Fake payslips and bank statements have been the weapon of choice for mortgage fraudsters for some time. However, as the market has adapted, so have the scammers, who are increasingly finding new ways to defeat lenders’ anti-fraud systems.
A growing army of borrowers tries to crack lenders’ affordability tests by hiding existing loans or outgoings, with some taking it to extremes by inflating their income and employment status.
On top of this, lenders’ defences are being tested by a continuous stream of buy-to-let ‘gaming’, which is proving hard to combat and threatening to destabilise their efforts to stay one step ahead of the fraudsters.
While recent figures from Experian reveal a fall in attempted fraud, this is not necessarily what lenders and brokers are experiencing at the coalface, indicating that the mortgage market’s war on fraud is far from over.
Experian’s figures for the final quarter of 2014 show 84 fraud cases were detected in every 10,000 applications – down slightly from 87 cases in the same period in 2013. But does this correlate with what firms are finding?
Brightstar head of mortgages Chris Bramham says his firm has seen an increase in attempted mortgage fraud, which he says is due not only to the implementation of the Mortgage Market Review but also to the impact of the recession, with people facing problems with adverse credit and low wages.
“A lot of low-level fraud stems from people trying to get around the affordability measures,” he says. “Some of it is not necessarily fraud as much as people being economical with the truth.”
Other people, he says, lie about their employment status and claim, for example, that they are an employed person when they are in fact a self-employed director trying to get around the challenges of obtaining a mortgage.
“This is very common and you have to be very vigilant to spot it,” he says. “At other times, people declare that they are living alone but instead are living with a partner with poor credit.”
Other examples of concealing information include where someone has declared a default but not that they have received credit from a payday lender in the past 12 months.
In addition, says Bramham, there are still sophisticated fraudsters who submit fake payslips and statements, or even invent the company they work for.
Having launched officially at the end of 2014, Fleet Mortgages has been operating for less than six months. Chief executive Bob Young says even in this short period the firm has experienced attempts at fraud.
“We have already had attempts at valuer fraud, suspicious documentation, the use of inflated incomes, undisclosed adverse credit and undisclosed addresses,” he says.
Young adds that he is most concerned about identity fraud.
“The positive is that we have picked up all these attempts and, given that we have spent a considerable amount of money on our fraud detection and prevention systems, this is already proving to be worth the significant investment,” he says.
“It’s obviously important for the entire industry that all stakeholders operate at the highest levels when it comes to stopping fraud and we all know this will require ongoing resource and investment in order to do this.”
Pink director Mark Graves believes the MMR has weeded out most lower-level fraud, due to the tightening of lenders’ systems.
“I do not believe there has been an increase in attempted fraud,” he says. “I suspect lenders say they have found more but we have not seen an increase in fraudulent activity within our network. But our systems and procedures are very tight.”
He adds, however, that the industry now faces ‘hard core’ fraudsters who have become more sophisticated.
He says: “It is a real concern that professional criminals are finding ways of beating the system. They will continue to exploit the weakest link in the chain, so brokers must make sure it is not them.”
Association of Mortgage Intermediaries chief executive Robert Sinclair believes, however, that the market is seeing simpler types of fraud precisely because of the MMR. This, he says, may be where customers attempt to misrepresent their employment, income or expenditure, or hide related costs such as maintenance payments, dependents or other debt.
But the most worrying trend, says Sinclair, is the increasing use of buy-to-let fraud, where some consumers may not even realise that what they are doing constitutes mortgage fraud.
“There are many consumers who see abusing buy-to-let to get around the affordability rules as fair game,” he says. “We should be clear that these are discussions in workplaces and pubs around the country.
“This is fraud and consumers and brokers need to be aware of that. The consequences can be severe,” he warns.
Gaming of the market
The Financial Conduct Authority warned last August that borrowers might attempt to game the buy-to-let market to circumvent lenders’ new affordability measures. The message does not appear to have deterred potential fraudsters but rather, if anything, to have highlighted the opportunity.
Precise Mortgages managing director Alan Cleary says gaming of the buy-to-let market happens every day and probably to every lender. He says: “Seventy-five per cent of what we see as potential fraud is from buy-to-let. The market appeals to mortgage applicants because they do not have to meet the same affordability rules as they would in the residential market.
“Buy-to-let fraud is not easy to spot,” he adds. “You often can’t prove it even if you suspect it, until the person buys the property and they move in.”
However, Cleary says certain things on an application form can set off alarm bells – none of which he wishes to make public.
“There are certain key triggers that alert us as to whether it may be fraudulent. Technology is a massive tool in the fight against financial crime; you can find out all sorts about the person and the property just by using the internet.”
Cleary says his lender still receives fake documentation but this has probably slowed as lenders have cottoned on and improved their detection systems. Another tactic that causes potential problems is undisclosed adverse credit, he adds, where applicants manipulate their address history.
Countrywide Surveying Services technical director Martyn Stones says the firm continues to submit to lenders increasing numbers of suspicious activity referrals month on month.
“While this is likely to be the result of better training, increased awareness and a more streamlined referral process than evidence of increased fraudulent activity per se, the main reason for referrals continues to be scheme abuse with over 50 per cent relating to hidden buy-to-let,” he says.
“This, coupled with indications from our lending partners that, on average, 80 per cent of all referrals by valuers result in something untoward being discovered, means that we continue successfully to prevent millions of pounds of fraudulent lending each year.”
London & Country associate director of communications David Hollingworth says the firm encounters people who call its offices to explain their situation and, when the adviser says it may not be possible to get a mortgage due to affordability issues, they start asking about buy-to-let.
“They can suddenly start changing their tune,” he says. “It may be that they start talking about buy-to-let when they have quite clearly just said they want the property to live in.
“I think, sometimes, that gaming of the market is talked about a little bit as if it is broker generated but, actually, a lot of it comes from customers.”
In such a scenario, Hollingworth says the adviser flags up the call and the customer’s details so that when they call back the adviser knows about the previous conversation.
The best intentions
The MMR has, in many ways, made it easier for applicants to fall into the trap of committing fraud, with some unaware of the potential consequences of not disclosing all necessary information.
Bramham says: “Often people do not put down all the information they have been asked, so they declare living costs of £200 per month when they’ve got four children, or they don’t disclose dependents at all, and then you find on their bank statement that they are in receipt of child benefit,” he says.
“Often they understate the amount they pay on their council tax or Sky television package. They think it doesn’t matter because they believe you have no way of finding it out, but often this will come up on their bank statement.
“Often there are a lot more problems than those disclosed up front, although it is always much better for a client to disclose it at the beginning because we can work with this, and technology allows us to find out if someone hasn’t declared something,” he says.
However, Graves says: “You cannot unintentionally commit fraud. Everybody is aware if they tweak or change an application form to make it read better. It is a deliberate act. The question is: does the industry want to class lying on the affordability calculator as fraud?”
He continues: “I am not sure any broker who has been ‘found out’ putting a food bill as £100 per month when the actual cost is £200 a month is going to be struck off a panel. However, if you keep getting away with it, do you accept this as the norm and move to the next level of fraud? Once you start manipulating the system, where do you stop?
“The MMR has created a problem because lenders ask the same questions but with different interpretations of affordability. So it is possible to answer the question through habit in a way that a particular lender does not need to know,” he says.
“For example, you may spend £3,000 on holidays but would you if interest rates went up by 5 per cent? Holidays would be the first thing most people would cut back on. So you need to be clear in what context each lender asks the question. This is the only way I believe you can genuinely make a mistake.”
Graves says the days of ‘helping’ a client to get an application through are long gone.
“An adviser is the first line of defence in fraud. A lender, rightly, should expect the adviser to make sure the facts coming to them are accurate,” he says.
“If there is a problem with an application form, an adviser must understand the start point from a lender’s point of view, which is that they have been complicit in completing the application.
“If the case has come via an introducer, you very much are guilty until proven innocent, especially in the eyes of the lender. It is in the adviser’s best interests to help ensure that every introducer they use is legitimate and clients do not misrepresent their information.”
Countrywide head of mortgages Graham Wood says there are always occasions where customers do not believe they are doing anything wrong in not disclosing adverse credit or outstanding loans or credit card balances.
“It therefore falls to the professional intermediary to educate the customer on the pitfalls and implications of non-disclosure,” he says. “Unfortunately, despite best efforts, we see customers continue to decline to share this information, whether intentionally or through naivety, ultimately causing cases to fail lender underwriting.
“This is an issue for all brokers and therefore we are working closely with our lending partners to seek ways that we can share information and best practices, while overcoming the limitations placed on intermediaries who have restricted access to the fraud checking ‘tools’ available to the lender population.”
There is no doubt that the increasing use of technology has assisted lenders and brokers in detecting attempted fraud. But is it also aiding and abetting would-be fraudsters?
“Technology certainly plays its part because potential borrowers who are intent on deceiving are more likely to have an awareness of the tools available to replicate fraudulent identification and fabricated income information,” says Wood.
“However, technology also helps lenders to ‘test’ authenticity and past customer activity. Looking forward, the ability for the broker population to have access to these verification systems available to lenders would help in our combined fight against financial crime.”
Graves says technology has taken fraud to another level.
“I genuinely don’t think a mortgage broker can spot a top-quality fraudulent driving licence, or passport, for that matter,” he says. “Even when given a fraudulent one to look at, it requires help to spot the error.
“On the other hand, technology is also playing its part to identify the fraud. I would not like to say which side is coming out on top.”
Young believes online fraud has grown at a similar pace to the internet and technology itself. He says: “The increased mobility of data and devices makes it easier for the fraudster to commit fraud. However, it also makes it easier for lenders to detect it and that’s obviously a positive – especially given the fact that the fraudsters are not going to stop attempting to commit fraud.
“The problem is that we are essentially dealing with a faceless customer who could be anywhere in the world. This doesn’t apply just to mortgage fraud, by the way, but to attempted fraud across all other industries.”
Bramham says potential fraudsters can quickly obtain information that is completely fake.
“Supporting documentation can be obtained and is obtained, and that includes sophisticated technology to produce passports, driving licences, etcetera. Even to the trained and experienced broker, some of these documents are so sophisticated that they are difficult to tell apart from the real ones,” he says.
“However, technology also helps us to beat fraud as we can use Experian, Office for National Statistics data, Google and social media to check people are legitimate.
“There are also fraud registers and technology enables us to do a lot more intelligence sharing,” he adds.
Even with the best intentions, it is not always easy for lenders and brokers to prevent fraudulent activity. Young says the important thing for brokers is to know their customer and trust the lender.
“Lenders may occasionally ask for information that may seem irrelevant but they have fraud detection systems with access to information the broker may not have and there will be very good reasons why the lender is asking for further details,” he says.
“It’s not simply to give the broker more work to do, even if that may seem the case. It’s in everyone’s best interest to weed out these fraudsters because it costs our industry millions upon millions of pounds every year.”
Bramham says brokers need to guard not just against customers but against other brokers looking to dupe them.
“There are still unscrupulous brokers who come up with a story and there is no place for these people in our market. But lots of brokers are innocent and have been duped themselves,” he warns.
“In some cases, the poor broker can be drawn in but the lender thinks they’ve been complicit and they can get struck off, expelled from their network and sometimes even lose their licence.”
He says the only way for a broker to avoid this is by carrying out the correct amount of due diligence.
“Sometimes spotting a fraud comes with gut instinct; if you’re naive, you can easily be duped. But everyone can do checks such as making sure that bank statements match payslips, and that a P60 looks right.
“If you’re suspicious as a broker, you need to question it. You need to interrogate the information and try to ascertain if someone is genuine. If you have doubts, you have to walk away from it. If it doesn’t look and smell right, don’t do it.”
Graves says Pink has experienced an increasing number of fraudsters trying to join the network since the MMR came in.
“The MMR has improved our business and our network but we may have just moved the problem elsewhere. I am not sure if the MMR has solved or improved adviser quality per se as it is still possible to commit fraud and offer advice because fraudsters are still free to move around the industry.
“The only way to beat this is individual registration,” he says. “As an industry, we all need to work together; it is pointless networks expelling advisers only to see them pop up elsewhere. We need to become much better at policing our own industry.”
“Some advisers are drawn into a fraudster’s web by introducers. We have noticed an increased number of struck-off advisers reinventing themselves as introducers.”
Graves says Pink now educates advisers on how to spot a fraudulent introducer.
“My advice is: do not be flattered if they say you have been referred; check it out. If it looks too good to be true, it usually is.”
Lenders may have upped their game when it comes to detecting mortgage fraud but so have the scammers through the use of technology and more sophisticated systems.
The new affordability measures that lenders have brought in as a result of the MMR have also widened the scope of potential fraudulent activity and brokers need to watch for borrowers misrepresenting their income and other expenditure when applying for a mortgage. If consumers persist in doing this, lenders may take an increasingly hard line on this type of fraud. But it will be the broker community that will be on the receiving end.
One of the most worrying developments that lenders and the sector continue to struggle with is the threat from buy-to-let fraud. As this problem increases, the industry may start to see prosecutions of such borrowers, which may prove to be the only deterrent.
Staying on the right side of mortgage fraud
Nick Mothershaw, UK and Ireland director of identity and fraud at Experian
More people are managing to secure those elusive mortgages, perhaps as a result of the Help to Buy scheme. In 2014, homeowner house purchases hit 676,900 loans, up 11 per cent on 2013 and the highest annual lending level since 2007, according to the CML.
So the good news is that the housing market is at its most buoyant in recent years and, although the past couple of months have seen a slight downturn, overall this indicates that momentum is returning to the mortgage market. If this trend continues, is it reasonable to expect mortgage fraud to rise too?’
The number of fraudulent applications detected in recent months has, in fact, declined. Nonetheless, mortgages remain the area with the highest rate of frauds detected each quarter. Mortgage fraud will, therefore, continue to be a critical issue for lenders and we have seen trends that suggest there could be more in future.
Regulatory scrutiny has resulted in increased vigilance in the form of extended mortgage application interviews, questionnaires and stress testing. This could soon pave the way for an overall rise in detected fraud attempts as borrowers try to disguise credit commitments and exaggerate their incomes. Many people are making applications under different guises, such as pretending to be employed rather than unemployed. Others are trying to side-step increasingly onerous affordability checks and stricter lending criteria by hiding credit commitments. Some are producing documents with evidence of deposits that are not actually there. We have already seen a small up-tick in first-party fraud, from 95 per cent of all detected mortgage fraud in Q4 2013 to 96 per cent in Q4 2014.
Some lenders are readily accommodating consumer demand and the mass-market switch to digital platforms but we are not seeing an increase in mortgage fraud as a result of technology. There are still many institutions that require traditional, paper-based documentation and, as such, we are seeing a rise in misrepresentation on documents – 88 per cent of all first-party mortgage fraud.
There are steps that lenders can take to ensure they make fair and responsible decisions. One is making sure that all documents are checked, which means not just those documents that verify a person is who they say they are. It means checking that payment slips are genuine and employers actually exist, for example. There are also mobile ID document and verification solutions to support and speed up back-office approval systems.
Being able to spot and understand where and why misrepresentation is taking place is vital as it could be an indicator of the financial stress and restricted cashflow that some households still feel.