UK: Getting Your House In Order: Increasingly Sophisticated Mortgage Fraud - Are You Prepared?

Last Updated: 20 June 2008
Article by Catherine Connolley

The recent credit crunch has had numerous negative effects- including a marked increase in the discovery of mortgage fraud. The current state of the market is leading to a rise in claims by lenders, similar to those seen in the 1990s when mortgage fraud was widespread. Lenders and professional advisers are being warned that they need to be more aware of the developments in this area to ensure that they are fully protected

An increasing number of mortgage fraud schemes are being exposed and the methods used are becoming ever more sophisticated:

  • Application fraud – This is what the Law Society has referred to as 'opportunistic' fraud where the mortgage application contains false information, such as exaggeration of income, or incorrect financial details.

  • Identity fraud - This may involve the creation of a fictitious identity, or the borrowing of a genuine property owner's name. Lenders and advisers should pay particular attention to transactions in which the buyer and seller are family members, as key details can be hidden from the lender. Thorough money laundering and identity checks should be carried out on prospective borrowers.

  • Fraud common to New Builds – The Council of Mortgage Lenders estimates that the average losses on loans on new builds currently stand at approximately £45,000 per property. Other frauds include undeclared incentives, artificially inflated valuations and the omission of new home warranties and certificates.

  • Criminal Syndicates – Criminal syndicates organise finance on a number of properties, possibly through the vehicle of a Property Investment Club. This is commonly seen in new build complexes or large scale renovation projects. The Law Society reports that the buy-to-let market is particularly vulnerable to this type of organised fraud.

It is crucial that lenders and professionals involved in property transactions are aware of the warning signs that could indicate fraud. The Law Society has issued guidance for solicitors. However, this advice can apply to all professionals. The main points to watch out for are as follows: -

  • Suspicious behaviour by the borrower, for example, where they seem unusually uninterested in the transaction. This could mean that they are not the real purchaser and a false identity is being used.

  • Unusual instructions from the borrower, or steps during the transaction which seem out of the ordinary. It is important to keep checking that fundamental parts of the transaction, such as the purchase price and the parties, do not change throughout the process.

  • Incomplete contract documentation, where details of the parties, or financial information have been omitted.

The Law Society has also provided guidance on the steps which lenders and other professionals can take to minimise their risk of being involved in mortgage fraud. Many of these will be procedures that organisations should already have in place as a matter of good practice:

  • Ensure that full identity and money laundering checks are undertaken to verify the identity of the borrower and those involved in the transaction. If there are other professional organisations such as solicitors or valuers involved who you have not previously dealt with, take steps to familiarise yourself with their business. It is also advisable to carry out Company Searches on organisations involved.

  • Discuss any issues that concern you with the borrower. Question anything that you are suspicious of and make sure you are satisfied that the transaction is legitimate.

  • Verify all relevant documentation, ensuring that the main points, such as contract price, remain consistent. Also check any signatures.

The guidance on how to spot and avoid potential frauds should arm organisations such as solicitors and valuers with the knowledge that they need to prevent them from becoming a victim. However, these professionals need to be aware that they can be held liable if they are party to a fraud, even if they were unaware of it and did not actively participate.

Solicitors and valuers could be faced with a claim against them for professional negligence if a lender believes they were involved in a mortgage fraud and did not take the necessary steps to avoid it.

Although lenders should take all possible steps to assure themselves that no mortgage fraud occurs, responsibility also lies with their professional advisers. The advisers' failure to spot a potential fraud and act appropriately could provide the lender with a potential lifeline through which they may be able to recoup their losses.

We at Glovers Solicitors LLP have handled many claims like this, both recently and in the 1990s when such fraud was also prevalent. The head of our professional negligence unit, Catherine Connolley, is also one of the founder members of the PNLA (Professional Negligence Lawyers' Association) Lender Claims Group.

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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