Fraud: awareness and prevention

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 financial crime and mortgage fraud, falling into a two main areas:

• Mortgage Fraud: awareness and prevention
• Anti-money laundering

This page contains the following:

• Background 
• Application Fraud
• FSA intermediary fraud initiative
• Identity Fraud
• Registration Fraud
• Valuation Fraud

Background

Mortgage fraud in its various forms is an area of considerable relevance to the industry. The FSA has carried out substantial work in this area, with publications available on its fraud library, and are currently reviewing their position following the identification of an increased risk of mortgage fraud in their 2008 Financial Risk Outlook. 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

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 now virtually all 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 manual or automated plausibility of income check. For a manual system, this includes regularly updated guidance manuals and training for staff on the parameters of what is realistic. For those with an automated system, this includes regular back-testing and the ability to perform manual reviews for those cases near the margins in order to identify potential problem cases; 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. 

In 2004, the FSA conducted a detailed investigation into mortgage application fraud especially in the self-certification mortgage market and concluded in their final letter to Chief Executives that "lenders generally have adequate controls in place to protect themselves from becoming conduits" for this sort of fraud. In February 2008 Phillip Robinson, Director of Financial Crime and Intelligence, gave a speech at the CML’s ‘Understanding Mortgage Fraud’ seminar highlighting the need for the FSA and lenders to continue working together to stamp out mortgage fraud.

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. In response the City of London Police announced that they will be appointing 50 investigators that will be focused on mortgage fraud. One of the tasks of the group will be to co-ordinate mortgage fraud investigations the cut across police jurisdictions.

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The FSA intermediary fraud initiative

The FSA intermediary fraud initiative was launched by the FSA following discussions with the CML in April 2006. It provides a process in which lenders can report, on a voluntary basis, cases of proven or suspected mortgage fraud where there is strong suspicion of intermediary involvement.

The aim of the initiative is to gain a greater understanding of such fraud, to gain a better sense of its extent, and to tackle reported cases more effectively. The CML financial crime panel has been in discussion with the FSA about the initiative and is supportive.

The FSA asks that as many firms as possible report, on a voluntary basis, cases of proven or suspected mortgage fraud where there is strong suspicion of intermediary involvement. The specific reporting criteria, which are set out below, have been considered with care, in order to promote reasonable consistency as to what is or is not reported, and to ensure that the burden on participating firms is not excessive. A number of firms have indicated that they currently report such fraud to intermediaries on this basis.

The reporting criteria

Following discussions with the CML financial crime panel, the FSA have set out the following reporting criteria:

They would like lenders to supply details of proven or suspected mortgage fraud where they have suspicion of broker involvement:

• Sufficient to have caused removal of that broker from their panel; or
• where they now refuse new business from an individual within a brokerage; or
• where subsequent investigation identifies fraud.

The FSA focus is on brokers:  they are not interested in cases of applicant fraud where there is no suspicion of broker involvement and the broker has not been removed from a lenders' panel.

The examples below are not exhaustive, and the FSA appreciates there will be other examples of fraud that result in a lender removing a broker from their panel.

Suspected fraud

• Doubts over income and employment details. 
• Suspicious behaviour or trends occurring on completed accounts; for example, a broker whose completed cases have an unusual rate of suspicious arrears/repossessions, benefit claims or fraud complaints.
• Links with other applicants where fraud has not actually been proven, ie, shared addresses, accountants, purchases on same development, identical loan amounts, etc.
• Links between different mortgage applicants, ie, shared bank accounts, addresses, etc. 
• Applications cancelled when further information/verification is requested. 
• Suspected fraudulent documentation.
• One or more of the above in several cases from the same broker or other suspicious trends.

In terms of the level of information to supply the FSA would like a summary of the investigations the lender has carried out including:

• Name of broker. 
• Details of individuals involved at the broker. 
• Details of fraud and evidence. 
• Names of customers involved

The FSA may wish lenders to supply them with further evidence if a case is to be pursued; they will discuss as appropriate.  

All reports are acknowledged and treated as confidential. The FSA is keen to feed general lessons learned, back to the industry as appropriate. The FSA is also keen to encourage as many firms as possible to take part in this voluntary exercise, which will provide valuable data as well as offering opportunities for the FSA to pursue cases of intermediary fraud in a more concerted and joined up manner.

Contact details

If you have any information you wish to submit to the FSA, or any queries about the scheme, please contact:Russell.Shotton@fsa.gov.uk

Outcomes of the scheme to date and next steps

To date the FSA have received more than 200 reports from over 30 lenders. From this intelligence more than 60 cases have been referred for enforcement action, which has resulted in a number of brokers have been suspended or banned.

The CML and FSA are currently reviewing the scheme to look at ways of providing greater clarity regarding the use of lenders’ intelligence and improving feedback routes to those lenders that submit reports.

Identity Fraud

Hijacking an individual's identity and then applying for credit in the victim's name is also becoming 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 CML is working with other organisations including the government on developing steps to mitigate the effects of identity theft when it occurs. HM Treasury has launched a Public-Private Forum on Identity Management chaired by Sir James Crosby (former chief executive of HBOS) comprising various government bodies and private companies. Following a concern raised by the National Consumer Council, it has formed a multidisciplinary working group to develop co-ordinated measures to assist victims of identity fraud, in which the CML participates.

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Registration Fraud

The Land Registry records ownership of all property in the UK. Lenders search the Land Registry records to confirm that the individual selling, or re-mortgaging, a property, is listed as the owner.

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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Valuation Fraud

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;
• valuer: according to new guidelines established by the Royal Institute of Charter 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 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.

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