Mortgage fraud – watch out for ‘first party’ fraud as mortgage prisoners become more desperate

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The recently released annual fraud report by Experian shows that, yet again, mortgage fraud topped the ‘detected fraud’ list across all financial products.  The report showed that in Q4 of 2014 there were 84 detected cases per 10,000.  Such a figure may seem low.  However, Council of Mortgage Lenders [CML] statistics show that there were around 1.2 million mortgage loans made in 2014 (when adding house purchase loans, remortgages and buy to let loans).  So that means there were around 10,000 cases of detected mortgage fraud a year.

So that means there were around 10,000 cases of detected mortgage fraud a year. 

Various regulatory requirements are placed on regulated firms in respect of fraud prevention.  For example, the Financial Conduct Authority [FCA] Principles for business require that “A firm must conduct its business with due skill, care and diligence” (Principle 2), “A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems” (Principle 3) and “A firm must deal with its regulators in an open and cooperative way, and must disclose to the appropriate regulator appropriately anything relating to the firm of which that regulator would reasonably expect notice” (Principle 11).  Systems and controls requirements place an obligation on regulated firms to establish and maintain adequate policies and procedures to counter the risk that the firm might be used to further financial crime.  And of course, under the money laundering regulations, firms have to verify the identity of their customers although it should be noted that mortgages are not generally the target of identity fraud.  However, mortgages are a regular target of first party frauds.

First party fraud accounts for 96 per cent of all detected mortgage fraud and 88 per cent of detected fraud includes an element of misrepresentation of the information provided on mortgage application documents.  This type of fraud is likely to increase in the future as more borrowers become mortgage prisoners trapped in expensive mortgages as a result of the more robust underwriting requirements brought about by the Mortgage Market Review [MMR].  As lenders continue to tighten criteria to comply with strict ‘affordability’ requirements the temptation to ‘bend the truth’, to get a mortgage or remortgage away from an expensive deal, is likely to become an increasing problem.  Such situations do not necessarily mean that the customer cannot afford the mortgage and there will be those who feel such deception is acceptable, but arranging a mortgage by deceiving the lender is fraud and firms should take steps to ensure that they are not party to the fraud.

Robust risk procedures should help firms focus on the cases that are more likely to be subject to ‘bending the truth’.  Examples of such circumstances are self-employed customers who may try to present themselves as an employee, first time buyers who may try to show a higher income than they actually earn to buy the home they want, buy to let customers who try to present a higher rental figure and those stuck with a high standard variable rate mortgage because previous product types (such as self-certified loans) are no longer available.

It seems to me that now is a good time for regulated firms to ‘spring clean’ their systems and procedures to make sure they are fit for purpose and that they will protect the firm from becoming unwittingly involved in mortgage fraud.

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Nick Baxter

Partner - Baxters Business Consultants - a business consultancy undertaking marketing, training, freelance journalism and expert witness services to the residential mortgage lending, building society and financial service industry (April 1993 to date) - www.baxtersbc.co.uk.

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