of the current CML Lenders Handbook:

“5.8 Other loans

“You must ask the borrower how the balance of the purchase price is being provided. If you become aware that the borrower is not providing the balance of the purchase price from his own funds and/or is proposing to give a second charge over the property, you must report this to us if the borrower agrees failing which you must return our instructions and explain that you are unable to continue to act for us as there is a conflict of interest.”

From this it is clear that the purchaser’s agent has a duty to report a short term top-up loan to the mortgage lender. If you fail to do so you are vulnerable, not only to a complaint but also a negligence claim and even a criminal investigation, on the basis that you are facilitating an arrangement.

What about the seller’s agent? Is it simply a matter of implementing the mandate and paying a chunk of the sale price direct to the loan company? If a mortgage has been obtained by fraud, it constitutes proceeds of crime. If you are involved in the settlement of a property transaction where the mortgage has been obtained by fraud, you risk committing a principal money laundering offence.

The courts will assume a high level of legal knowledge, and are unlikely to accept claims of unwitting involvement in a fraud if there has been a failure to apply appropriate due diligence. This would include finding out from the seller the purpose of the payment, checking whether the purchaser’s solicitor is aware of any rebate scheme and being satisfied that the mortgage lender knows about and has approved it. You may need a waiver of confidentiality from the seller to discuss the matter with the purchaser’s agents; if the seller is reluctant to provide this you can draw your own conclusions!

There is no doubt that the incidence of mortgage fraud is on the rise as the recession bites and that the attitude of mortgage lenders is hardening as a result. The Society is currently engaging with a number of the major high street lenders on various panel issues. Our negotiating position will be greatly enhanced if we can assure them that our members are doing their bit to prevent this type of criminal activity.

Contracts at home: could you be caught?

Members involved in residential conveyancing should be aware of the Cancellation of Contracts made in a Consumer’s Home or Place of Work etc Regulations 2008, which came into force on 1 October 2008. They are aimed at traders who enter into a contract for goods or services with consumers at the latter’s home or workplace, and provide a seven-day “cooling off” period in terms of a cancellation notice which must be served on the consumer. By schedule 3, contracts for the “construction, sale or rental of immovable property” are excluded. However it would appear that estate agency agreements are affected, on the basis that there is no mention of “marketing”. The regulations would not apply in any event to terms of business issued from the office after a home visit.

Tenements: duty to insure

In light of a case recently drawn to the Conveyancing Committee’s attention, members acting for purchasers of flats are reminded of the provisions of s 18 of the Tenements (Scotland) Act 2004. This places a statutory duty on each owner in a tenement to insure his or her own property and the common property of that tenement against the usual risks. If the various owners in a tenement so wish, they may put in place a common policy of insurance for the whole tenement. Owners also have a statutory right to inspect their neighbours’ insurance policies and to enforce compliance with the duty to insure. It would be helpful to draw these provisions to the attention of any client buying a tenement flat.