4th September 2008

Loan Fraud – What not to do!

Involvement in loan fraud has serious consequences and all La Trobe Correspondent originators or 'loan referrers' must be aware that the correspondent bears the responsibility for all actions of his or her employees. The correspondent is also responsible for the content and quality of each application, whether submitted to La Trobe or any other lending institution.

This was clearly demonstrated in two court decisions which resulted in convictions and jail sentences.

Case Study 1: 2 Years Jail – Fraud

"The altering of documents by a financial consultant to bolster a client's bank loan application reflected a 'declining commercial morality' in the community," a County Court judge said.

Judge Anthony Smith convicted and jailed the broker for two years in 1994, after he had pleaded guilty to attempting to obtain a financial advantage.

The judge said that the broker, under pressure from a client who was threatening him, altered two employment documents and two group certificates to support his client's application for a $121,716 housing loan from ANZ.

He accepted that the broker was initially unaware that the employment documents were false, but became aware of this before he sent them to the bank. One document overstated the earnings made with a company. The other fabricated a job.

Judge Smith said the loan was approved, but police, who were investigating the client for insurance fraud, discovered the deception before it was granted. He said the broker had little to gain from the fraud. His standard fee for a successful loan was $500, and $350 for an unsuccessful application. He received nothing for this job. His motivation was not greed, but a desire to please this client.

But, as a financial consultant, he should have known better and withstood the pressures, the judge said.

Case Study 2: 4 Years Jail – Financial Theft

A solicitor, after purchasing an established practice was keen to satisfy a group of existing clients and attract new ones with supposedly secured loans funded by other clients with some cash to spare. The solicitor used to be involved with continuing education at Leo Cussen Institute in Melbourne, the lawyer's finishing school.

He acted for the publican of a small country hotel, and lent him money advanced by another client who had some cash to spare. The loan was secured against the pub (which was to be renovated and sold), with additional security provided by some residential land being subdivided, and further secured by a guarantee from the publican's brother.

Interest payments on the loan were not being paid, instead being capitalized. The alarm bells ought to have started ringing, but as the solicitor now remarks candidly, "You do not want to lose face with either client… the lender and the borrower are both people you have looked after for years and I couldn’t bring myself to tell them to cop a loss when there seemed other ways …so I started robbing Peter to pay Paul. I couldn't confront a loyal client and certainly could not imagine having to sue him. In my mind I was concealing things but to keep it under control, to buy time until it all fixed up, till he came good. No one was ever going to find out."

The deception was continued for eight years, manipulating money from account to account to do what he hoped was the right thing by various clients who needed money from time to time. When the balloon went up, almost $800,000 was missing and 25 clients were short of money. Where did it all go?

"I don't exactly know, even now, but I do know it didn't go into my pocket. I have nothing, I'm bankrupt, I've lost my superannuation, my career, the lot."

"I was frightened. Once it started, it was easier to keep going than to face up to it. As long as I could keep the deception going, there was a chance I could try to fix it all up. Provided I kept paying, no one would find out. I kept hoping for windfalls so I could fix things up, but they never came. And I never had the guts to add it all up, to do a reconciliation of the second trust account. I just kept writing out cheques when people asked for their money. I was just trying to be a nice guy."

So how did it all come unstuck eight years down the track?

"One client asked for all his money and I just didn't have enough. I lied and said the mortgages were slow that month, and eventually he confronted me and said he had done a title search and there was no mortgage and he was going to dob me in to the Institute."

"Not that I am saying jail is a deterrent; it isn't, it never served to deter me. Even when I was fiddling things, I never looked at any of the other lawyers who got caught and thought, ‘Gee, I must stop'. That was never a deterrent. You tell yourself you will never get found out, that it will all be okay if you just have enough time to fix it all up."

"My self-esteem has been destroyed and I feel strange talking about it, but if by telling my story I save one lawyer from the agony of what I went through… if it helps one person end the lie and come forward, then it has been worth doing."

(Extract from law journal)

Consequences

The effect of ‘loan fraud’ is costly to all parties involved. Fraudulent loans damage our reputation with our investors, bankers and mortgage insurance providers. The price paid by those who participate in 'loan fraud' is even more costly which can include:

  • criminal prosecution;
  • loss of professional practicing certificates;
  • loss of lender access;
  • civil action by La Trobe Financial Services;
  • civil action by client;
  • loss of approval status with La Trobe Financial Services;

  •     and
  • prosecution under the Consumer Credit Code.
  • These consequences can also apply to the borrower and include loss of employment and adverse effect on credit history. La Trobe, as a responsible lender, regards this issue as paramount.


    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.








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