Fraud: awareness and prevention
Last reviewed 11/01/2012: any recent updates in this colour.
Financial crime and mortgage fraud are areas of considerable concern to all lenders. In its many guises, financial crime is capable of causing lenders significant expense and loss of public credibility. It is also an area of increasing complexity where lenders have to be aware of developments which may adversely affect their mortgage business.
For this reason, the CML and its members are involved in a number of activities aimed at tackling mortgage fraud and financial crime in general. This page covers those activities which relate to mortgage fraud awareness and prevention.
This page contains the following:
Tackling mortgage fraud in its various forms is of high priority to the industry and its regulator. The FSA has carried out substantial work in this area and have recently undertaken a thematic review of lender's systems and controls relating to mortgage fraud. In December 2011, the FSA issued a policy statement incorporating a set of financial crime guidance for firms. The guidance is summarised the CML's circular 2545. The CML participates in this work, and lenders have developed and continue to update their systems to detect, investigate and combat fraudulent activity.
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Application fraud is when an individual knowingly submits incorrect or misleading information on their mortgage application. Some examples of application fraud include:
- exaggerating borrower income to qualify for a larger advance;
- applying for a owner-occupier mortgage for a property (or properties) intended solely for letting
Members go through a number of detailed checks at the application stage to search for potential fraud.
If the application came from an intermediary, other applications made by the same firm are also verified for inconsistencies or patterns. Intermediaries found to be committing or countenancing fraud could be both struck off that lender's panel of intermediaries and reported to the FSA or other authorities.
Once the intermediary is verified, then the applicant's details are subject to detailed checks:
- credit information from the three credit reference agencies Experian, Equifax and CallCredit, to verify the applicant's current and previous addresses, previous and existing credit, credit footprints left by other credit searches, and also checking for evidence of mortgage possessions and county court judgments;
- application consistency check using the National Hunter system: this was developed in 1993 by the credit reference agencies with input from the CML, and many lenders participate. The system searches for other applications made to other organisations by the same person at the same address, and looks for inconsistencies or patterns;
- a plausibility of income check. This includes regularly updated guidance manuals and training for staff on the parameters of what is realistic; and
- the lender may also conduct additional checks arising from its own analysis or systems, such as searches for any patterns across applications. These may include other computerised searches using other databases to which they subscribe.
Many lenders have dedicated application vetting teams that systematically examine flagged applications and investigate cases of possible fraud. They are encouraged also to refer investigated cases to the FSA, the Solicitors Regulatory Authority, the RICS, the police, or the Serious Organised Crime Agency (SOCA). To help facilitate further analysis and intelligence gathering, SOCA has set up a system known as Suspicious Activity Reporting (SAR) to facilitate communication with the industry.
In March 2008 the Association of Chief Police Officers (ACPO) released ‘Safe as Houses’ a ‘problem profile’ looking at the causes and broader social consequences of mortgage fraud.
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Hijacking an individual's identity and then applying for credit in the victim's name is a major concern. Mortgage lenders are working alongside other lenders and their trade associations on measures to protect consumers' identity, both by increasing safeguards within firms, educating customers on prevention, and mitigating the effects when identity theft does occur.
Lenders conduct identity fraud checks on mortgage applications using the CIFAS system, which searches for signs of this type of fraud. Consumers suspecting they may have had their identity hijacked can apply to this organisation for an alert to be placed on their file.
Consumers can take preventative measures to protect their identity, and the credit reference agencies mentioned above have detailed information on how to avoid becoming a victim. The Home Office also offers a consumer guide.The NFA have a dedicated web-and phone based resource for consumers called Action Fraud.
The CML is working with other organisations including the government on developing steps to mitigate the effects of identity theft when it occurs, chiefly via the National Fraud Authority's Mortgage Fraud Forum.
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The Land Registry records ownership of all property in England and Wales. Lenders search the Land Registry records to confirm that the individual selling, or re-mortgaging, a property, is listed as the owner.
In Scotland and Northern Ireland, there are separate registers of property ownership.
Registers of Scotland is part of Scottish Government and holds the Land Register of Scotland and the Sasine Register. These registers record details of all property transactions in Scotland.
In Northern Ireland, the Land Registry is part of Land and Property Services, which comes under the Department of Finance and Personnel Northern Ireland.
If the registration of a property has been fraudulently changed, the fraudster can take a mortgage out against the property. This is particularly relevant for landlords, or other people who do not live in the properties they own, or where there is no mortgage on the property.
As the Land Registry guarantees the title to all registered properties, individuals who been victims of this type of fraud can claim compensation. The amount of compensation can be reduced if individuals have not adequately protected themselves.
The Land Registry has produced guidance that outline the steps that homeowners can take to help prevent fraud and protect the ownership of their property.
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Steps have been taken by the industry to ensure lenders are given accurate and relevant information on property valuations. This is particularly relevant to new-build properties where valuations on off-plan properties are not as comparable. The CML's work on valuation of new-build properties is aimed to ensure lenders receive relevant information on the true value of the property. This comprises of several declarations:
- customer: lenders may require customers to declare on the application form any discounts and incentives offered by the developer, via the CML's Disclosure of Incentives form;
- valuer: according to guidelines established by the Royal Institution of Chartered Surveyors (RICS) in cooperation with the CML, valuers must declare any discounts or incentives that could have a distorting affect on the agreed sale price. Valuers may also need to look for comparable evidence beyond the immediate development. If there are concerns that valuers have not been valuing in accordance with the Red Book, this should be taken up with the RICS.
- conveyancer: the Law Society of England and Wales has produced guidance for its members on mortgage fraud, which states that a solicitor is under a duty to inform the lender of the true price being paid for a property. This includes not only informing the lender of straightforward price reductions, but also of other allowances which amount to a price reduction. The examples given in the guidance include incentives offered by builders such as free holidays and part-subsidisation of mortgage payments. The CML Lender's Handbook also includes a disclosure of incentives form which conveyancers must complete for certain properties.
As with all frauds, the trends and typologies change over time, and CML works with members to identify these through regular meetings with members and external stakeholders.
