Mortgage Fraud

Understanding Mortgage fraud is essential in the financial industry. It is a serious crime that can cause lenders significant financial loss and distress to borrowers. 

In an industry where trust is paramount, mortgage advisers must understand the different types of mortgage fraud and how to protect themselves and their clients from potential harm. 

Types of mortgage fraud

• Income Fraud: A borrower intentionally falsifies information about their income to qualify for a mortgage. They might exaggerate their earnings, claim false employment, or use forged documents to back up their lies.
• Occupancy Fraud occurs when a borrower claims that the property they’re buying will be their primary residence when they intend to use it as a rental or investment property.
• This is fraudulent because lenders typically offer lower interest rates for primary residences, assuming they carry less risk than rental properties.
• This also works the other way, called BTL Gaming, where a borrower claims the property is a buy-to-let but plants to live in the property.
• Again, this is fraudulent as the borrower bypasses the more stringent affordability rules of residential mortgages. 
• Valuation Fraud: In this type of fraud, the value of a property is intentionally overstated to secure a higher loan amount or minimise the deposit amount. This can be done by the borrower, a dishonest valuer, or a collusion between the two.
• Identity Theft: This happens when someone uses another person’s identity to secure a mortgage. The fraudster might use stolen personal information, like Social Security numbers and bank information, to complete the application. This type of fraud can occur in an unencumbered property where a tenant poses as the owner.
• Transaction Fraud: This involves complex arrangements between multiple parties, including buyers, sellers, valuers, brokers, and solicitors, to defraud a lender. It often involves inflated prices, hidden genuine buyers, or fictitious properties.

The importance of prevention

As mortgage advisers, we must identify and prevent mortgage fraud. Here’s why it’s so important:

• Protecting the Industry: Mortgage fraud damages the mortgage industry’s reputation. It makes lenders more cautious and can make it harder for honest borrowers to secure loans.
• Financial Security: Fraud leads to substantial financial losses for lenders, which can, in turn, affect the overall economy.
• By being vigilant against fraud, we help maintain financial stability.
• Legal Consequences: Being implicated in a mortgage fraud case, even unknowingly, can have serious legal repercussions. Advisers may face fines, loss of lender agencies or regulatory approval, or even jail time.

How do you protect yourself and your clients?

• Verification is Key: Always verify the information provided by the borrower. Use independent sources to confirm employment and income, and work with trusted valuers.
• Stay Informed: Understand the common signs of fraud and stay up-to-date on the latest scams. Knowledge is your first line of defence.
• Ethical Practice: Follow ethical lending practices. Do not bend the rules for a client, no matter how convincing their story might be. 
•  Know Your Client (KYC): Take the time to get to know your clients. Understanding their financial situation, needs, and capacity can help you identify inconsistencies or suspicious requests.
• Report Suspected Fraud: If you suspect a client or a transaction is fraudulent, report it to your supervisor or the appropriate regulatory body. You might prevent a crime and save your company from a costly mistake.

As mortgage advisers, we play a significant role in preventing mortgage fraud. It’s a part of our responsibility to our clients and company, as well as to our industry and economy. 

Staying vigilant, informed, and ethical can contribute to a safer, more trustworthy lending environment. Mortgage fraud has a longstanding history within the industry and is not a recent development. The landscape of the mortgage lending sector has undergone a profound transformation.

The collapse of the subprime market has triggered substantial alterations in the operations of lenders and other entities participating in the property market. Several mechanisms previously exploited by fraudulent actors, including buy-to-let mortgages, have become less prevalent.

Lenders now exercise greater prudence when approving loans for prospective property buyers. Read more