30 June 2014

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 prices 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) with 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 or Accountants Certification. 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.

Loan Fraud – What not to do!

Involvement in loan fraud has serious consequences and all La Trobe Financial originators or 'loan referrers' must be aware that they bear the responsibility for all actions of their employees. The originator is also responsible for the content and quality of each application, whether submitted to La Trobe Financial 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 National Consumer Credit Protection Act.

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





... That's Lending

Best regards,
Paul Wells, Chief Investment Officer
La Trobe Financial Asset Management Limited



La Trobe Financial is one of Australia's leading independent credit specialist Fund Managers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 123 staff and has managed over AUD$10Billion covering over 100,000 investment grade assets since inception in 1952.

Copyright 2013 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer

The following awards and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund and may be viewed on our website

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