View more on these topics

FSA to review 20 lenders’ fraud systems

The Financial Services Authority is to visit 20 mortgage lenders to check they have adequate anti-fraud systems in place.

Margaret Cole, director of enforcement and financial crime at the FSA says one reason mortgage fraud became so prevalent during the boom years was because sales targets and incentives led to lending decisions that were not in the long-term interests of lenders.

Speaking at a British Bankers’ Association conference, she told delegates that in extreme cases it saw cases of bank staff effectively colluding with customers to mislead their employers into granting a mortgage.

Cole says: “As part of the thematic review we are visiting 20 retail lenders to examine whether their internal systems to manage fraud risk are sufficiently robust and to ensure incentives offered to salespeople do not undermine efforts to contain fraud.”

The results of this review will be published next year.

It has banned nearly 100 mortgage brokers for failures related to mortgage fraud since 2008 and has imposed penalties of over £2m.

The FSA welcomes the initiative to allow the Inland Revenue to share information with lenders.

Cole says: “The power of income verification in combating financial crime was illustrated by a pilot scheme run by Her Majesty’s Revenue and Customs last year. This scheme allowed lenders to check whether income details supplied on mortgage applications matched the data held by HMRC.

“During the pilot over £111m worth of mortgage fraud was prevented.”



News and expert analysis straight to your inbox

Sign up
  • Post a comment
  • Grey Haired Underwriter 12th November 2010 at 10:21 am

    NR – sorry I should have made it clear that the addbacks are a given when asessing the deal. The point I wa trying to make is the number of times an underwriter is being asked to acknowledge the ‘other’ income that slips into that back pocket and doesn’t go through the accounts

  • NR 11th November 2010 at 3:28 pm

    To Grey Haired Underwriter.
    I would suggest that a disposable income could be calculated after considering various “addbacks” to the net profit figure. For instance, depending on the circumstances, they could include : Use of home as office, directors emoluments, directors pension contributions, loss on sale of an asset. There are countless other deductions which may appear in accounts that MAY also be considered. Each case to be assessed on its own circumstances and merits. This would be a far better way to underwrite – to assess a risk – than to merely take a bottom line net profit and apply a multiple that is meant to fit all. This could be supported by an I&E statement to confirm affordability.

  • jon 11th November 2010 at 2:44 pm

    Before self cert, accountants were asked to confirm that their client – the self employed applicant – had sufficient UK taxable income to service the loan. This could produce generous loan amounts as it was not dependant on income multiples. Then their trade body advised them not to provide this information, and self cert followed.

    As to tax avoidance, no issues with this, but a number of the self employed put extra expenses via the company, and also accept payment in cash – moving into tax evasion – but expect mortgage lenders to take this into account when lending.

    The good underwriters I know are able to read accounts, and historically have been prepared to redirect the spouses income back to the main applicant if this increases the amount that can be borrowed, and also add back in dividend payments. Obviously systems based underwriting does not have this facility.

    As to income for mortgage purposes, base it on taxable income, have an allowance for companies cars, which the employed could also benefit from, and an allowance structure for other benefits people may receive. Also accept incomes from more than one job – which could be more secure than income from just one job.

    Getting back to the article and sales staff concluding with brokers to mislead their employers – the lenders – to grant a mortgage, for the most part lenders were aware of this. More of an issue was some lenders were telling their underwriters to just accept what was put on the application form, even where the underwriters did not believe the information. A starting point to preventing fraud would be to keep risk management and underwriting away from the people responsible for setting and reaching sales targets.

  • Roy Williams 11th November 2010 at 2:30 pm

    Well well Grey Haired underwriter you seam to have more than enough time to take part in these debates don’t you. Still it beats working for a living and having to produce your own client bank.

  • Grey Haired Underwriter 11th November 2010 at 1:37 pm

    to NR – I understand your point but there is a need to evidentially establish an income against which a multiplier or affordability calculation may be made. Disposable income, as you put it, can change from month to month and is a somewhat tenuous concept. The fact that a self employed person may draw down more than the business can afford does not mean that it is true sustainable disposable income albeit that a snap shot of the bank statements may make it look that way. Can you suggest some way of establishing some form of consistency for the calculation of ‘disposable income’ as I would suspect that you would have immense difficulty. It may be all well and good trying to take a punt on a perceived income but that that sounds a litle unsound to me.

    To some extent I can equate your point to the FSA wanting to implement their unwieldy ‘income and expenditure’ calculation so as to establish a disposable income but the key word is income and establishing just exactly what that is is still fundamental to the debate.

  • Grey Haired Underwriter 11th November 2010 at 12:30 pm

    To anon 12.03 I can only say that it is refreshing to see such a constructive addition to the debate. And my Ivory Tower isn’t actually that comfortable because I have to work in the real world.

  • NR 11th November 2010 at 12:26 pm

    Re: Grey Haired Underwriter
    Regarding point two…..I fail to see a direct corelation between the amount of tax somebody pays and their ability to meet a given mortgage commitment.
    It is far more relevent to assess “disposable income” when posing the question of whether the applicant can afford the repayments.
    The fact that they have legitimately and efficiently reduced their tax liability suggests they are a better risk.
    A person should not be demonised for tax avoidance, which you seem to suggest. If it “wasn’t right” to avoid tax I am sure HMRC would not allow it. Tax evasion, on the other hand, is a different matter.

  • Roy Williams 11th November 2010 at 12:03 pm

    Grey haired underwriter couldn’t possibly see anybody elses point of view because thats what he is a’Grey haired underwriter’ distanced from the real world stuck in his ivory tower.

  • Andy Valvona 11th November 2010 at 11:25 am

    Anon 10.57 am’s response from the lender seems harsh.

    However, I can see their view to a certain extent – any adviser is required to “Know the customer” and this includes details of the property. How many advisers would knowingly agree with a client who thinks their property is worth much more than it is? Let’s face it, it’s not hard to obtain comparables for standard property types – it’s the unusual properties which are more difficult to value.

  • Grey Haired Underwriter 11th November 2010 at 11:22 am

    I love the way the debate has shifted from the subject back to lender bashing ior defence of the indefensible. The thematic review has been going on for months – I know because I work for one of the 20 and i am bound to say that it was a good logical and capable audit headed by someone who actually understood risk. If the FSA can produce usable statistics it will go some way towards creating best practise and that has to be good.

    In response to some of the points raised I would make the follwoing comments:

    1) There are a very large number of brokers who go doolally at the sight of accounts – I know because once you use a word like cashflow they seem to go into a catatonic state
    2) I agree that net profit may not genuinely reflect actual disposable income but the fact that soemone is trying to avoid paying tax doesn’t make it right. Effectively you are saying to the lender – ifgnore the evidence and pick an income figure ot of fresh air. Sounds like self cert.
    3) There is no such thing as a down valuation. The fact that the borrower thinks his/her property is worth more than the valuer does doesn’t make the borrower right. Valuations are opinion and it is my inclination to go with the opinion of an expert. Calling the valuer’s opinion a down valuation is as legitimate as calling the borrwoer’s opinion and over valuation. Let’s not be quite so emotive in our wordings and accept that borrwoer optimism isn’t always accurate.

  • Roy Will 11th November 2010 at 10:57 am

    I agree with AP the Broker is responsible for the product being suitable the lender is resposible for the underwriting.
    I spoke to a lender the other day who sujested that the broker is also now responsible for the valuation. If a down valuation takes place on a re-mortgage and the client looses a booking fee it’s the brokers fault!!!!!!!

    It’s raining outside….brokers fault again.

  • NR 11th November 2010 at 10:16 am

    To Anonymous (10th Nov 10.25pm)
    One of the main reasons self-certification became neccessary was the interpretaion of “income” by lenders. The vast majority of underwriters seemed incapable of interpreting trading accounts, using the “net profit” figure as a poor substitute for disposable income.
    For most self employed a genuine net profit figure – legitimately calculated to minimize tax liability – bears little or no resemblance to their disposable income.

  • Fred Flintstone 11th November 2010 at 10:09 am

    Self cert can work and has worked for self employed people where there were less than 1 year trading. It can be used where bank statements effectively show the generated income from the client where accounts are not available. I have never understood self cert for employed clients though. Sadly self cert was abused by both lender and broker.

  • Fred Flinstone 11th November 2010 at 10:09 am

    Self cert can work and has worked for self employed people where there were less than 1 year trading. It can be used where bank statements effectively show the generated income from the client where accounts are not available. I have never understood self cert for employed clients though. Sadly self cert was abused by both lender and broker.

  • Sandra McWhirter 10th November 2010 at 10:25 pm

    To Victor, get a grip-self cert was never a good idea! If you don’t declare all your income to the inland revenue then why should lenders agree to accept that income source!
    I have have worked at various lenders both prime and subprime and never really agreed with it! Even when the market was booming self certs were underperforming in terms of arrears which is why many lenders and now all withdrew them.

  • anon 10th November 2010 at 7:48 pm

    This is a funny article as it states the FSA knew that bank staff made dodgy applications. None of them have been banned or fined yet the report goes onto state over 100 intermediaries have been banned.

  • AP 10th November 2010 at 6:57 pm

    Ahh, the nub of the matter is that lenders were complicit in getting people to bend the truth and then just lie outright. Broker consultants would come in to tell you exactly how to navigate the system underlining that there would be no checks, Northern Rock even had a special senior underwriter who’s job was to ‘find a way’, products were designed to shovel cash out the door to anyone with a heartbeat. And little else.

    That together with mortgage regulation overlooking the requirement to vet brokers for fit and properness created a situation where being an honest broker required that you tie both arms behind your back in the fight against the competition. The BoE and the FSA allowed lenders to create this environment and were effectively complicit themselves.

    Responsibility for underwriting and terms lies with the LENDER, not the broker. At least the FSA are belatedly picking up on this. When will they do a themed visit on themselves?

  • Victor Meldrew 10th November 2010 at 4:08 pm

    The FSA seem to have a never ending supply of ways to amaze us. Who knows they might just find out that self cert can work if it is properly applied and regulated.