The mortgage industry is in a healthy state. But mortgage fraud is still very common. What can those in the industry do to avoid falling victim to what is a widespread problem?
The last year or so has been healthy for mortgage lenders. According to the Council of Mortgage Lenders, gross mortgage lending for the third quarter of 2014 was an impressive £55.5 billion. This was an 8% rise on the previous quarter and 13% up on the same period a year earlier.
So it’s all good news, then? Well, yes and no. On the good side, borrowing is clearly buoyant. On the bad side, mortgage fraud is still proving very attractive to criminals. This is a situation that carries significant financial and legal risks for mortgage brokers and all other financial experts who are involved in the mortgage industry.
As a firm with years of experience in representing mortgage industry professionals in some of the country’s most high profile prosecutions, you may expect us to emphasise the risks. But what we would also like mortgage professionals to remember is the need to act promptly as soon as anything arouses suspicion. Seek expert legal advice as early as possible; as it is the only way to nip problems in the bud and avoid problems later on.
Statistics for mortgage applications show that over the last two years around 0.8% of applications have been identified as fraudulent.
This does not, admittedly, seem like a huge percentage. But it is worth considering a couple of points. Firstly, this is only the amount of mortgage applications that have been recognised as being fraudulent. We do not know for sure the precise number of fraudulent applications. Many more may have been successful and yet not have been identified as fraudulent. Secondly, any single successful mortgage fraud can create a huge amount of financial hardship and finger pointing between the lender and the other parties involved. If we take that 0.8% figure, it means that at least one in every 125 mortgage applications is fraudulent. And if we take figures from last year that show the average mortgage being taken out by first-time buyers is £121,500 then it’s clear that one successful fraudulent application can involve very large sums of money.
Increasing demand for mortgages and rising house prices have led to lenders scrutinising applications more closely. But it would be surprising if this has not simply led to those attempting mortgage fraud becoming more devious in their attempts to obtain the five-figure sums they are seeking. It is clear that the authorities are aware of the problem - as more than 100 people associated with the mortgage industry have been banned since 2006 – but it is in the best interests of the mortgage industry as a whole if everyone involved does everything they can to make sure they do not fall victim to fraud or become unwittingly involved in it.
It is no secret that lenders have, in recent years, made some incredibly risky loans without carrying out adequate checks. The US saw the bundling up and selling on of mortgage debt with disastrous consequences while all involved somehow retained their AAA ratings from the major ratings agencies. In the fall-out from the economic crash, mortgage fraud cases have been coming to court here and in the US. Some have involved tens of millions of pounds and the involvement of people in all parts of the mortgage chain: mortgage advisors, brokers, valuers and solicitors. While some have been elaborate cases of property over-valuation, with the relevant professionals fully aware of what is being perpetrated, many more have seen such people unknowingly involved in huge mortgage frauds.
When people accused of mortgage fraud state that they knew nothing about any illegality, the prosecution will often react with disbelief. Such a response is often unfair. It should be remembered that if a fraud was detailed enough to dupe the lenders then it could just as easily have fooled some of those who became involved in it. But as this is rarely a view taken by the likes of the Serious Fraud Office (SFO), professionals involved in all stages of the mortgage process need to make sure that they are doing everything they can to reduce the chances of them becoming involved in such a criminal operation.
Whatever the size and precise nature of the mortgage fraud, the central issue in any prosecution will be dishonesty. Can the accused justify their actions? Did they carry out adequate research prior to becoming involved in the application? When working on this application, did they do anything differently from the hundreds or thousands of other applications they have handled? With the right solicitor making appropriate use of relevant documentation, expert witnesses and the client’s professional pedigree, a prosecution case can be challenged vigorously; no matter how strong the accusations may appear at first glance.
But what about trying to prevent matters ever reaching that stage? We live in an era in which the authorities have a keener sense of the need to seek prosecutions – and many of these organisations have more resources and more useful legislation at their disposal than they have had before. Legislation such as the Fraud Act places a huge responsibility on companies and individuals to comply. As a result, anyone looking to prevent – or, at the very least, detect – mortgage fraud has to be introducing some form of compliance procedures into their activities.
Bodies such as the SFO, the police, HM Revenue and Customs, the Financial Conduct Authority (FCA) and their foreign counterparts are all working closer together than ever before; aided by technological advances and an increased awareness of the potential international dimensions of financial crimes such as mortgage fraud. The obvious outcome of this is that more wrongdoing is being uncovered. As a result, it is imperative that anyone in the mortgage application chain is able to show that they made a thorough and carefully prepared attempt to prevent any wrongdoing being carried out in their name. The chances of mortgage fraud being uncovered and prosecuted are far higher than they were even a decade ago.
Ignoring the importance of compliance or throwing together a quick compliance policy so it looks like you have “done your bit’’ will cut no ice with investigators who suspect wrongdoing. If they are to be of any value whatsoever, compliance procedures need to be strong, thorough and introduced after careful study of the way the company, its staff and representatives work with any other organisations or individuals. And introducing well thought-out procedures is not enough: they must be properly publicised, routinely monitored, reviewed and revised when necessary and seen to be followed by all staff of all ranks.
Finding the time, effort and funds to make sure a company is fully legally compliant may seem like a chore in the fast-moving financial world. Mortgage brokers, financial advisors, lenders and everyone else with a stake in the multi-billion mortgage market already have their days full enough as they strive to gain and maintain a slice of the business. At Rahman Ravelli, we advise companies and individuals on compliance. We understand that compliance may not be viewed as the most dynamic part of the workload for anyone in the finance industries. Many will consider it something to be avoided or, at best, paid lip service to. Yet nothing can be more damaging to anyone’s prospects than being investigated, charged or convicted of fraud.
When it comes to an area of business such as financial advice, the merest hint of wrongdoing could prove devastating. Anyone found to have been involved in mortgage fraud or especially vulnerable to it will find it extremely difficult, if not impossible, to keep attracting the all-important stream of clients necessary for a business to survive and prosper.
Anyone suspecting wrongdoing in their operation has to speak to experienced, specialist lawyers immediately. But in reality it is far better to be proactive rather than reactive when it comes to tackling fraud. As we mentioned earlier in this article, just one successful fraudulent mortgage application can be hugely damaging – far more costly than the price of compliance.