7th February 2008

Preventing Mortgage Fraud?

Individuals can risk going to jail by committing mortgage fraud by knowingly changing personal and/or financial information to obtain credit. Often, these individuals feel that their client will not qualify for a mortgage if they honestly admit their true financial circumstances. Due to the large amount of documentation involved with securing a mortgage, there are numerous areas that are open to fraud. The top six documents that most commonly contain falsified information are :

  • Application - The application may contain false information about income, debt, employment, and other items.

  • Tax Returns - Information may be altered to leave the impression of higher income.

  • Employment Verification - Changes may be made to employment dates, hourly or salaried earning, job position, or other work-related information.

  • Bank Deposit Information - Actions taken mostly to inflate an individual’s cash on hand. Some people will make large cash deposits, from an outside source such as a credit card, friend, or relative in order to increase the current balance, which leaves the impression of having more cash on hand than is actually true.

  • Security Valuation - This fraud can be committed by the borrower, the valuer, or both. The borrower could alter the valuation on the actual document, the valuer could inflate the home's value, or the borrower could pay the valuer to inflate the home's current value. The result of this fraud has most recently been felt around the country as Valuers Professional Indemnity Insurers are now refusing to conduct valuations for many parties on the grounds that those parties constitute a high risk for claim to valuers because of their poor lending and/or loan management practices.

  • Contract Documentation - Altering contract documents to obtain higher loan values. Regrettably, some lenders got caught up in this inadvertently with the "two-tiered" markets of Queensland, or inner city apartments, in the last decade with over inflated purchase price which formed the sole basis of the lending assessment.

Prevention Measures

One view to prevent fraud is to measure how many loans your Quality Assurance (QA) program prevented from being funded involving fraud. Companies must therefore develop QA procedures. We suggest including the following pre-funding steps to assist in a fraud prevention program.

Pre-Funding Checks

  1. Verbal verification of employment and income (VOEI) and employer, including independent verification of the employer’s phone number. Also, performing the VOEI as close to loan settlement as possible will help prevent fraud from a scam involving temporary phone lines set up specifically to verify the borrower’s employment. This should also extend to income verifications.

  2. Carrying out independent credit report checks, especially where a residential mortgage credit report was provided by another party. Credit reports should be reviewed all the way down to the last line. One red flag is multiple enquiries that were recently made indicating a possible consolidation loan that is not yet showing on the bureau.

  3. Ensuring loan documentation received are originals and not facsimile or photocopy records which may have been tampered with.

  4. For self employed, signed Taxation Returns. Requiring this form at the front end will discourage some fraudulent borrowers from completing the transaction.

  5. Proper borrower/guarantor identification obtaining original photo ID, driver’s licence, passports etc.

  6. Verify the seller on the contract is the owner recorded on the preliminary title report. This requires teaching employees how to read title searches. Other title red flags include delinquent property taxes.

  7. Specify in settlement instructions to the lender's solicitors if source of funds should be verified.

  8. Choose referrers wisely. Deal only with counterparties who are properly vetted by you as to background character and integrity. What is their track record . . . do they have substance? Choose parties who have real regard for "reputation risk" - when things go wrong they should worry about losses sustained.

Post-Funding Checks

  1. Having an internal computerised Fraud Report and cross-checking system which regularly reviews all delinquent files for systematic relationships between a particular broker, real estate agent, valuer and staff loan underwriting . . . ask more questions.
  2. Check any files that are immediately put into substantial credit following loan settlement.

FraudArticle

Click Here to read article and fraud case studies

We trust this information assists you stamp out bad lending practices.


Best regards
Iain Pepper




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Iain Pepper
Head of Lending

Iain Pepper is a Vice-President and the Head of Lending for the La Trobe Group.Read full profile here.








La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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