Why mortgage brokers have to be more careful than ever about the risk of fraud.
All the evidence indicates that the authorities no longer view mortgage brokers as the middle man, free from all blame. As a result, brokers are increasingly finding themselves in the dock along with people who made the fraudulent mortgage applications that aroused the interest of investigators.
This may surprise the brokers who believe that if mortgage fraud is perpetrated it is only a problem for the accused and the lender. Hopefully, it will shock them into taking action to avoid prosecution.
Mortgage fraud can be varied in its nature, carefully thought out and can involve millions of pounds. It can range from relatively straightforward, one-man attempts at fraud right up to elaborate schemes involving specially-created companies, huge inflation of the proper value of properties, inaccurate or forged documents and large-scale misrepresentation involving anyone in the chain: brokers, solicitors, surveyors and even those working for the lender. Such attempts at fraud can be incredibly sophisticated. In such cases, anyone involved in such a chain, either knowingly or unknowingly, will come under intense scrutiny by the authorities. Any mortgage broker looking to portray themselves as the blameless middleman will have to work hard to prove this.
It is a situation that does not make welcome reading for brokers. But with the spotlight now firmly on them, they cannot afford to be either ignorant of the possible repercussions of their actions or overawed by the responsibilities they face.
As specialists in business and financial crime, we regularly advise property professionals, including brokers, on how to respond to allegations that they have behaved illegally. We are known for constructing strong, proactive defence cases to give the client the best possible chance of proving their innocence. And we know that brokers are a sector that investigators are increasingly scrutinising in an attempt to tackle fraud. Which means that doing nothing is not an option for mortgage brokers.
Many allegations of mortgage fraud would not have reached the courts, or even surfaced at all, if brokers and their colleagues had taken serious precautions before sanctioning a mortgage application. It is understandable if the desire to secure a fee is what drives a mortgage broker on. After all, we all need to make a living. But, now more than ever, brokers have to be conscious of what they need to do to avoid falling foul of fraud.
While most mortgage applications are legitimate, it only takes one failure to identify a fraudulent one for the most highly-respected mortgage broker to attract the attention of the authorities. That can mean investigation, prosecution and up to 10 years’ imprisonment, not to mention a career ending in disgrace. When this is considered, cutting a few corners to gain your fee as quickly as possible is not worth the risk.
Mortgages can be the vehicle of choice for the person looking for an easy route to a fraudulent fortune. With this in mind, brokers should consider issues regarding each and every mortgage applicant. These issues may not indicate whether a borrower is 100% legitimate but they are worth remembering when dealing with an applicant.
First, if a borrower is looking to release equity from an unencumbered property, then the broker should try and find out why. They should also be making all possible efforts to establish whether the borrower has the right to use the property to secure funds. A second issue that needs close examination is the identity of the borrower. Where are they based? How close are they to the broker’s office? Do you physically meet them? Do they produce bona fide proof of their identity and current address?
If the answer to the last two questions is no, then there should be some concern about the validity of the application. Similarly, a borrower who decides to use a broker for no apparent reason should also prompt further questioning from those arranging the lending. If they are not based nearby, have not used the broker before and were not advised to use them, a reason needs to be established for why they are doing so. Any would-be borrower who is unclear about their reasons for wanting the money, or whose explanations include inconsistencies or even contradictions, has to be challenged about the exact nature of their application.
This cannot be a question of going through the motions, ticking boxes and waiting for the fee to arrive. If there is no active attempt to weed out fraud every time a broker vets an application there will always be the risk that they are sanctioning fraud – and may end up in the dock.
In the past 12 months, cases have come to court of lenders being tricked into making a loan secured on registered properties not owned by the borrower. The fraud only became apparent when the bemused legitimate owner had proceedings served on them for mortgage arrears. There has even been a case of a fraudulent borrower creating a bogus branch office of a legitimate law firm in an elaborate attempt to convince lenders a property deal was imminent. In such instances, brokers cannot be criticised for being tricked – but that is only the case if they can be shown to have carried out due diligence.
Brokers must have their own controls in place, otherwise they will become unwitting targets for those looking to make fraudulent mortgage applications. The Information from Lenders (IFL) scheme, run by the Financial Conduct Authority, asks lenders to report suspicions of fraud involving mortgage intermediaries. IFL is currently receiving around 175 alerts a year about suspicious intermediaries. In the past four years, 80 brokers have been given bans and fined a total of £1M. This is all down to brokers’ lack of diligence.
IFL reflects an anti-fraud culture that is being imposed on all aspects of the financial sector. While promoting IFL, the FCA is also assessing the anti-fraud measures being adopted by mortgage lenders. This will inevitably lead to examination of the approaches being taken by the brokers, as they are the next link in the chain.
For many brokers, this will create unease, however principled they are. It’s a very stark reminder of the responsibilities they shoulder and the risks they face.
Some brokers may need clear advice tailored to them. We advise many different types of companies and organisations on how to design out the potential for fraud. Our advice may vary from professional sector to sector. But when it comes to mortgage brokers, the message is simple: doing nothing will cost you far more than any commission fee can cover.