The many faces of mortgage fraud

The types of organised fraud facing lenders and the legal industry today, especially relating to mortgage fraud, are developing fast and becoming more and more sophisticated. It is essential therefore that lenders and solicitors are aware of the techniques and trends in this area and become more vigilant.

Not only is it important that we are aware of what is happening, but solicitors and lenders must ask the right questions when dealing with mortgage applications and receiving instructions and documents from clients. This should be considered not just at the start of any transaction but at different stages of the process.

At the recent CML conference held in London, the different types of mortgage fraud were discussed. Lenders spoke of the various trends and forms of fraud they are experiencing, and the efforts they are making to strengthen their own risk awareness and underwriting processes. In the current climate, where transfers of large amounts of money are involved, it poses too much temptation for some fraudsters who will manipulate any weaknesses in systems or processes to obtain funds.

Grant Sidey of the National Fraud Authority commented that the monetary cost of mortgage fraud was increasing and was conservatively estimated for the UK at being £1 billion last year. The figure continues to grow, and the percentage of mortgage fraud associated with Scotland is also on the rise.

The things they try

The so called “buy to let to live” fraud is growing. This happens where the customer applies to a lender for a loan on a buy-to-let basis but actually intends to use the property as his own principal or main residence. By obtaining a buy-to-let mortgage on the prospect of rental income to be received, the fraudster obtains a higher level of mortgage than the lender would have advanced had their true intentions and circumstances be known.

Fraudsters can also infiltrate branches of mortgage lenders, and rather than applying for a loan to the central mortgage processing departments, they are applying via branches where loans are authorised by bank employees. Detailed checks and training are being provided for branch staff dealing with such applications. Their decisions also being scrutinised more closely to avoid any exploitation in these areas.

Imposter fraud is a well known type of fraud where a customer impersonates someone else or forges another person’s signature to obtain loan funds from lenders. This type of fraud is on the increase, with organised groups working together using high quality forged identity documents and a sophisticated knowledge of the inner workings of the underwriting, conveyancing and land registration processes.

A new twist to this type of fraud is now also being seen in England, where there is an increasing level of “vendor fraud” which is causing lenders and solicitors growing concern. Given the large jurisdiction of England, it was not unusual for one conveyancing solicitor to be asked to transact with another, possibly 100 miles away, and with whom they have had no prior dealings. That vendor solicitor may have stopped trading, or perhaps had moved offices and some rogue opportunistic fraudster pretends to be them and proceeds to liaise with the purchaser’s solicitors regarding the transaction and obtains the money. The other tactic is for the vendor solicitor details to change at the very last minute and funds to be sent somewhere else.

Sounds incredible? It is, but cases like these are not a one off. Lenders spoke of this as a growing trend and a real concern and this was echoed by others. One major lender spoke of their panel solicitors having been duped by just such a scam only a few days previously. The panel solicitor had checked the details of the vendor solicitor on the Law Society of England & Wales (LSEW) website as well as asking the Solicitors Regulation Authority (SRA) to verify the details. The information from LSEW was out of date and the SRA took so long to respond that by the time it did, it was too late – the transaction had completed and the money was gone.

Lenders and others were very upset that the SRA was unhelpful – either it didn’t respond or when it did, often it was with out-of-date information which by then was too late.

The other concern being raised was intermediary fraud. These included brokers, solicitors and surveyors. The concern was that often the intermediaries’ processes were weak, or poor practices were being employed and it was these that the fraudsters were exploiting.

The message was that lenders and LSEW need to work together and increase awareness to make it harder for such fraud to go undetected. It is vital for parties to share knowledge and intelligence.

Caught out in Scotland

It would be wrong to think that Scotland being a smaller jurisdiction than England makes it immune from mortgage fraud, or that mortgage fraud is very rare. While some types of fraud, such as vendor fraud, are unlikely to take place in any major way in Scotland, other types such as buy to let to live, or imposter fraud, do happen and are happening.

The following examples have been highlighted in our courts just recently. In the case of Frank Houlgate Investment Co Ltd v Biggart Baillie LLP [2011] CSOH 160, Lord Glennie at the Court of Session in Edinburgh recently ruled that an investor who lost around £480,000 to a conman impersonating the real owner of Balbuthie Farm, Kilconquhar could pursue a damages claim against Biggart Baillie LLP.

Mr Houlgate claims that the conman persuaded his company to invest and agreed for Balbuthie Farm to be used as security. Biggart Baillie drew up the standard security and a total of £480,000 was invested. The firm had truly believed they acted for the true owner of the property and were also duped. The claim against Biggart Baillie is for alleged breach of duty of care and breach of warranty of authority, and accuses a partner in the law firm at the time of having “knowingly participated in and furthered” the fraud.

Two other cases involving lender mortgage fraud in Scotland have also been considered at the Court of Session. Both were related and were presided over by Lord Glennie. They were (1) Cheshire Mortgage Corporation Ltd v Grandison (Judicial Factor of Longmuir & Co), and (2) Blemain Finance Ltd v Balfour + Manson LLP, both referenced [2011] CSOH 157.

In both cases, the lenders had been the subject of mortgage fraud by some rogue fraudster. In both, the fraudster applied for a loan pretending to be the owner of a particular heritable property which was offered as security. When the loan was approved, a fake standard security was drawn up and executed. The money was advanced by the lenders, believing the fraudsters to be the owners of the secured properties. The fraudsters then disappeared into the ether.

In both cases, the lenders instructed Mellicks solicitors. In both cases, the fraudster instructed separate agents whom he managed to deceive also. These firms thought they were acting for the true owners and that the fraudsters were who they purported to be. They both liaised with the lenders’ solicitors on behalf of their clients and obtained identification documents. The fraudsters had forged the documents and basically stolen the identities of the true owners. The securities were worthless and the true owners as well as the lenders were the victims.

The cases illustrate that mortgage fraud does happen in Scotland, and we do need to be aware of this and ask the right questions. However, whilst the percentage of mortgage fraud in England is on the increase and novel forms of the process are coming to light, we are a much smaller legal jurisdiction and have a close relationship with our Law Society of Scotland.

Often for lenders it is a question of whether they have a valid and enforceable standard security which they can rely on to cover their risk or to calculate what their financial loss actually is. There are a number of reasons why the level of mortgage fraud in Scotland seems disproportionately low to England. Most big lenders are based in England and property prices in England are clearly much higher than in Scotland. For many lenders, the amount of loss they suffer from mortgage fraud can fall just under their appetite to pursue claims, so is below the threshold they have. Often these claims are therefore just written off or classified as not being commercially viable to pursue.

The other factor is that in Scotland, all solicitors are covered by the one Law Society indemnity insurance policy with the Royal & Sun Alliance, brokered by Marsh UK. Sometimes what is seen is that what is actually fraud, even clear fraud perpetrated on the lender or customer by the conveyancing solicitor, can wrongly be categorised or written off as poor practice or negligence and the lender recovers their loss from the insurers rather than by way of claim on the less known Guarantee Fund, which requires lenders to exhaust all other avenues of recovery first.

Lender initiatives

In the recent years, lenders have significantly reviewed and tightened their own underwriting processes. Their appetite for risk tolerance is much lower than before and they are becoming stricter in the conditions they set for their panel solicitors.

Lenders are conducting more intelligence-driven back book reviews, and where they are finding a trend, or if an intermediary is struck off for negligence/fraud, they are reviewing the business which came from them to check any risk exposure.

In England the FSA carried out a thematic review last year. It published its findings in June 2011. Its focus was on lender systems and controls and it found a number of things, including the fact that some lenders were actually very good and thorough whereas others required to reinforce its guidance for underwriting staff regarding mortgage fraud indicators. Specialist training was recommended, with the focus on less reliance being put on the FSA taking the initiative.

The message from the FSA was clear – sometimes it’s a case of not asking the right questions or not picking up on trends. The focus needs to move away from following process when looking at mortgage applications, towards assessing risk. There can also be a reliance on external sources such as FSA or LSEW, but this should never be the only reliance – lenders and solicitors need to make their own checks and have their own practices and processes reviewed to ensure they are risk compliant and make it less easy to be targeted by such fraudsters. As one member said, these fraudsters are very sophisticated, often with inside information on lender practices and processes regarding underwriting as well as branch procedures. This is serious business for them – it would be naïve to think they don’t have their own offices, their own intelligence-sharing conferences and indeed their own training programmes!

Lenders have always differentiated between the risk of lending to the individual and protecting the risk by ensuring the value of their security is sufficient. In many cases, if the security value is good then the risk of lending to the individual personally is rated better.

Random checking of self certified applications and information provided to lenders has been increased, and spot checks or audits of intermediaries have been stepped up. A worrying aspect of all this is that some lenders now have closed panels whereby they employ in-house solicitors and surveyors, or monitor their panel solicitors very closely. GE Money Home Lending Ltd is one lender which only employs in-house solicitors and surveyors, and this gives them more control and less exposure to risk than other bigger lenders who use panel solicitors, surveyors or brokers.
Some lenders mentioned the idea of lender-to-lender transfers, particularly in remortgage cases, to prevent the money from being routed elsewhere. It was considered a possibility, but it was also recognised that it would have a serious impact on conveyancers everywhere and might be an overreaction to take such a big step at present. The idea has not though been ruled out altogether.

Using intelligence

HM Revenue & Customs, the Council of Mortgage Lenders and the Building Societies Association teamed up recently to launch the UK-wide Mortgage Verification Scheme. The purpose of this is to provide a mechanism for lenders to verify income as well as identity and transaction information. Lenders often have limited evidence or background information to verify their customers’ credentials when looking at mortgage applications.

This scheme provides them with a secure platform where they can liaise with a specialist unit set up within HMRC, who can check the information provided to lenders against information provided in income tax and employment returns. HMRC will then advise lenders whether or not the details correspond, which will assist in lending decisions. A small fee of £14 plus VAT is charged, but this provides necessary comfort to lenders. It is also useful in reducing the time lenders take to reach a decision and helps them reduce risk and lend responsibility. It has also meant that in some cases, lenders have been able to lend where otherwise they might have felt compelled to refuse an application.

The scheme has been praised by lenders, who have been keen to utilise the benefits. It is just such endeavours that will be useful and it is important that lenders and solicitors be aware of the facilities and services available to them.
Working together and sharing intelligence was also high on the agenda. It was agreed that if something is hitting one lender, the chances were that others were also being affected. The fraudsters share intelligence and knowledge as well.

The lending industry already shares alerts and trends, and information about known fraudsters. However it was also raised that there is a limit as to how far lenders should be forced to police themselves.

It was recognised that for the police, it is often a question of resources. Many forces round the UK already have specialised fraud units dealing with these types of cases. They have increased training and are aware of the trends and often the names of different firms on their radar. Sharing intelligence is often the best way to combat matters. The idea of lenders funding units within the police was mooted, but the general view was that it was unfair for lenders to be forced to pay out even more for organised crime.

The general feeling was that this type of specialist fraud was not considered important, or was seen as a “victimless” crime because the only person who suffered was the lender. This is not correct given that the industry as a whole is affected when lenders tighten their lending criteria, or if they were to stop lending altogether.

All in it together

It is clear that mortgage fraud is a growing area and is of real concern, and we all need to work together to combat it. Sharing intelligence, tightening controls and building closer ties with the Law Society of Scotland and the Financial Services Authority is one way. The impact of fraud goes much further than just within the lending industry itself, and sharing intelligence and keeping due diligence in mind is the only way to combat fraud.

Mortgage lenders and their decisions are under much scrutiny in the present climate. They are being asked to lend more freely, but at the same time to do so responsibly and with due diligence. It is therefore essential that solicitors acting as intermediaries between the lending industry and the public, work together and share the tools available to them to combat mortgage fraud.