Against a backdrop of the economic downturn helping to reveal the real extent of mortgage crime, the NFSA wants fraud risks to be designed out of mortgage products, better industry safeguards and professional integrity, and more effective detection of the fraudsters.
Attorney General, Baroness Scotland, lead government minister on fraud, is encouraged by a range of industry initiatives already in place but endorsed the call for greater action to combat a menace which has led to considerable financial loss for individuals and companies, and job losses.
A report, “Fighting Mortgage Fraud Together”, published by the NFSA today, estimates the scale of mortgage fraud losses in the UK as in the hundreds of millions of pounds and recommends next steps across the mortgage community. National lead force for fraud, the City of London Police currently have a significant number of cases of mortgage fraud under investigation.
The report follows workshops and analysis developed and delivered by the NFSA this year involving lead players in the mortgage sector including the Council for Mortgage Lenders and the Financial Services Authority. The scale of the NFSA’s work in this sector is unprecedented and involved organisations in the mortgage process representing over 500,000 professionals; with members who provide 98 percent of mortgage lending; are responsible for regulating over 100,000 firms; and employ over 35,000 police officers.
The report states over-valued properties, whether they relate to error, negligence or fraud, are harder to spot when there is flourishing market, as natural market rises disguise the impact of over-valuation on property prices. And the high loan to value mortgages – in excess of 100% - offered in recent years have, in some cases, been abused by fraudsters as a way to maximise their criminal profit at relatively low risk.
Four key areas of improvement were identified to increase the mortgage market’s resilience to fraud. These areas are:
• Designing-out the fraud risks inherent in different mortgage products and processes
• Instigating preventative safeguards and controls within firms at the right level to make mortgage fraud easier to spot and stop
• Ensuring professional integrity amongst key professional sectors
• Driving up the risk to perpetrators through more effective detection and prosecution.
Welcoming the NFSA’s report, Attorney General, Baroness Scotland QC said, “In this difficult economic climate, more than ever, we need to be protecting ourselves and consumers from mortgage fraud. Mortgage fraud has had a troubling impact on the financial services sector and housing markets. It can also have devastating effects on those families who may find themselves in financial difficulties as a result of artificially inflated prices or identity theft.
“The NFSA has worked with a wide network of organisations with a role in preventing mortgage fraud to build a common programme that tackles the problem at its roots. Tackling fraud in partnership is already paying real dividends and helping to hold fraudsters to account, but I look forward to a concerted drive from the financial services industry, regulators and the police to substantially reduce this criminal threat.
“Government, the criminal justice system, business and the public each have a role to play in rooting out fraud – and a stake in each others’ success.”
NFSA Interim Chief Executive Sandra Quinn explained, “By bringing together all the groups involved in the mortgage process, the NFSA has provided a structured approach for people to identify the causes of mortgage fraud - and most importantly - develop and own the solutions that will shut down these opportunities for fraudsters to exploit the buying process.
“Many of the gaps identified result from processes that were created in response to market demand or consumer need. The challenge is to make sure that when the market improves these needs and demands can continue to be met in a way that does not harm the effectiveness of the sector, and does not allow criminals to defraud honest parties.”
Falling house prices and tightening credit conditions have shed significant new light for both lenders and the police on the extent to which criminals have exploited the mortgage process to steal funds and acquire property.
While the losses generated by mortgage fraud represent only a small fraction of the overall mortgage market, the methods by which this fraud is committed are utilised in other parts of the economy, namely: professional and insider corruption, due diligence, internal control failures and procurement process weaknesses.
The increased co-ordination developed and supported by the NFSA has already produced or accelerated delivery of improvements across the mortgage community, including:
• The “Introduction of Disclosure of Incentives” by the Council of Mortgage Lenders (CML), for conveyancing and valuations, to capture the true value of new-build properties
• A pilot scheme between HM Revenue & Customs (HMRC) and lenders set up to verify the validity of HMRC documentation provided by a mortgage applicant (ie. as proof of identity and income level) has prevented over £16m worth of fraudulent transactions
• Release of enhanced guidance produced by the British Bankers’ Association and the CML, that details and promotes best practice across the industry to help lenders spot and tackle weaknesses in the mortgage lending process
• The Financial Services Authority’s “Information from Lenders” (IFL) scheme was relaunched and has seen a 25 percent increase in reports of suspicious brokers, 24 individual brokers suspended and the issuing of more than £300,000 of fines
• CIFAS, the UK’s fraud prevention service, has extended access to their Staff Fraud Database to mortgage intermediaries to ensure fraudulent staff are identified at the application stage.
Government has committed £29m to reduce the harm caused by fraud across the UK economy. Part of this funding has established the NFSA and its creation of a National Fraud Strategy to co-ordinate and focus counter-fraud activity. The funding has also enabled the creation of a Lead Police Force for Fraud to strengthen the law enforcement response to this crime. The City of London Police has identified mortgage fraud as an early operational priority and is currently actively undertaking investigations into several highly-organised and sophisticated mortgage frauds.
