A specialist has warned that banks and brokers must overhaul their verification and analytics systems to stay ahead of increasingly sophisticated mortgage fraud.
Australian lenders are under mounting pressure to upgrade how they detect and prevent mortgage fraud, with FICO senior partner Corey Smith warning that the relentless wave of bogus income documents and AI‑generated paperwork had catapulted the problem beyond traditional ‘liar loans’ into an industry-wide plight.
Smith, who has more than two decades of experience in credit and fraud prevention, said recent revelations around doctored income documents in introducer channels highlighted that mortgage fraud was now deeply intertwined with anti‑money‑laundering risk.
“Anti‑money laundering has been a CEO killer,” he told The Adviser.
“If you look at the history, look at Westpac, look at CBA. CEOs have lost their jobs over this sort of activity.”
He said that technology had changed the game for both sides of the market, stressing that the same tools used to automate workflows were now readily available to fraudsters.
“It’s becoming easier for the fraudsters. It’s becoming harder for the brokers, harder for the lenders, to identify the challenges,” Smith said.
Brokers at the ‘coalface’ of detection
Despite the focus on alleged misconduct in parts of the broker channel, Smith stressed that most intermediaries were critical gatekeepers in stopping bad loans before they reached credit teams.
“Brokers are at the forefront, they are at the coalface, and so they do have a role to play here, the vast majority are exceptionally good at this and have been doing it for a very long time,” he said.
However, he said the emergence of AI‑fabricated payslips and bank statements demanded a deeper level of inquiry.
Smith said brokers needed to fastidiously probe client conversations and document checks.
“Their client interviews... make sure they dive deeply into the client’s background, their employment, their income, their financial situation,” he said.
“Are there any discrepancies in that? Is there anything that doesn’t quite smell right?”
Smith noted that certain document types warranted further scrutiny, given their history in fraud cases.
“They need to look at payslips, tax returns, bank statements, commonly falsified documents,” he said and added that where possible, brokers should seek independent income verification.
He also raised behavioural and process‑related red flags that should trigger extra checks.
“If a broker is trying to facilitate a loan and there are third parties contacting them, maybe it’s developers or other brokers applying pressure to expedite the mortgage, I think that is something they should be keeping an eye out for,” he said.
“A straw buyer profile is a borrower that is almost disengaged to the process. They don’t seem to care about the interest rate. They don’t seem to care about the repayments.”
Open banking and the push for ‘single sources of truth’
While fresh research has positioned open banking as a tool to combat forged documents, Smith said it remained underused and on its own would not solve the problem.
“It’s obviously a very small proportionate footprint in the market today. It’s not a silver bullet,” he said.
Instead, he said Australia needed to move beyond digitising legacy manual checks and build access to income and tax data that could be queried at the point of application.
“If we were doing a more formal review into the Australian economy, you’d be looking at complete sources of truth, single sources of truth,” Smith said.
“I think industry should be lobbying the ATO to have direct APIs, where, as a single source of truth, income can be verified by lenders – go to the source of truth and actually find out.”
Smith pointed to international examples where tax authorities provided API‑based services, noting that similar arrangements in Australia could improve credit quality and change borrower behaviour.
He added that the measure could be monetised by government and would sit alongside open‑banking feeds and third‑party verification providers.
Mapping fraud networks and strengthening controls
Beyond income verification, Smith said banks and lenders needed to view fraud across the entire customer and referrer network.
“If you think about it, fraud syndicates leave connection patterns – common brokers, common accountants, common solicitors, perhaps IP addresses, device IDs, deposit sources,” he said.
“These things can be mapped using network analytic tools these days, and you can run that across your back book.”
By running these tools through existing portfolios and new flows, he said lenders would be able to see when a fresh application linked back to a previously identified network.
That approach, he said, was critical in an environment where recent scandals had revealed complex webs of professionals and intermediaries facilitating fraudulent loans.
Smith also urged lenders to invest in “really sophisticated document verification capability” that could plug into a range of third‑party data sources, from superannuation and PAYG checks through to specialist verification databases.
“I think the banks need to make sure that they’re looking into deposit source patterns and making sure that they identify any potential risk for further investigation,” he said.
Why smaller lenders may hold an advantage
Asked how smaller banks and non‑bank lenders could respond, Smith said that less complex institutions were better placed to adapt.
“The smaller institutions are more agile, and their ability to make changes and introduce new software are a bit easier and probably more cost-effective,” he said.
For all players, he said the economics of inaction was becoming harder to defend as regulators sharpened their focus on mortgage fraud.
“This software is accessible to all organisations, the cost to deploy fraud prevention capabilities is minuscule when you look at the risk of getting it wrong, and the regulated fines that you can be open up to,” Smith said.
He noted that fixing the problem could not be left solely to individual brokers or banks, stating that governments and regulators needed to play a more active role in reshaping the data infrastructure.
[Related: ASIC confirms it is investigating CBA loan fraud]
