Fraud in the UK is a billion-pound illegal business with fraudsters targeting perceived weaknesses in systems. Be it individuals misrepresenting their own circumstances to obtain services that would otherwise be out of reach or the threat of identity fraudsters masquerading as someone else, fraud continues to be a major cause for concern among mortgage providers.
Mortgage fraud has not been immune to the recession and its aftermath. As pay freezes, job cuts and business closures hit pockets hard in many parts of the country, attempts have steadily increased.
Information from the National Hunter anti-fraud data sharing system revealed that 15 in every 10,000 mortgage applications were fraudulent in 2006. By 2010 this figure had more than doubled to 32 in every 10,000, a level that has been more than maintained in the first half of 2011.
Mortgage fraud modus operandi
The majority of mortgage fraud is committed by dishonest consumers. By manipulating key information such as employment status or income, or attempting to conceal a patchy or poor credit history, they try to access facilities they would not normally be accepted for.
If the individual cannot then meet the financial commitment the lender incurs collections and recovery costs plus the potential bad debt loss.
First-party fraud made up 97% of mortgage fraud last year, up from 93% in 2009. This was bolstered by self-cert lending rule changes that affected self-employed borrowers without the requisite number of years’ accounts as proof of creditworthiness. Faced with a choice of no loan, a less competitive rate or a more affordable mortgage via misrepresentation of job status, many chose the last option.
The Terraced Melting Pot demographic is where first-party fraudsters are most likely to come from
The most likely perpetrators of first-party mortgage fraud come from the demographic labelled by Experian’s Mosaic classification as the Terraced Melting Pot young, poorly educated people working in relatively menial, routine occupations who live close to the centres of small towns.
This group was responsible for 16.5% of recorded first-party mortgage fraud cases in 2010, attempting it at a rate equivalent to more than two and a half times the national average.
Another demographic prone to misrepresenting their information is, ironically, the New Homemakers, which attempted almost a third more mortgage fraud in 2010 than in 2009.
With a high proportion of young single professionals and couples, this group tends to inhabit small starter homes, likely to have been built in the past five years and designed for people on average incomes.
While the bulk of mortgage deception is first party, identity fraud remains a significant threat. Indeed, mortgage providers frequently express concerns about organised criminal gangs running complex and obscure fraud rings.
Although this type of fraud is less common than first-party fraud, the size and speed of the losses can be more significant. It involves stolen or created identities, with networks of individuals making multiple applications to gain access to significant sums of money. Often these frauds involve conveyancing firms that have either been duped or are complicit in the deception.
Tackling the threat
Faced with rising mortgage fraud, providers have become sophisticated in how they combat it using robust tools to verify the identities of those they are dealing with, strong measures at the point of application and innovative analytics to monitor signs of organised fraud or other suspicious activity within their account base.
The first and best strategy is prevention identifying and stopping fraudsters at the point of application. As a critical starting point, lenders need to ensure they can manage identity validation and verification of applicants.
They are increasingly turning to electronic approaches to confirm customer identities. Modern authentication systems capture, check and validate identity and address details in just a few seconds.
This protects the organisation from fraud and speeds up the customer validation process, increasing client satisfaction.
The next step is to check the information provided by the applicant. Sophisticated anti-fraud systems enable lenders to screen data in real-time. Logic checks can be applied to highlight inconsistencies and it is considered best practice to check data against a range of external sources, including all past applications and databases of known and suspected frauds, to highlight data manipulation or other anomalies which could indicate suspicious activity. This allows the mortgage provider to prioritise cases for further investigation.
The emergence of sophisticated fraud networks has necessitated deeper analysis over recent years. In-depth analysis of information held in internal systems and shared industry databases enables lenders to identify and cluster groups of connected applications and thereby identify and prioritise organised fraud networks for further investigation. This level of understanding provides additional insight that can be factored into anti-fraud systems used at the point of application.
Protecting the bottom line
While the identity and motivation of fraudsters varies from dishonest customers to organised criminals, losses resulting from fraud always affect profitability. Lenders that keep a tight lid on fraudsters will keep a tighter grip on their bottom line. But meeting this challenge is not easy identifying fraud, monitoring it and then curbing its impact is a full-time endeavour.
The data, technology and expertise firms like us provide is helping many providers become sophisticated in how they combat fraud. The key is to provide these defences at the same time as ensuring genuine customers can access your business on their terms and at their convenience.