Although most people don’t associate applying for a mortgage with committing a crime, mortgage fraud is more common than you would think.
Anecdotal evidence suggests that even though the number of cases is relatively low compared to the total of all fraudulent acts committed against financial institutions, the total dollar losses are extremely high.
According to some, mortgage fraud may account for 3.2 per cent of all cases, while the expenses directly related to mortgage fraud totalled as high as 12.9 per cent of all financial institution losses.
According to Australia’s leading mortgage loan loss insurers, more than 50 per cent of all cases involving fraud relate to mortgage application documentation.
Mortgage fraud is generally committed at two distinct levels. The first is the applicant level where the person applying for the mortgage initiates and commits the fraud. Such fraud is perpetrated through falsified information that the applicant alters. The most common kind of falsified information consists of changing facts on a tax return, income verification or purchase price of the security.
The second is the lending level, where the fraud is committed by persons directly involved in the mortgage lending or origination (broking) process.
The consequences of the discovery of mortgage fraud in a portfolio can have a devastating affect on a licensee, registrant or broker organisation, even if the company is a victim of fraud.
Some of the common consequences include: the sudden withdrawal of investor support; loss of servicing portfolios following unfavourable audit findings; unanticipated demands of the principal lender/bank to repurchase mortgages; direct write offs; sudden loss of top personnel; and ultimately, suspension or loss of licences.
Mortgage fraud, for the most part, is committed by individuals who feel that they can risk going to jail by changing personal or financial information. 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.
Regrettably, some lenders got caught up in this inadvertently with the ‘two-tiered’ markets of Queensland in the past decade with over inflated purchase prices, which formed the sole basis of the lending assessment.
Other types of fraud exist within the mortgage industry that don’t involve the borrower directly. Many borrowers, however, will pay for such crimes without even realising it.
In recent months, the Australian Bureau of Criminal Investigation has successfully completed some investigative operations involving such cases. Often this is done without the knowledge or consent of the potential borrower. Some fraudulent lenders will change information contained within the application, such as inflating earnings, adjusting outstanding debt, or other important items. This is primarily done so that the application has a better chance of being approved. The more mortgages that are approved, the more money the lender or broker stands to earn.
One way to prevent fraud is to measure how many loans Quality Assurance (QA) prevented from being funded involving fraud. Companies must therefore develop QA procedures to include both pre-funding and post-funding checks.
The wider context of the fraud mitigation debate is really about mortgage industry regulation. Proposals such as the reform of consumer credit legislation at a national level, reporting fees on an annualised basis, the NSW Consumer Credit’s review of brokers and the Australian Securities and Investments Commission’s (ASIC) review of solicitor mortgage schemes are cases in point. These should ultimately lead to:
Support from all lenders and industry participants for a single national regulator for all secured loans; and
The need for the broking industry to be nationally regulated and formally licensed, with appropriate requirements for capital, adequate compensatory arrangements and standards of education aligned to ASIC’s PS 146.
Intent on weeding out fraud, the mortgage industry is launching a major self-regulatory effort that will fail unless it requires the national registration and licensing of every mortgage broker within the next two years.
Industry executives are concerned that consumer confidence in the mortgage brokerage community is declining quickly, as reports of fraud continue to appear in news outlets around the country.
At the time of writing, the Victorian Major Fraud Squad had taken the unprecedented step of issuing a ‘fraud alert’ on a syndicate in Melbourne and have named individuals involved covering some $3 million worth of fraud.
The Australian Taxation Office (ATO) is also conducting separate investigations into several mortgage related ‘identity-theft’ frauds.
Broker regulation and licensing is particularly important because a staggering amount of mortgages — more than 50 per cent is estimated — are originated today by brokers, compared with traditional sources such as banks. In the early 1990s, brokers originated some 20 per cent of the nation’s loan volume.
Mortgage brokerage companies are independent firms that serve as third-parties, soliciting mortgage applications directly from consumers and then funnelling them to a mortgage lender, bank or other lender who funds the loan. Because the broker originates, lenders no longer have an instinctive feel for borrowers — who have become anonymous in a broker-based system that pushes for speed and rule bending.
Consumers work with brokers because of convenience and pricing. Brokers are supposed to do the ‘leg work’ finding the cheapest and most appropriate mortgage for the borrower after searching through the offerings of dozens or even hundreds of lenders. Because lenders give brokers wholesale rather than retail pricing on mortgages, the broker can pass on all or part of those savings to the borrower — ideally providing a better financing rate than if the consumer went directly to a lender.
Should the national registration effort succeed, consumers would benefit immediately. Any complaint, court judgement or jailing would become part of every broker’s national registration file. Lenders and others in the mortgage origination process would refuse to do business with those brokers, effectively shutting them out of the mortgage marketplace, industry executives agree. Brokers refusing to register also would be unable to do business.
Law enforcement officials also like the idea of registering brokers. That’s because the brokerage industry, like the real estate brokerage and insurance businesses, remains one of the few segments in the financial services industry not regulated nationally. That makes catching the industry’s crooks particularly difficult. The fear is that brokers perpetrating fraud in one state can simply set up shop under a different name in another state if they run into trouble, with little chance of their fraudulent past being discovered.
Compounding the problem is licensing, bonding and educational requirements that vary broadly from state to state. In some cases, individuals need pay only a small fee to obtain a licence, with no bond to post and little if any education requirement.
However, the bottom line is that most industry executives view licensing as a win-win arrangement for virtually everyone. Tracing fraud should become much easier.
Simon Purcell is the legal directorof the La Trobe Capital andMortgage Corporation.
