Document 6495760

How to: Identify mortgage fraud and avoid it
Introduction
In April 2013, Experian reported that the rate of mortgage fraud had risen to 38 cases in
every 10,000 applications in 2012, more than double the number recorded in 2007. They
predict that this will continue to rise throughout 2013 driven by an ongoing squeeze on
household incomes and benefits as well as stricter credit and lending criteria.
Nine in 10 cases involved individuals painting a false picture of their personal circumstances
on an application form, most commonly giving false information about their employment
status or attempting to hide a poor credit history.
The purpose of this document is to:
Help you to identify mortgage fraud in the course of your work as a mortgage adviser and
avoid getting involved in it. This will, in turn, help you to avoid removal from a lenders
panel or regulatory action by FCA.
Background
The buoyant UK property market leading up to the financial crisis provided an opportunity
for individuals and groups to exploit weaknesses in the mortgage market for unlawful
financial gain. This was through both opportunistic action to obtain greater loan values
than a person legitimately is entitled to by misrepresentation of income or property value
and through organised crime syndicates.
Definition of mortgage fraud
There are two broad categories of mortgage fraud.
Mortgage fraud for property
Mortgage fraud for property is usually committed by an individual, in order to obtain a
mortgage on a property on more favourable terms than they would otherwise have been
able to attain through, for example, the exaggeration of their income on the mortgage
application
Mortgage fraud for profit
Mortgage fraud for profit is financially motivated and usually perpetrated by a “fraud ring”
involving more than one individual, with the intent of defrauding the lender of large sums of
money. Though this is less common than frauds for property, it has a much greater impact
as often these are linked to other serious organised crimes, it is likely to result in much
greater losses for the lender and is inherently more difficult to detect
Mortgage fraud can involve more than one criminal act, whether it is fraud and/or money
laundering. Fraudsters may be prepared to make a loss on a transaction to successfully
launder their criminally obtained money. Post the financial crisis there has been an
increase in broader criminal acts such as theft of the mortgage monies.
When mortgage fraud becomes money laundering
Where a mortgage has been obtained fraudulently, the value of the mortgage represents
proceeds of crime or criminal property.
Any person who then acquires, uses, has
possession of, enters into an arrangement with respect to or transfers the criminal
property, will be at risk of engaging in money laundering under the Proceeds of Crime Act
2002 (POCA).
Your legal and regulatory responsibilities
The Fraud Act 2006
The Fraud Act 2006 introduced a general offence of fraud that can be committed in three
ways:
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Fraud by false representation
Fraud by failing to disclose information where there is a legal duty to do so
Fraud by abuse of position
Dishonesty is a required element and the offence carries a maximum sentence of 10 years’
imprisonment.
FCA Requirements
As a mortgage adviser you also need to be aware of the FCA’s conduct requirements. The
FCA’s Principals for Business require that a firm must:
Conduct its business with due skill care and diligence (Principle 2),
Take reasonable care to organise and control its affairs responsibly and effectively, with
adequate risk management systems (Principle 3); and
Must deal with its regulators in an open and co-operative way, and must tell the FCA
promptly anything relating to the firm of which the FCA would reasonably expect prompt
notice (Principle 11).
The Systems and Controls chapter of the FCA’s Handbook of Rules and Guidance requires
firms to establish policies and procedures to ensure compliance with obligations under the
regulatory system and for countering the risk of financial crime. Firms are also obliged to
notify the FCA of significant fraud, errors and other irregularities under the supervision
manual of the FCA’s Handbook. Firms might also have to take measures to meet their
obligations under the Money Laundering Regulations 2007.
How to recognise mortgage fraud
Fraud for Property
This is the type of mortgage fraud that you are most likely to come across as a mortgage
adviser. It is usually undertaken by individual buyers so that they can obtain a higher vale
mortgage than they are entitled to or higher than a lender would have granted.
This involves the presentation of false occupation and earnings details, backed up by
fraudulent income evidence. It might involve the customer providing false or misleading
information about their:
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Previous credit history (eg undisclosed CCJs, defaults)
Income
Employment
Identity
Source of funding for the purchase (eg monies for the deposit)
It might also involve:
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A false value/valuation of the property
False information regarding the purchase price and any payments to be made directly
between seller and purchaser
False information about who will like in the property
This list is not exhaustive.
There are a number of websites offering ‘replacement’ or ‘novelty’ documents including
payslips and P60s to prove income, utility bills to prove address and bank statements to
prove income and address. (Type ‘payslips’ into Google and see what you find)
As a mortgage broker you can get involved in this type of fraud by presenting lenders with
inaccurate or false information about your customer. Typically brokers also partake in
‘gaming’ lender systems i.e. making multiple applications to lenders to secure an advance
for their customer.
Fraud for profit (organised fraud)
Mortgage fraud can also be perpetrated by organised crime syndicates who want to fund
illegal activities. These frauds will generally be more sophisticated and the scale of the
fraud much larger.
Criminal syndicates will often organise finance on a number of different properties at any
one time. New-build apartment developments or large scale renovation projects have
historically been attractive targets for organised crime gangs as they are able to buy in bulk
with the opportunity to negotiate discounted prices and then obtain mortgages at higher
values.
Both buy-to-let mortgages and standard residential mortgages have been used in such
frauds. Commercial properties may also be involved.
The nominated purchasers (who apply for the mortgage) can range from genuine
purchasers, “mortgage mules” – who are duped or coerced into the purchase – to complicit
individuals or totally fictitious purchasers that rely upon false identities.
When the lender seeks repossession of the property the criminal syndicate may raise
additional mortgage funding from a different lender, effectively selling the property back to
themselves.
As the second mortgage has been further inflated, the first mortgage is repaid together with
any arrears. This leaves the crime syndicate with a substantial profit. The process can be
repeated may times, until a lender forecloses on a property, to find it in disrepair and worth
significantly less than the outstanding mortgage.
Alternatively the organised fraudster may never make a loan repayment at all. In this
scenario, as the lender institutes proceedings to re-possess the property, it may be rented
or let, creating additional income for the fraudster.
Corporate structures may sometimes be used instead of fictitious buyers, where the
property in question is sold between related private companies at inflated values.
Organised criminal gangs will often involve at least one naïve, negligent, coerced or
complicit professional in the mortgage process, to provide reassurance and direction to the
other professional who are involved. There is evidence that mortgage brokers/introducers,
valuers, accountants and solicitor/conveyancers have all been used in this way.
How to protect yourself from becoming involved in mortgage fraud
Criminal methodologies are constantly evolving: however there are a number of warning
signs which may point to an attempt to fraudulently obtain a mortgage. They are not of
course
proof of actual or attempted mortgage fraud, but may indicate further
investigation/checking is warranted before you submit an application to a lender.
General considerations
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Are all the questions on the application form completed?
Does your customer live locally to the property they want to purchase?
Does your customer live near your business? Are the conveyancer and valuer also
local?
Is the property consistent with your customer’s circumstances or too big/small?
Does your customer’s declared income appear high for their age or type of
employment?
Are there any inconsistencies in your customer’s address history?
Has your customer been able to supply supporting paperwork of a good quality, for
instance do payslips show a payroll number? Or, do the documents include spelling
mistakes etc?
Does your customer intend to keep an existing, more substantial property than the
one they are buying? If so it is possible that the customer intends to let the property
being purchased and obtain the advantage of a higher loan-to-value or better product.
Does your customer seem unusually disinterested in the purchase? If so they may be
a “front” buyer.
Is the seller a private company or have they recently purchased the property from a
private company?
Has the property being purchased been owned by the seller for less than 6 months?
If so, what is the explanation for the quick sale?
Is the property being sold between two members of the same family or between those
who have known associations?
Has the value of the property increased or decreased significantly in a short period of
time? If so, is the change in line with the property market conditions in the area?
Is it likely that any incentives or discounts will be offered to your customer to secure
the sale? If so, have these been declared?
Is the deposit being paid by someone other than the purchaser? Is so, why?
Are the same professionals acting on every transaction in the chain e.g.
accountant/solicitor etc?
Has there been a change in the solicitor’s details (ie firm, address, bank details)
during the application process?
Are you asked to make multiple applications for different people but looking to
purchase the same property with the same current address, employment,
professionals etc
Below we look in more detail at some of the more common indicators of fraud for property.
False occupation and/or income evidence
The fraud most commonly seen by SBG involves the presentation of false occupation and
earnings details, back up by fraudulent income evidence.
Payslips
Although it is possible to obtain very good forgeries via the internet there are some tell-tale
signs that you can look out for.
1. Company details: Does the company exist? You can check this on Google. You should
also check that the telephone number and address are the same as the ones provided
by your customer
2. Basic pay: This customer’s basic pay works out at exactly £25,000 per annum. Round
figures such as this are virtually unseen.
3. Bonuses: The bonus here is £3,000 and was exactly the same for three months. This
might be legitimate but it is unusual.
4. Deductions:
Customers with higher earnings often have additional deductions from
their salary (eg pension contributions). Is it credible that there are no deductions for
anything other than tax and NI?
5. Low employee numbers: If, for example, your customer worked for Tesco and their
employee number is number 1 or 2 you might expect that they were the founders of
the company!
6. Total earnings: This customer’s total earnings were declared to be £47,500. It’s
unlikely that such an amount would be paid in cash. If the payment method is BACS
and there are other indicators that concern you, ask to see the corresponding bank
statement. Is there a deposit for an equivalent amount from the employer?
Other warning signs that payslips might not be genuine
The document is six months old but looks newly printed. If your customer receives their
payslips electronically then this is probably OK. But, if they receive them in the post they
are unlikely to be in pristine condition.
Perforated/tear open payslips
If the payslips are of the type that are sealed on three sides and have perforations you tear
off to open them, but the ones you receive from the customer have never been sealed and
still have the tear-off slips attached, they may well be false.
The customer only supplies a copy of their evidence
You should not accept copies; they are much easier to forge.
payslip dated 31st September!
Sesame received a copy
The income evidence doesn’t stack up alongside evidential information
We’ve seen cases where the customer has claimed to be a chef working in a restaurant in
London earning £80,000 only to find that he actually worked in a fast food outfit where he
was earning circa £20,000!
Bank statements
You might obtain a customer’s bank statement to confirm their salary or their address. If
you do make sure it is genuine (are the transactions printed in line, the same font etc) and
examine the transaction details.
If your customer is paid by BACs this will show on the bank statement and should match
the date and amount on the payslip
Look out for child benefit payments – Sesame had a case where the customer received
these payments but they had declared categorically that they had no dependents!
When considering whether a property purchase is Buy to Let being proposed as a residential
purchase look at the pattern of the customer’s spending. Can you see evidence that they
spend a significant amount of time in the area they are buying in? You may be able to
determine this from the shops they spend money in and the service stations they visit. If
you can’t see they’ve spent time in the areas they are buying in, is it logical they are
moving there?
Account and accountants’ references
When your customer is self-employed you will need to obtain copies of their accounts or an
accountant’s reference. It can be difficult to confirm whether these are genuine. You would
usually expect these to be on headed paper and you should be able to check out the firm on
the internet. You would normally expect them to have their own website and office
premises.
You should also be able to tell whether the financial situation set out in the accounts reflects
what you know about your customer’s circumstances.
Scheme manipulation (also referred to as product abuse)
Where a customer applies for a Buy to Let Mortgage for a property that they intend to live
in (usually because they will not meet the lender’s affordability criteria or cannot prove their
income).
It can also occur the other way round where an application is submitted to the lender for a
residential product but the customer has no intention of living there (but intends to let the
property) this will usually be because the customer doesn’t have a large enough deposit or
can’t afford the repayments on a Buy to Let Mortgage.
Indicators of product abuse
Your customer lives and works in one area, but decides to move to another part of the
country:
You need to consider if it’s plausible that your customer could relocate. Are they changing
jobs? Do they work for a national company? Or is their real intention to let the property?
Couples who separate, reconcile and then separate again
Sometimes couples will tell you that they are separating, buying a residential property for
one, and retaining the original for the other. Sometimes this might genuinely happen but
at other times it isn’t true. You should look for these indicators:
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Does the party who isn’t moving out still deal with all the details of the mortgage?
Will mortgage payments be made from a joint account? Why is this the case if the
couple is splitting up?
Why are you dealing with both partners, wouldn’t it be normal for you to be dealing
with only one?
Eventually the same couple might come back to you to tell you that they briefly reconciled
(so they are still living in the original property), but are now definitely separating and so
need to repeat the process outlined above.
A customer already has a large number of Buy to Let mortgages but want to buy
the next property on a residential basis
You should ask yourself whether this is likely – particularly if it’s combined with the desire
to ‘downsize’ from a four-bedroom detached property to a two-bed terraced house (for
example). This might be reasonable if the customer is elderly and perhaps now lives on
their own – but is it really likely for someone younger with a family?
Customers who take out multiple residential mortgages
On occasion customers might take out a residential mortgage on a new property, perhaps
moving out of their parents’ home for the first time. This is perfectly normal until a few
months later they return to the adviser saying that they want to buy a second property
which they intend to live in while they rent the first property.
Residential mortgages submitted as Buy to Let
This is usually because the customer cannot prove their income. By providing a letting
agent’s letter stating likely rental value for their residential property, they may avoid the
lender asking for other income evidence. You need to consider the following:
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It might be that the lender doesn’t need to see income evidence. But SBG do
recommend that you obtain this and you should take steps to confirm this is genuine
If the customer has a residential mortgage on the property already and is moving to a
Buy to Let are you handling the residential mortgage on the new property? If you’re
not, is this because it’s not really happening?
Source of deposit
Lenders will usually expect anyone wanting to arrange a mortgage to have accumulated
funds to put towards the purchase of the property i.e. the deposit. It is important to
remember that the source of funds for the deposit and the source of wealth are not the
same thing.
Source of funds – refers to where the monies are held ie the customer’s bank account
Source of wealth – refers to how the customer accumulated the money that is to be used
for the deposit, i.e. did they save the money, cash in an investment, sell their vintage car,
borrow the money from family or win it on the lottery
The FCA and mortgage lenders expect advisers to establish the source of the customers’
funds for the deposit and the source of wealth. Purchasing property with illegally obtained
funds is a way for criminals to place funds into the UK financial system. This is particularly
so when the funds are located in an account outside the UK. Lenders will also have
concerns if you are not transparent about the source of the customers’ wealth for the
deposit. They won’t look favourably on a statement that the source of wealth is savings if
they can’t then see evidence of monies moving from a current account to a deposit account.
Source of funds for the deposit
You must record the source of funds for the deposit. This will usually be a UK bank account
or building society account.
Source of wealth for the deposit
The source of wealth for the mortgage deposit refers to how the customer has accumulated
the monies that they are going to use for the deposit.
In all cases you must ask yourself whether the customer’s claims seem plausible. If the
source of wealth is outside the UK you must give details. This applies whether the deposit
is the customer’s own, coming from parents or from any other third party.
A full audit trail including bank statements from any foreign accounts the deposit originated
from or passed through must be gathered and recorded on file. You also need to gather
any other relevant documents such as company registrations where the funds are coming
from an overseas business.
Savings as source of deposit
Where the customers’ monies for the deposit come from savings, you must be sure that this
is plausible. Given the customers age, occupations, existing financial commitments and
their salary, is it likely they have saved the amount they claim? If you are satisfied about
the plausibility of their claims and feel that everything stacks up then you don’t need to do
anything other than to ensure this is reflected on your customer file. If this doesn’t stack
up you will need to obtain documents to support the customers attestations i.e. their
current account and savings account statements showing a transfer between the two and a
corresponding accumulation of funds in the savings account.
Equity as source of deposit
In many cases the source of a customers’ deposit will be the equity in their existing
property. If you are satisfied that, given the value of the existing property and the details
of the current mortgage, that this amount is reasonable, you need make no more enquiries.
Other sources of deposit
The customers’ deposit will not always be equity from their existing property or money they
have saved. The following list includes other, less common, potential sources of wealth. In
each case, the table below shows the details you should record on your customer file and
evidence that can be gathered to back up the customers claims. The list is by no means
exhaustive but gives an indication of the type of information that you can use to verify that
the customer’s source of wealth is genuine in a number of different scenarios.
Source
Record on file
Evidence may include
Sale of Company
Name of Company
Date of Sale
Total amount received
Principal activity of company
Customer’s share of proceeds
Signed letter from
solicitor/accountant confirming
sale and the proceeds
Certified copy of bank
statement
Media coverage (if applicable)
as supporting evidence
Lottery/gambling win
Name of organisation won
from
Date of win
Total amount
Letter from organisation
Certified copy of bank
statement
Media coverage (if applicable)
Inheritance
Received from whom
Date received
Total amount
Copy of grant of probate/will,
which must specify the
amount
Letter from solicitor
Return of Loan to the customer
Date of loan
Original loan amount and
amount returned, including
details of any interest paid
Details of loanee
Copy of loan agreement.
Loanee’s bank statement
showing money deposited
from customer
Pension pay out
Date of retirement
Total amount
Name of scheme
Copy of final pension
statement
Letter from trustees
Compensation
Amount of award
Date received
Total amount
Solicitor’s letter
Copy of court order
Letter from compensation
body
Sale of shares
Dates funds received
From which company?
Total amount
Copy of redemption certificate
Gift from a third party as source of deposit
When the deposit is being gifted to your customer from parents or other third parties you
need to consider the source of wealth just as you would if the monies were coming from
your customer. You must make enquiries about the financial position of the third party,
including their earnings and plausibility of the savings. You should consider whether the
funds have been amassed legitimately.
Note – Where the deposit is being gifted to the customer most lenders require that a letter
is obtained from the donor stating that the deposit is a genuine gift and repayment is not
required. This is in addition to, and not instead of, your responsibility to establish that the
origin of the monies is plausible. The lenders requirements relate to their assessment of
affordability, you also need to be satisfied that the monies are not the proceeds of crime.
Disclosure of loans and county court judgements
You should always encourage your customer to give an accurate depiction of their financial
situation. You cannot categorically know if they are doing so, but you can advise them that
lenders will always carry out credit checks and will not look favourably on any misrepresentations of the truth.
Current scams of which you should be aware
Below Market Value Fraud
This is also known as a ‘distressed property sale’ and is a reflection of the current difficult
economic climate.
How below market value fraud works
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Distressed vendor
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Open market value for property is £150,000
Unable to sell at open market value (OMV)and needs to sell
the property quickly
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Below market
value company
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Agrees purchase price of £100,000
Vendor uses nominated solicitors
Possibly instructs test valuation to ascertain OMV
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Property club
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Emails lists of armchair investors
Offers equity of £50,000
Preferred broker and solicitor
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Applicant found
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Agrees to buy for £100,000 knowing the property is worth
£150,000
Pays property club a fee on completion
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Broker submits
application
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Price declared is £150,000
Loan @ 75% is £112,500
Valuer advised price is £150,000
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Deposit source
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Deposit is equity release from another property or
Short term loan repaid immediately after completion
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Completing
solicitor
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Acts on offer stating £150,000 price
Receives mortgage and deposit funds and passes all to
vendor solicitors
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Vendor Solicitor
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Nominated by Below Market Value company
Completes sale and disburses £100,000 to vendor and
£12,500 ‘fees’ to all involved
Identifying this type of mortgage fraud
It isn’t easy for a broker to identify this type of fraud – especially as selling a property at a
discounted price is not always illegal or fraudulent. However, where it is fraudulent there
are some indicators you can look out for.
Often the ‘Property Club’ (at step 3 above) acts as an introducer. You should consider
whether you have introducers who bring you clients who live in another part of the country.
Does the customer buy Buy to Let properties in another part of the country remote from
both you and the introducer? If so, how are these customers and properties being sourced?
You need to understand how your introducer gets their leads, they might have a website
which will give you a clue.
At step 7 above, the solicitor representing the lender needs to receive a deposit. This might
be from a cash fund held by the buyer or it might be short-term lending from bridging
finance. You need to make sure that you know where the deposit comes from. A bank
statement might be able to help you do this. It might a deposit and the name of the person
or firm making it – a google search might then show this to be a provider of short-term
finance.
Sale and rent back schemes
Below market fraud is sometimes linked to sale and rent back schemes.
Please remember that for a non-Network firm, specific authorisation is required by the FCA.
Such schemes offer the vendor the option to remain in the property and rent if from the
investor who purchased it. Alternatively the investor might sell it on again to someone who
has no agreement with the original owner (now the tenant). The new owner can put the
rent up, or evict someone who may have lived in the property all their lives causing
significant distress.
Using an Introducer
Across the industry it is recognised that the largest source of mortgage fraud is business
introduced to an adviser by a third party. Often this will be a property developer or
someone else involved in the property business. It might even be someone who was once
a mortgage adviser but has had their mortgage permissions removed by FCA and been
struck off a lenders panel!
There are certain steps you can take to reduce the risk of you becoming involved with a
dodgy introducer.
Set up an introducer agreement
In the majority of cases, if introductions are for mortgage purposes only, it is not a
regulatory requirement to set up an introducer agreement. However this doesn’t mean that
you can’t have a formal contract in place. SBG would recommend that you do as this might
deter prospective fraudulent introducers.
Only let your introducer ‘introduce’
It sounds obvious, but SBG have come across a number of fraudulent mortgage cases
which would have been spotted earlier had the introducer not been permitted to act as a
“go between” - usually between the adviser and the customer. Please remember that once
you have received the introduction from your introducer they should have no further
involvement.
Ask yourself some key questions about your introducer:
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What happened to the last person who dealt with introductions from that source?
Is the introducer’s answer to this question reasonable?
Does the introducer want to be overly involved in the sales process?
Do they want to provide you with income evidence and copies of any documentation?
An example of fraud for profit
It is much less likely that you will come across fraud of this type. This involves
criminals who are looking to defraud a lender of the mortgage proceeds and have no
intention of repaying the money.
1. A client goes into an estate agency in which a mortgage adviser is based. He enquires
about an expensive property. He views the property and is referred to the mortgage
adviser.
2. The client is able to provide accounts which appear to be genuine and other CDD
appears to stack up
3. The client then decides not to proceed with the original property and selects another
which he claims to have viewed with another estate agent. He wishes to retain the
services of the mortgage adviser and suggests that he will also want to conduct
further business in the future
4. Initially the client uses the solicitors recommended by the mortgage adviser, but later
say that he is unhappy with their service and wishes to use a solicitor of his choice
5. On the day of completion the client’s solicitor drew down the mortgage advance but
did not complete the property transaction.
Both the solicitor and the client
disappeared
6. The adviser was not aware that this was part of a wider fraud whereby fraudsters
across the country were duping adviser in the same way. They all directed the
conveyancing to the same firm of solicitors, manipulating the situation so that
completion was all scheduled for the same day. In total, the lenders lost £7 million in
this fraud
Identifying this type of fraud
Changing solicitors part the way through a property transaction may be a cause for
concern. There could be a good reason but, as the client will incur costs from the minute
they instruct a solicitor, it’s unlikely they would want to start all over again.
If third parties are involved (ie for bridging finance) you should check out their details. Are
there email and phone details genuine?
You need to ask yourself whether your firm is being sufficiently vigilant and has the
appropriate systems in place to prevent it being used for committing fraud or other financial
crimes. You should have systems and controls in place that let you identify any trends or
anomalies
What to do if you have any concerns
If you have any suspicions you must report these to the Money Laundering Reporting
Officer (if you are directly authorised). This will help you to avoid removal from a lender’s
panel or regulatory action by FCA – which will in turn protect your livelihood.