With attempted fraud on the rise and fraudsters getting more sophisticated, brokers must ensure they don’t become soft targets by doing robust due diligence on all cases
With a raft of regulations, major funding problems and widespread dual pricing mortgage brokers have a lot on their plate at the moment. But one thing they can’t afford to ignore is the specter of fraud that permanently haunts the industry.
In the good old days between 2005 and 2007 when mortgages were aplenty brokers were probably guilty of being as lax as lenders and regulators when it came to checks.
Those days are gone and the consensus seems to be that as the industry dips and business volumes fall so does fraud, but this is a dangerous complacency.
Experian’s Fraud Index reveals that attempted fraud rose by 37% in the first half of 2010 compared with the second half of 2009 due to a rise in so-called soft fraud which is when borrowers misrepresent incomes to get a deal rather than by organized crime.
Hard fraud is committed by sophisticated criminals to money launder while soft fraud is the ordinary borrower lying to get a mortgage – serious but not in the same league. The best way for brokers to guard themselves against both is simple – due diligence on their clients through rigorous checks and questioning.
“The most important thing brokers can do is to identify applicants, be skeptical of what they are being told and check the facts rigorously,” says Nick Baxter, partner at Baxter Business Consultants.
“If a broker doesn’t have an impressive record it gets around and they can be used as a conduit to fraud, perhaps accidentally,” he adds. “The biggest danger is that brokers who don’t ask the tough questions become targets for money launderers who think they are lax. Brokers must ask tough questions at the right time.”
Alan Cleary, managing director of Precise Mortgages, agrees that brokers face the danger of being used by fraudsters.
“It’s not a good thing for brokers because you can’t plead ignorance if you’ve been targeted,” he says.
“Lenders can identify specific brokers they get bad business from and there are a lot of brokers being kicked off panels at the moment – it’s a growing problem. As lenders become more vigilant brokers are caught up in it and it is damaging to their business. If you get kicked off Lloyds Banking Group’s broker panel you’re out of business because you can’t be a broker without dealing with 30% of the market.”
For money laundering in particular Baxter says it is crucial brokers ask the right questions. Brokers must have proof of their deposit and ask where the money has come from and if it is legal.
“Buy-to-let frauds with no proof of deposit are a key risk,” he says. “There is no reason why a person who wants to buy 10 properties shouldn’t be asked where the deposit has come from. They should be asked whether it comes from legitimate means and how they have produced this money.
“By asking such questions brokers will protect themselves. Genuine customers won’t care about the intrusion and money launderers will go elsewhere.”
Ray Boulger, senior technical manager at John Charcol, agrees that tough questioning is the key to brokers preventing fraud but adds that it is difficult to counteract the sophistication of some documents.
“Brokers must do the obvious checks but also be experienced enough to recognize when something doesn’t sound right,” he says. “One of the biggest problems for brokers is the sophistication of fraudsters. Some copies of passports and identity are so good that you can’t tell they are fake.
“I was at a conference a few years ago where even fraud experts struggled to differentiate the two, so brokers can have difficulties sometimes.”
John Malone, chairman of PMS and the Association of Mortgage Intermediaries’ spokesman at the National Fraud Authority’s mortgage fraud forum, says fraudsters are always years ahead of the businesses they set out to deceive.
“Fraudsters are more sophisticated these days and use technology to their advantage,” he says. “On the internet you can get pay slips, P45s, fake passports and driving licenses that look real. Fraudsters will always be up to five years ahead of businesses.”
And Malone warns some types of fraud such as identity theft are increasing. His role at AMI gives brokers a voice at the National Fraud Authority. Until he took up the role this month brokers were not represented. Malone insists brokers are crucial in the chain as a conduit between clients, solicitors, surveyors and lenders.
“Brokers are right in the middle of it,” he says. “So we are trying to educate them and limit fraud as much as we possibly can.”
Baxter agrees that fraud is still an issue but believes there has been a decrease as volumes have fallen.
“Mortgage fraud has probably reduced because the days of the one minute mortgage don’t exist anymore,” he says.
But Baxter says brokers must be wary of mortgage fraud in the long term. He says many fraudsters are clever and present themselves as plausible customers. In short, if they can deceive people they will. He criticizes the speed of applications and the focus on volume and while praising fraud checks via credit scoring to highlight risks, he does not think it is a silver bullet.
“Credit scoring checks help but it was difficult for underwriters to consider all the information in the time they had,” he says. “I have seen things in credit scoring checks that should have made them ask questions but they didn’t.
“Between 2005 and 2008 I don’t think staff were adequately trained either. That is still the case but the difference is they now have more time. Lenders need to use this to train their staff for the future. Just because the mortgage market is depressed doesn’t mean fraudsters are going to leave. Lenders must do all they can to tackle it.”
Malone believes lenders can do more, such as making sure that brokers’ client information is secure.
“You can go into an intermediary’s office and there are files and computers lying around,” he says. “But what happens when they leave the office at night? Big institutions have to go through a risk education process to try to eliminate or reduce the onset of risk.
“Of course, one of the things lenders are asking everyone to do is to protect client details in a locked safe or filing cabinet. But in brokers’ offices that often isn’t the case. That’s the kind of things lenders should be asking questions about.”
Colin Snowdon, managing director of residential mortgages at Aldermore, says brokers should not be wary if lenders start to ask questions.
“When lenders ask questions that brokers think are strange it isn’t always because they are trying to make things difficult,” he says.
“You can’t be too careful about mortgage fraud these days. Brokers have an important role as it is they who meet the clients. They have to be aware of all the issues and ensure they don’t allow themselves to be used. There is a real danger of that.”
Eddie Goldsmith, senior partner at Goldsmith Williams, has just set up the Conveyancing Association to tackle fraud in conveyancing and says lenders will always use people they are comfortable with.
“In every profession there are good and bad individuals and you can’t avoid criminals who infiltrate the industry,” he says. “What lenders need to do is work with people they know, are comfortable with, and who they trust.
“Firms that are members of our trade body are all reputable and one of the reasons we formed it is to help lenders use good firms. This won’t get rid of fraud overnight but if lenders are going down a restricted panel route we can tell them to look at the Conveyancing Association as a reputable grouping.”
Malone agrees that brokers have a huge responsibility and that the Financial Services Authority is clamping down on them. He says that for years the buzzwords have been ’know your client’ but the emphasis has now changed as the FSA seeks to talk tough on fraud and stresses the need for ’client due diligence’.
“I think the phrase puts far more onus on brokers to understand more about their clients,” he says. “At PMS if we want to take on a new firm we have to do thorough due diligence on it before taking it on board and that is what brokers have to do. ’Know your client’ was good at the time but there is a change of emphasis at the FSA which is demanding due diligence.”
He adds that it is more than just clients who need to be thoroughly checked.
“Brokers also have to look all around the client’s situation such as the property they are buying and the solicitor they are using, and check things such as how long it has been operating and whether it has had any issues with lenders,” he says.
“These are the things that brokers haven’t been doing over the years. They’ve just been accepting the solicitors their clients use but it’s their responsibility now to find out more about them.”
Cleary says due diligence is crucial and if business is coming from an introducer brokers must take appropriate steps to guard against fraud.
“If brokers are accepting business from an introducer they are basically saying that they are so confident about that individual that they will use their FSA license to get the business through,” he says. “If it goes wrong the broker is in trouble, so they have to go through the appropriate checks.”
But Cleary does not believe brokers have to do all the work as lenders have systems and structures to combat fraud.
“Brokers can’t be expected to do everything,” he says. “Lenders have access to national fraud databases and credit referencing tools, which I don’t expect brokers to have because it costs a lot of money.
“The main thing for brokers is to verify the source of introduced business and make sure they don’t get duped into accepting dodgy pay slips. If you smell a rat check it as if it’s too good to be true then it probably is – we’ve all got that sixth sense that tells us when something isn’t right.”
Malone insists brokers have a responsibility to check the client’s situation.
“Brokers have to be aware of who they are dealing with,” he says. “It can be done in a few phone calls. If lenders are reducing the legal firms they use, they are clearly going through their lists to make sure they know those acting on their behalf. Brokers must do the same.”
He says that when individual registration is brought in there will be even more onus on brokers to perform thorough checks.
“Individual registration will reduce the number of brokers in the mortgage industry,” he says. “We don’t know by how many but I think it will further reduce the numbers. We will be left with a strong, hardcore group of intermediaries who will have to protect their position. We’re asking them to protect themselves and their business by having a firmer understanding of their transactions.”
There is a clear sense that brokers are going to have more responsibilities and be subject to more scrutiny when individual registration is introduced. Malone believes brokers should start verification of clients as early as possible.
“Brokers must start to verify potential clients before they become official clients,” he says. “A lot of brokers just get clients from lead generation firms and no-one has verified them. Brokers haven’t verified clients enough in the past because of the volumes they were doing. A lot of fraud is now being uncovered from the boom years when gross lending was £700bn in 2005 and 2006. If even 5% of that was fraudulent that would amount to a massive £35bn. It is these numbers we’re grappling with.”
A spokesman for the Council of Mortgage Lenders says that varying market conditions create opportunities for criminals who always target weaknesses.
“The ground is constantly shifting with fraud and different practices that organizations follow creating different opportunities for criminals to target,” he says. “They will systematically target weaknesses. But changing market conditions have exposed fraudulent practices that may not have been so apparent when property prices were rising.
“One of the problems with fraud is that it is difficult to quantify. Someone can make a fraudulent application which is declined and we have to decide whether it is a failure that the fraud was attempted or is it a success that the fraud didn’t happen.”
He adds that the most important thing is for brokers to report suspicious information to the right authorities. He highlights the FSA’s Information from Lenders programmed as an example of what brokers should be doing.
Even in depressed times and with brokers fighting for their survival, they must remain vigilant against fraud. Lax checking can ruin careers and reputations can be forever tarnished.
Brokers don’t have all the responsibility and clearly lenders have their role to play too but it is brokers’ necks on the line if something goes wrong, so they have to be sure who they’re dealing with.
There will always be fraudsters looking to deceive them so brokers must make sure they are not a soft target. By doing robust due diligence brokers can protect themselves and fulfill their responsibilities to tackle the specter of fraud that could come back to haunt the industry in a big way.
Brokers must be the first defense
It is a well-known fact in the financial services industry that mortgage lenders have tightened their criteria significantly in an effort to protect themselves from escalating mortgage fraud losses. Coupled with this, the Council of Mortgage Lenders has reported that gross mortgage lending has fallen by 6% in August 2010 compared with August 2009.
Applications are being heavily scrutinized by lenders for signs of material misrepresentation or other anomalies.
Mortgage brokers have suffered much bad press in recent months as the unscrupulous practices of a few have led to serious repercussions for the honest majority. In many cases lenders have reduced the number of brokers on their panels and therefore the number of brokers they are prepared to do business with.
So what can brokers do to win back favor with mortgage providers? What are banks looking for from individuals who are introducing business to them?
As part of my role as fraud consultant at CoreLogic Solutions, a company that specializes in fraud detection technology for the financial services sector, I recently undertook analysis that has highlighted the most common types of mortgage fraud.
The top six most common types of mortgage fraud are:
* Income – 35% of fraudulent applications had evidence of significantly over-inflated salaries.
* Employment – around 16% of applicants had tried to hide details relating to their employer, with a large proportion not disclosing they were self-employed.
* Occupancy – 14% were applications for undisclosed buy-to-lets.
* Fake accounts – over 11% of the proven fraud cases were supported by financial accounts that were either fake or bore no resemblance to the true trading performance of the company or trading individuals.
* Valuation fraud – 11% of cases were backed by valuations that were over-inflated by up to 500%.
* Other professionals – around 6% of the sample showed evidence of fraudulent behavior by other mortgage professionals.
In my experience, the best way for brokers to win back the confidence of lenders is to act as a first line of defense. In many cases it is brokers who build rapport with applicants and have access to supporting documentation. By checking documentation relating to income, employment and occupancy and ensuring that the application appears to make sense, brokers will be able to assist lenders and speed up the application process.
Hopefully in time, this will improve the rapport between lenders and brokers and ensure that strong relationships develop and flourish as the mortgage market starts to recover.”
Mortgage broker fraud cases this year
Noel Smith of Andrew Copeland Mortgages
Noel Smith, a director of south London-based Andrew Copeland Mortgages Limited, was fined £17,500 for systems and controls failings and for exposing his business to the risk of being used to further financial crime. Smith also had his Financial Services Authority approval to perform management functions withdrawn.
The FSA concluded that Smith’s poor management controls and compliance monitoring led to 224 clients being exposed to the risk of receiving unsuitable advice and left the firm open to abuse by fraudsters. Smith also failed to oversee remedial actions outlined by the FSA to address potential poor advice given to clients. There was also no evidence that affordability had been assessed.
John Apicella was banned for lack of competency by leaving his business open to the risk of involvement in financial crime. Apicella was a sole trader at Newbury-based Mortgages 4 You.
The FSA found that Apicella failed to meet the minimum standards required of a broker by not always completing a fact-find document for new customers or taking the time to research their attitude to risk. In interviews with the FSA regarding customer’s income Apicella said that “if a lender doesn’t require it I don’t ask for it”. He added that he would accept self-employed customers’ income figures at face value. Also, Apicella did not carry out due diligence on a mortgage introducer from whom he accepted seven mortgage applications.
Neale Morton, Syed Meah and Jonathan Smith of Neale Morton IMS Limited
The individuals banned all worked for one firm, Neale Morton IMS Limited, based in Gateshead, Tyne and Wear. Neale Morton was the principal and director of IMS. The FSA prohibited and fined him £130,192 for his knowing involvement in mortgage fraud and for systems and controls failings at IMS for which he was personally culpable. Part of the fine, £5,192, represented a disgorgement of the profit he made from the fraudulent applications.
Morton not only submitted mortgage applications for himself using false income details, but also allowed his firm to be used for mortgage fraud by its advisers and customers. Advisers Jonathan Smith and Syed Meah produced falsified compliance documents during the FSA investigation. Smith also submitted falsified applications to lenders on behalf of customers and Meah did not notify the FSA that he had been arrested on suspicion of money laundering and been suspended as a mortgage adviser at IMS.
In an interview with the FSA, Smith estimated that around 5% of the mortgage business he submitted at IMS was fraudulent.
Collective action is important
This year is notable for an unwelcome first – it is the year mortgage fraud cases with a collective value of more than £1bn were heard by Crown Courts in England and Wales. But anyone who thinks things will get better soon needs to think again, and quickly. My advice is to revise estimates penciled in for 2011. If £1bn is your benchmark, you’re seriously underestimating the problem.
There are two reasons for this. First, £1bn only relates to the known cases of mortgage fraud heard by the courts during the past 10 months. Second, any fraud professional will tell you that for every case that is uncovered, up to four go undetected.
My view is that the real level of mortgage fraud exposure in the UK could be significantly higher than £1bn – and growing rapidly. And if that is the case, the sooner the industry takes appropriate action the better.
The harsh reality is that fraudsters regard lenders as easy prey where the pickings are rich and the chances of being caught pretty remote. Lax and inconsistent controls in the lending and broking community and an unwillingness to recognize the crime – particularly insider and employee fraud – have enabled con men to run riot in sectors such as buy-to-let, self-cert and commercial.
This is a major reason why we have seen a huge increase in the number of lawyers, accountants, surveyors and intermediaries who are prepared to fleece their way to easy and lucrative property paydays.
Any fraud professional will tell you that for every case that is uncovered, up to four go undetected
The Solicitors Regulatory Authority clearly thinks the problem is growing. Recently, its head of fraud went on the record stating his team was looking into the affairs of dozens of law practices suspected of being run by criminals and involved in committing mortgage fraud.
The SRA is working with several police forces to start a major clean-up. This is welcomed as it’s a break with the legal world’s traditional practice of staying silent until a threat has been eliminated. I also applaud the likes of the Association of Mortgage Intermediaries for setting up a panel to address fraud.
But the time has come for the whole industry to debate the extent of the problem in a meaningful way.
Getting to the heart of the matter will require all parties to put their egos to one side because mortgage fraud afflicts all organizations, regardless of their size, geography and corporate DNA.
It also means the industry must stop sweeping cases of insider fraud under the carpet. Organizations need to realize 60% of all fraud has a significant insider element and staff poses a threat to the well-being of businesses.
If there isn’t the collective desire to get to grips with things, then mortgage fraud will continue to be a major bête noire – and the sector will remain a safe haven for organized crime and opportunistic thieves.