Learn how to identify and avoid mortgage broker fraud with our comprehensive guide to common types, warning signs, and protection strategies
Updated: 5 June 2024
As a homebuyer or investor, you’re taking significant financial steps to secure your future. Navigating the mortgage market is already complex enough on its own—it’s no help that not all brokers operate with integrity.
Mortgage broker fraud is a real and growing threat that can derail your plans. The worst part is most victims have no idea they’re taking part in this until it’s too late.
To help you steer clear of these traps, we put together everything you need to know about mortgage broker fraud—the common types, the warning signs, and the many ways you can protect yourself.
What is mortgage broker fraud?
Mortgage broker fraud involves unethical practices by brokers or loan officers to do any or all of these acts:
- manipulate mortgage applications
- inflate property values
- misrepresent borrower information for personal gain
This can lead to higher interest rates, additional fees, or approval of loans that borrowers cannot afford, resulting in foreclosures and financial ruin.
It’s a problem not only in Australia but the entire world. In 2022, CBC Marketplace went undercover to investigate how real estate agents, mortgage brokers and bank employees are perpetrating mortgage fraud for a fee.
Take a look at how prevalent it is:
In this 2021 story on mortgage broker fraud in Australia, a Gold Coast broker was charged for scamming 18 people. He was ordered to pay over $1.5 million in compensation.
Common types of mortgage broker fraud
Mortgage broker fraud can take several forms, each with the potential to cause significant financial and legal repercussions for unsuspecting borrowers. Understanding these common types of mortgage fraud can help you avoid them.
Income fraud
Income fraud occurs when brokers misrepresent or inflate a borrower’s income to qualify them for larger loans. This practice can put borrowers at risk of taking on more debt than they can manage. For example, a broker might alter income documents or advise a borrower to falsely claim higher earnings, making them appear more creditworthy to lenders.
In real-life cases, brokers have been known to forge pay stubs or bank statements to reflect higher incomes. This deception can lead to borrowers receiving loan approvals for amounts beyond their repayment capacity. Unable to meet the high monthly payments, the borrower faced foreclosure.
Appraisal fraud
Appraisal fraud involves inflating property values to secure higher loan amounts. This type of mortgage fraud can leave borrowers underwater if the property is overvalued, meaning they owe more on the mortgage than the property is worth.
For instance, a broker might collude with an appraiser to artificially increase a property’s value, allowing for a larger mortgage to be approved. This can be done by using inappropriate comparables or ignoring necessary repairs.
This becomes a real problem when the housing market declines. The borrower will find themselves unable to sell or refinance the home with a mortgage that far exceeded the actual worth of the property.
Identity theft
Identity theft in mortgage broking involves using stolen personal information to apply for mortgages in someone else's name. This type of fraud can result in unauthorized loans being taken out, leaving the victim with significant financial damage and a tarnished credit history. Often, the victim won’t even be aware that this is happening until they start receiving late payment notices for a property they don't own.
A Canberra woman discovered her home was sold without her knowledge while she was overseas. Fraudsters forged her signature, engaged a real estate agent, and directed the sale proceeds to an offshore account. The mortgage fraud came to light only after the sale was finalised, leaving the victim in a legal battle to reclaim her property.
Equity skimming
Equity skimming involves fraudulent actors acquiring property through deceitful means and extracting equity through refinancing or resale, often leaving the original owners with significant debt. This form of mortgage fraud typically targets distressed homeowners, convincing them to sign over their property deeds under false pretenses, promising to help them avoid foreclosure.
In practice, equity skimmers might pose as investors who offer to take over mortgage payments in exchange for the property title. Once they have control, they strip the home of its equity through multiple refinancings or by taking out new loans. The original homeowner is left with the debt and possibly foreclosure if the new loans default.
Impact of mortgage fraud on consumers
Mortgage fraud can have severe and long-lasting consequences for consumers. These impacts can be financial, emotional, and legal, significantly affecting victims' lives.
Here are some of the primary effects:
- Loss of funds. Consumers may lose significant amounts of money through upfront fees, inflated loan payments, or through the fraudulent sale of their property.
- Increased loan costs. Fraudulent brokers might misrepresent financial information to secure larger loans, leading to higher monthly payments and interest rates.
- Foreclosure. In cases of income fraud or appraisal fraud, consumers might be approved for loans they cannot afford. This can lead to missed payments and eventual foreclosure.
- Legal battles. Victims often have to engage in lengthy and expensive legal battles to clear their names, reclaim lost funds, or regain ownership of their properties.
- Credit damage. Fraud can severely damage a consumer’s credit score, making it difficult to secure loans, credit cards, or even employment in the future. Resolving credit issues can take years.
Jess and Jackie Morecroft purchased their Gold Coast home at auction five years ago, but earlier this year a court ruled the home was never really theirs and it still belonged to the previous owner. https://t.co/IaTHMt42tS (via @abcnews)
— ABC Australia (@ABCaustralia) April 26, 2023
Warning signs of mortgage broker fraud
When working with a broker, you might wonder, "How do I know if a mortgage broker is legit?" Besides verifying broker licences, try to notice if there are behavioral warning signs.
Here are some dead giveaways to watch out for:
- Pressure to sign incomplete or blank documents. This is a major red flag, as it gives the broker the opportunity to add terms and conditions that you did not agree to.
- Promises of guaranteed approval regardless of credit history. Legitimate lenders evaluate your creditworthiness based on your financial history and current situation. A broker who guarantees approval might be trying to get your application approved using false information.
- Requests for false income or employment information. This is a clear indication of fraudulent activity. Misrepresenting this information can lead to serious legal consequences for you.
- Presents unrealistic loan terms. If an offer seems too good to be true, it probably is. Be skeptical of deals that offer unusually favorable terms, as these may be designed to lure you into a fraudulent scheme.
- Rushes the process without adequate review time. Aggressive pressure to proceed with the loan is a common tactic of fraudulent brokers. They may try to create a sense of urgency to prevent you from conducting due diligence.
- Demands large upfront fees. Although some legitimate fees may be required, excessive upfront charges are a red flag. Legitimate brokers will only charge reasonable fees after providing their services.
- Gives vague explanations. This tactic is often used to confuse you or to hide crucial details about the loan terms, fees, or the broker's credentials. A trustworthy broker will take the time to explain everything in clear and understandable terms.
- Refuse to provide written estimates. Refusal to provide written estimates of fees is a major red flag. Receiving detailed, written estimates is crucial to understanding the total cost of the loan.
How to protect yourself from mortgage broker fraud
Verify credentials
Before engaging with a mortgage broker, it's crucial to verify their credentials. You can do this by checking with regulatory bodies such as the:
These organisations maintain databases of licensed brokers and any disciplinary actions taken against them.
Additionally, searching for reviews or complaints online can provide insight into the broker's reputation. Ensuring your broker is properly vetted reduces the risk of falling victim to fraudulent schemes.
A man has been convicted of fraud offences after the Australian Securities and Investments Commission (ASIC) alleged he “dishonestly” represented himself as an insurance broker and sold “invalid” insurance policies. https://t.co/SfoJvAADgZ pic.twitter.com/gokSMux2lb
— Financial Services Online Australia (@FSOAustralia) December 20, 2022
Read before signing
Never sign blank or incomplete documents. Review all paperwork carefully and seek legal advice if necessary.
Fraudulent brokers often pressure clients to sign documents that are incomplete or blank, promising to fill them in later. This can lead to significant legal and financial issues, as the broker can insert unfavourable terms without your consent.
Always ensure that all paperwork is fully completed and clearly understood before signing. If you are unsure about any aspect of the documents, seek legal advice. A legal professional can help you understand the terms and conditions, ensuring that you are not being misled.
Monitor your credit
Regular credit monitoring can help you detect unauthorised activity early. By frequently reviewing your credit report, you can spot unfamiliar accounts or inquiries that may indicate fraudulent activity.
Services like Equifax, Experian, and TransUnion offer credit monitoring tools that alert you to changes in your credit report. Early detection of suspicious activity lets you act quickly.
Credit file monitoring
For professionals in the mortgage industry, it's important to request a credit file from clients, even if the bank has already done so. This practice helps in assessing the client's financial risk and ensures that all liabilities are accounted for. It also fosters transparency and trust between broker and client, as it shows diligence in protecting their interests.
Providing a comprehensive credit file can enhance the overall assessment process and prevent potential issues down the line.
Review bank statements
Reviewing bank statements is essential in verifying a client's financial stability. Brokers should request at least six months of bank statements from clients. This is done to:
- track their income and expenses
- establish proof of income
- ensure they can meet loan obligations
This also ensures that the information provided by the client is accurate and truthful, reducing the risk of fraud.
Document everything
Maintaining detailed records of all communications, documents, and transactions with your broker is essential. Save emails, take notes during phone calls, and keep copies of all signed documents.
Having a comprehensive record can help you track the progress of your loan application and provide evidence if any issues arise. Detailed documentation also helps in resolving disputes and verifying the legitimacy of transactions.
Understand the fee structure
Understanding how your broker is compensated is crucial. Some brokers charge upfront fees, while others may receive commissions from lenders. Ensure that all fees are transparent, justified, and clearly outlined in writing.
Compare the broker's fees with industry standards to ensure they are reasonable. Being aware of the fee structure helps you avoid overpaying and identifies potential red flags if the fees seem unusually high or hidden.
Ask detailed questions
Don't hesitate to ask detailed questions about the loan process, fees, and the broker's services. A reputable broker will be patient and transparent, answering all your queries thoroughly. Be wary of brokers who provide vague answers or seem annoyed by your questions.
Seek recommendations
Personal recommendations from people you trust can be one of the best ways to find a reliable mortgage broker. Ask for recommendations from trusted friends, family, or financial advisors.
In addition, trusted professionals in related fields, such as real estate agents or financial planners, often have networks of reputable brokers they can recommend.
Understand your rights and resources
Educate yourself about your rights and resources for reporting mortgage fraud.
Organizations, such as those listed in the bullet points higher up, offer guidance and support for consumers. Knowing your rights and the proper channels for reporting fraud can empower you to act if you suspect fraudulent activity.
Legal consequences for fraudulent brokers
Fraudulent mortgage brokers face severe legal consequences under several Australian laws and regulations. These penalties are designed to deter fraudulent activities and protect consumers from financial harm.
Here are some of the primary legal ramifications:
Criminal charges
Fraudulent brokers can face criminal charges, which may result in significant fines and imprisonment. The severity of the punishment typically depends on the extent of the mortgage fraud and the amount of money involved.
For instance, under the National Consumer Credit Protection Act 2009, brokers found guilty of providing false or misleading information to obtain a financial advantage can face up to 10 years in prison and substantial fines.
Licence revocation
Regulatory bodies like the Australian Securities and Investments Commission (ASIC) have the authority to revoke the licences of brokers found guilty of fraudulent activities. Once a broker’s licence is revoked, they are prohibited from engaging in any activities related to mortgage broking.
Civil penalties
In addition to criminal charges, fraudulent brokers may also face civil penalties. ASIC can impose civil penalties, including fines and compensation orders, which require brokers to compensate affected consumers.
Disqualification from managing corporations
Most countries have regulatory bodies with the power to disqualify individuals from managing corporations if they are found to have engaged in fraudulent activities. This disqualification prevents the individual from holding directorial positions in any company, thus limiting their ability to engage in similar fraudulent activities in the future.
Restitution and compensation orders
Courts can order fraudulent brokers to compensate victims for their financial losses. These restitution orders are designed to make the victims whole by reimbursing them for the money lost due to the broker's fraudulent actions. The compensation can cover direct financial losses, legal fees, and other related expenses.
Reputational damage
Beyond legal penalties, fraudulent brokers suffer significant reputational damage. Being involved in fraudulent activities can destroy a broker's professional reputation, making it difficult for them to find employment in the financial services industry in the future. This long-term impact can be just as damaging as legal penalties.
Don’t let fraudsters win
Mortgage broker fraud can have devastating consequences, but being informed can help you avoid falling victim to these schemes, no matter what kind or form they take.
Now that this article has explained how to know if a mortgage broker is legit or not, it’s your turn to do your part. Work with reputable professionals, stay informed, and act quickly if something seems suspicious. You never know when you’ll encounter a mortgage broker fraud, so it’s best to be vigilant.
Have you or anyone you know might have come across mortgage broker fraud? Share your story in the comments
