Much has been written about the flags of mortgage fraud, with a
description of flags often buried in articles not read very
carefully. In the interests of brevity, and as a tool for you and
your staff to have a ready simple guide, here are some of the most
common flags of fraud. For a more detailed explanation, see my
papers on real estate fraud in the 2014 and 2015 Real Estate Summit
1. Things not called for in the agreement of purchase and sale
deposits "paid" but not
called for by the agreement of purchase and sale; even if you see
cancelled cheques or receipts for the payments, uncalled for
payments made are a flag of fraud.
VTB mortgages not called for by the
agreement of purchase and sale; It means all the cash to be paid on
closing is not being paid and the VTB mortgage may not be good
amending agreements reducing the
purchase price because for example renovations were not made to the
property as required by the agreement or to reflect additional
deposits paid; it may mean the lender is lending on expected fair
value without notice of the price reduction
deposits or additional deposits paid
directly to the vendor; payments to vendors as additional deposits
are not usual and suspicious, even with receipts or
acknowledgements of payments.
2. Payments to third parties unrelated to the transaction, even
if you get a direction
Closing proceeds should be paid to the vendor or borrower or to
pay off existing mortgages or other usual expenses only. A
direction to pay third parties unrelated to the actual transaction
is a flag of fraud and needs to be further investigated and where
necessary, the lender advised. A lawyer should not be the
client's banker. Never forget your duty to the lender. Note
that some title insurers require funds on private mortgage
transactions to be paid to discharge prior mortgages or executions
or to the registered owner only. It is not sufficient to pay funds
to a borrower's lawyer in trust on direction.
3. Clients willing to pay premium legal fees
Excessive legal fees for standard transactions are often seen as
flags of fraud suggesting that the lawyer will prefer the interests
of the personal client over that of the lender client or that flags
of fraud may be ignored in the interests of realizing an
4. No real estate agents involved or real estate agents named
in the offer but no invoice for the balance of commission or
instructions not to pay them
Some fraudsters put the name of an agent into an agreement of
purchase and sale to make it look legitimate but you are instructed
as vendor's lawyer not to pay the agent; If there is no named
agent or no real agent, the purchase price on the offer may not
reflect a market transaction and may be inflated to induce the
lender to lend more than the property is actually worth.
Flips are legal but the issue is disclosure; the ultimate lender
must be told of the price increase.
6. Recurring parties
The same people appear in a series of transactions, sometimes as
buyers, sometimes as sellers with transactions dubbed
"investment deals". The parties do not appear to know
much about the deals or do not otherwise appear to have the
"means" to buy these properties.
OTHER THINGS TO WORRY ABOUT
You have a duty not participate in a
fraud even if you are not acting for the lender.
Do not assume that the lender knows
about the ultimate sale price, has seen the agreement of purchase
and sale or amendments, or has been told everything relevant by the
mortgage broker. Lawyers have a duty to disclose or advise of
material changes in a transaction.
Do not rely on your client's
acknowledgement or receipts that he or she received or paid any
additional cash deposits.
Do not rely on your client's
direction re funds if the money is going to non-deal related
Always have a real forwarding address
for your vendor client. Watch out for those who say "I will
come in and pick up my report and my cheque" and have no
verifiable address. If your vendor client sold, where are they
moving? Get some proof.
Check client ID against the property
they are selling. Get the story if the ID does not match. If there
is some "story", substantiate it.
Be suspicious of transactions among
"friends", relatives, etc. that involve no real estate
agents. Some frauds occur where the client tells the lawyer some
"story" which the lawyer accepts at face value such as
selling to a brother, a cousin, exchange to satisfy a debt, a
private transaction. These are often fraudulent mortgage
transactions with inflated values and a typical flag of fraud.
Remember your duty to the lender and
your obligations under the Rules of Professional Conduct.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Russell v. Township of Georgian Bay provides a useful reminder of the fact that while municipal officials sometimes appear to hold all of the cards in disputes with home owners, that is not always the case.
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