To catch a fraudster

According to a recent study by Galaxy, as many as 2.7 million Australians have deliberately falsified details on their loan applications by either exaggerating or underestimating figures.

But while 2.7 million borrowers may have admitted to falsifying their loan documents in one way or another, few make it through to settlement.

According to Veda, there were just over 6,500 incidents of mortgage fraud in 2011.

Mortgage Settlements Australia’s national compliance and risk management director Paul Agnew says there are “numerous reasons” for the proliferation of mortgage fraud, including desperation and lower moral standards.

According to Mr Agnew, a “large number of people [now] believe that falsifying applications is part of the norm and not a crime”.

New technologies have also helped borrowers feel comfortable dabbling in mortgage fraud.

“Criminals now have easier access to the information and technologies needed to commit mortgage fraud,” he says.

Of course, while borrowers form a majority of those responsible for mortgage fraud in Australia – law firm Gadens believes at least 80 per cent of all successful mortgage fraud can be attributed to the borrower – they are not the only ones massaging the truth for their own gain.

The mortgage market’s fraudsters also include brokers, originators, valuers, accountants, legal advisers and lenders.

In its most pernicious form, fraud can involve a syndicate of market participants colluding to obtain loans or property by a variety of unlawful means, including providing false information.

And according to Veda’s general manager of fraud and identity solutions, Imelda Newton, mortgage fraud ‘rings’ are more common than one might think.

“Of the recorded 6,500 mortgage fraud incidents in Australia in 2011, there was a real mix as to the culprits,” Ms Newton says.

“Individual fraudsters did not dominate the incident numbers and nor did fraud ‘rings’ – both really played an equal part.”

Geographically speaking, however, incidents of fraud tend to take place in the same areas year after year.

“In our research, we can look at which areas produce more cases of mortgage fraud than other areas,” she says, “and there are definitely some key ‘hot spots’ or suburbs that stand out among the rest. More interestingly, these ‘hot spots’ rarely change and are really one of the few constants in mortgage fraud.”

While most industry participants are at pains to emphasise a majority of practitioners are honest and diligent, as Price Waterhouse Coopers’ Fraud in the Mortgage Industry report revealed recently, even a level of mortgage fraud below one per cent represents serious potential losses in a multi-billion dollar industry.

So, where do the risks lie?

IDENTIFYING THE CULPRITS
First, it is important to know exactly what constitutes fraud and to identify some of the most common fraudulent practices.

According to Gadens’ John Denovan, the term ‘mortgage fraud’ covers a wide array of concepts, including misrepresentation of financial employment or identity, false valuation or intentional default following a cash-out action.

“Fraud is a very strong word,” he says.

“While there are a lot of borrowers out there who will partake in fraudulent practices in order to receive a bigger loan, there are others who supply slightly incorrect information or fail to acknowledge outstanding credit card payments.

“While sometimes this is a genuine mistake on behalf of the borrower, it does constitute fraud.”

In fact, Mr Denovan believes more than 90 per cent of all mortgage fraud cases are the result of carelessness on behalf of the borrower or the broker.

Due to the large amount of documentation involved in securing a mortgage, there are numerous areas that are vulnerable to fraud.

Gadens’ research shows the top five documents that most commonly contain falsified information are tax returns, bank deposit information, security valuation, employment verification and loan applications.

Borrowers can provide false information on their loan application in several ways, including income, debt and employment. They can also do this with their tax return, where they try to show they earn a higher income.

Similarly, many borrowers will also make changes to their employment dates, hourly or salaried earnings and job title. Another common fraudulent practice is making cash injections.

Mr Denovan says it is not unusual for borrowers to make large cash deposits before seeking the advice of a broker, giving the adviser the impression that the borrower has saved more than they actually have.

This is one of the most common practices since many borrowers do not believe it to be deemed “fraudulent”, he says.

“They will get their parents or someone else to deposit a huge chunk of money into their account to ‘prove’ that they have genuine savings,” Mr Denovan says.

Other borrowers may try to alter their property valuation. While this practice is not at all common, given that most brokers conduct their own valuations, it is not unheard of.

Moreover, this type of fraud can be committed by the borrower, the valuer or by both.

The borrower can alter the valuation on the actual document; the valuer can inflate the value of the home; or the borrower can pay the valuer to bump up the price of the property.

Veda’s Imelda Newton says it is even not unusual to find an application that has been “completely fabricated”.

“In instances where the mortgage fraud is committed by an individual, they will, in most cases, falsify their various loan documents, including employment contracts and bank statements. But in instances where the mortgage fraud is committed by third party or organised crime rings, they will, in most cases, falsify the personal identification documents,” she says.

“At Veda, we have seen cases where the person applying for a loan is completely fabricated. In some instances, the fraudster has just changed the date of birth on a real ID to avoid bad credit checks, while in other instances, they have invented the person entirely.”

While the latter example is much rarer, according to Ms Newton, it still happens, which is why Veda created an electronic ID verification tool that can be used both by brokers and lenders.

The ‘ID Matrix’ lets a lender or broker enter the potential borrower’s details into the system and check whether or not the person actually exists.

“We do this through various data sources,” Ms Newton says.

“We use certain data files including passports, Medicare cards, driver’s licences and the electoral roll, to name but a few. By checking the person’s details against all of these external data sources, we can confirm whether or not they are a real person, with a real credit history.”

PICKING THE FRAUDSTERS
While there are tools to help brokers and lenders identify mortgage fraud, QBE LMI’s chief executive officer Jenny Boddington says that, in most instances, brokers can simply use common sense to identify whether a loan application looks fraudulent.

According to Ms Boddington, most of the documents that QBE LMI sees that contain anomalies are pay slips and bank statements.

“Brokers should ask themselves whether the pay slip has been issued by a professional pay roll system or does it look like it could have been created using Microsoft Word?” she says.

“Does the pay slip contain all the information you would reasonably expect to see? If a broker has any concerns, it’s best to obtain an original bank statement and check it to see if it shows the borrower’s wage deposits.”

With bank statements, Ms Boddington says, the key to the broker’s identifying and preventing this type of fraud is personally sighting and photocopying original documents.

This also holds true for personal identification documents. Where possible, the broker should confirm the information and supporting documents with the issuer.

Meanwhile, with the non-disclosure of liabilities, the broker needs to ask the right questions. These include questions like, ‘Do you have a car loan?’ or ‘Do you have any store credit cards?’ which can help jog the borrower’s memory.

“Checking the borrower’s bank statement for payments to other financial institutions helps as a starting point for these questions,” Ms Boddington says.
“If the broker identifies any anomalies in the loan application or supporting documents, they should contact the lender to discuss their findings with them.

“Remember, the devil is in the detail and a close examination of some supporting documents may be warranted.  Brokers also need to stay current with trends and issues impacting the industry to enhance their effectiveness in the fraud prevention process.”

While a large percentage of potential borrower mortgage fraud can be identified by verifying and checking the loan documents for anomalies, Rate Detective Home Loans’ Warren Dworcan says brokers can also identify fraud by just “trusting their gut instincts”.

“When a client is very anxious for the loan to settle when there is no urgency, alarm bells should ring,” he  says.

Moreover, if the client is unwilling to provide documents that the bank has requested, or they deliberately avoid answering a broker’s probing questions, then it is usually because they are hiding something or being fraudulent.

“I also find any borrowers who get defensive when banks are asking for additional information are hiding something,” Mr Dworcan says.

“I like to live by the old adage ‘Where there’s smoke, there is fire’. Similarly, if it walks like a duck, quacks like a duck, it generally is a duck.”

FRAUDSTER-FRIENDLY TECHNOLOGY
While gut instinct may help a broker spot potential fraud, 2013’s fraudster is a smart, tech-savvy animal. And they have access to very advanced technology.

Printers, copiers and scanners can all be used to make fraudulent documents look just like the original.

A quick Google search for ‘How to make fraudulent documents look real’ came up with plenty of results – including kits that can be purchased online to falsify everything from a doctor’s certificate to marriage certificates.

Indeed, the internet is bursting with information on how to get away with fraud.

So, what hope is there for the honest broker? How can a single operator with a backlog of clients and upcoming appointments be expected to check and verify every single document?

Loan Market’s Paul Smith says there are simple steps that brokers can take to ensure any documents they are given are 100 per cent legitimate – steps that won’t force brokers to work on every loan application for an inordinate amount of time.

The first step is verbal verification, says Mr Smith. “Brokers should verbally verify employment income and employer, including independent verification of the employer’s phone number,” he says.

“Performing this verification as close to settlement as possible will help prevent scams that involve temporary phone lines.

“Secondly, all brokers should carry out independent credit report checks. Credit report checks should be reviewed all the way down to the last line.

Checking with the listed financiers, where possible, to check the current status of the enquiry [is also important].

“Thirdly, all brokers should ensure they receive proper borrower/guarantor identification, as per AML/CTF legislation.

“Fourthly, brokers should verify that the seller on the contract is indeed the owner of the property.

“And finally, it is vital that all brokers ensure the loan documents they receive are the originals and not facsimile or photocopy records, which may have been altered,” Mr Smith says.

This is a step that Mortgage Choice’s compliance and corporate standards manager, Tim Donahoo, supports.

Mr Donahoo says all Mortgage Choice brokers are encouraged to retrieve original documents from their client, rather than rely on photocopied or faxed versions.

“It makes business sense,” he says. “While it is possible to make a fraudulent document look like an original, it is very difficult and most brokers will be able to identify a fraudulent document straight away.”

REPERCUSSIONS FOR BROKERS
Provisions of the National Consumer Credit Protection Act (NCCP) now require brokers, by law, to take “reasonable steps” to verify a consumer’s financial situation.

Where there is reason to question information provided by a consumer, then it is particularly important that the information be verified.

If it cannot be verified, or there is evidence to suggest it is fraudulent, it is likely the credit should be assessed as unsuitable.

According to the Australian Securities and Investments Commission (ASIC), “a broker should not facilitate the provision of suspect information to a prospective lender, and should consider referring evidence of fraudulent conduct to the police”.

Where a broker has failed to identify borrower fraud, it is unlikely they will lose their licence. That said, Homeloans’ general manager for sales, Greg Mitchell, believes the repercussions associated with not identifying borrower fraud are still quite serious since such cases can put a “grey cloud over the broker’s name”.

“If a broker’s integrity or simply their professionalism is questioned, the repercussions can impact on a broker’s income and reputation – and the industry talks,” he says.

Where the mortgage broker themselves has acted fraudulently, however, the repercussions can range from expulsion from the industry to a prison sentence.

ASIC commissioner Peter Kell says under section 33(2) of the National Credit Act, the penalty for providing false documents is two years’ imprisonment, a fine of up to $17,000, or both.

“The Crimes Act provides the court with the power to multiply the fine by four in the case of corporations,” Mr Kell says.

“In addition, the broker may also be banned from engaging in credit activities and have their credit licence cancelled.”

In recent months, ASIC has made it very clear the regulator is “cracking down” on fraudulent mortgage applications submitted by brokers. And, in instances where ASIC has uncovered a fraudulent application, the industry watchdog has used the case to send the rest of the third party distribution channel a firm warning.

Late last year, in a landmark case, ASIC laid its first criminal charges under NCCP against a NSW-based mortgage broker who entered a plea of guilty to 10 charges, including mortgage document fraud.

Daniel Nguyen pleaded guilty to nine offences against section 33(2) of the National Credit Act for providing false documents to banks for nine home loans totalling more than $3 million between 29 July 2010 and 7 January 2011.

In addition, the Sydney broker pleaded guilty to one offence against section 11.2(1) of the Commonwealth Criminal Code and section 123(6) of the National Credit Act for assisting three clients to apply for credit contracts that were unsuitable for them between 28 September 2010 and 7 January 2011.

At the time of the offences, Mr Nguyen was the sole director and sole employee of MAI Pacific Pty Ltd in Bankstown.

The broker was given a two-year good behaviour bond by the Sydney District Court.

But Mr Nguyen isn’t the only broker to come under the industry watchdog’s eye. According to Mr Kell, ASIC has filed more than 120 credit matters for formal investigation since licensing came into force.

“ASIC will continue to concentrate on the mortgage broking industry and ensure that brokers are adhering to the new [NCCP] laws,” he says.

“We stress that brokers familiarise themselves with their obligations under the National Credit Act. They should know the law, read our guidance and seek additional/external advice if they feel they need it.

“While we aren’t in a position to nominate percentages due to broker fault and borrower fault, I can say that in a significant percentage of cases, brokers have been at least aware of false information or documents being provided, or otherwise have actively participated in the provision of false information,” Mr Kell continues.

“ASIC is particularly concerned with instances where persons have engaged in fraud or other misconduct relating to information provided in loan applications. Since the commencement of the NCCP, ASIC has banned six persons from engaging in credit activities for such conduct and has 18 other current investigations.

“In a majority of cases, these matters concern loan applications to ADIs which have been identified and reported by the industry.

“While ASIC regularly undertakes compliance reviews and publishes reports and guidance on compliance risks and good practice, we will not hesitate to take action where we encounter deliberate breaches, serious misconduct or significant risk of consumer detriment.”

In November 2011, ASIC published Report 262 on its review of finance brokers’ responsible lending practices between July 2010 and December 2010.

While the watchdog found brokers were aware of the responsible lending obligations and were taking steps to comply, there were also a number of areas in which improvements could be made.

“ASIC is currently finalising a review of how credit licensees with a large number of representatives – including aggregators – are monitoring and supervising their representatives’ compliance with the responsible lending obligations,” Mr Kell says. “We expect to publish a report of our findings in the next couple of months.”

THE BENEFITS OF NCCP
While Mr Kell has made it very clear that ASIC will continue to watch the mortgage industry “very closely” and “crack down” on fraudulent activity by brokers, it should be noted that since the introduction of NCCP, the number of fraudulent mortgage applications has significantly declined.

According to data from Veda, there were over 11,000 documented mortgage fraud incidents in 2009. In 2010, that number had decreased significantly, falling to 10,500.

The volume of incidents fell further still in 2011, tumbling to just 6,500 reported cases of mortgage fraud.

Gadens’ John Denovan says the decline can be attributed to NCCP: “Legislation has cleared out a lot of the cowboy brokers,” he says. “It has made the industry significantly more professional. Today, there are very few bad eggs.

“Brokers would never want to put their trail, career and livelihood in jeopardy. They are good, professional advisers. If and when mortgage fraud does occur, I would assume, in the majority of cases, it is as a result of broker carelessness,” he says.

“They haven’t properly conducted their due diligence. While this is bad and can ultimately cost them their trail, it does not mean that they are fraudulent.

“I think we will continue to see the number of mortgage fraud incidents drop as the industry continues to mature and become more professional,” Mr Denovan says.

Mortgage & Finance Association of Australia (MFAA) data reinforce his view.

According to the MFAA, only 12 mortgage brokers have been expelled since the introduction of the new NCCP regulations – a remarkable figure given that there are 10,000-plus mortgage brokers operating within the industry.