Because of the wide ranging nature of fraudulent activities and the potential of solicitors to find themselves criminally liable because of the wide definition of fraud in the Fraud Act 2006 and the extensive offences under anti-money laundering regulations, the Law Society has published a practice note to help solicitors identify when mortgage fraud might be taking place. Of interest are the methods of fraud. These fall into two areas:
1. Opportunistic mortgage fraud
1.1 General methodology
Individual purchasers can commit mortgage fraud by obtaining a higher mortgage than they are entitled to by providing untrue or misleading information or failing to disclose required information. This may include providing incorrect information about:
- other debt obligations
- the sources of funds other than the mortgage for the purchase
- the value of the property
- the price to be paid and whether any payments have been, or will be made, directly between the seller and the purchaser
1.2 Use of professionals
Opportunistic fraudsters will not usually attempt to include their solicitor in the original fraud. However, you may become aware of information conflicting with that provided to the lender as you progress the conveyance.
Clients engaged in opportunistic fraud may be evasive when questioned on the conflict and may try to dissuade you from conducting relevant checks or advising the lender.
2. Large scale mortgage fraud
2.1 General methodology
Large scale mortgage fraud is usually more sophisticated and involves several properties. It may be committed by criminal groups or individuals, referred to hereon as fraudsters. The buy-to-let market is particularly vulnerable to mortgage fraud, whether through new-build apartment complexes or large scale renovation projects. Occasionally commercial properties will be involved. The common steps are:
- The nominated purchasers taking out the mortgage often have no beneficial interest in the property, and may even be fictitious.
- The property value is inflated and the mortgage will be sought for the full inflated valuation.
- Mortgage payments are often not met and the properties are allowed to deteriorate or used for other criminal or fraudulent activities, including drug production, unlicensed gambling and prostitution.
- When the bank seeks payment of the mortgage, the fraudsters raise mortgages with another bank through further fictitious purchasers and effectively sell the property back to themselves, but at an even greater leveraged valuation.
- Because the second mortgage is inflated, the first mortgage and arrears are paid off, leaving a substantial profit. This may be repeated many times
- Eventually a bank forecloses on the property, only to find it in disrepair and worth significantly less than the current mortgage and its arrears.
2.2 Use of non-bank lenders
Fraudsters may use private sources of funding such as property clubs, especially when credit market conditions tighten. These lenders often have lower safeguards than institutional lenders, leaving them vulnerable to organised fraud. Property clubs can be targeted particularly in relation to overseas properties where the property either does not exist, or it is a vacant piece of land, not a developed property.
2.3. Use of corporate structures
Sometimes fraud is achieved by selling the property between related private companies, rather than between fictitious individuals. The transactions will involve inflated values, and will not be at arm's length.
Increasingly, off-shore companies are being used, with the property sold several times within the group before approaching a lender for a mortgage at an inflated value.
You may be asked to act for both the seller and the purchaser in these transactions.
2.4 Flipping and back-to-back transactions
Investors will always look to re-sell a property at a profit. However, fraudsters may seek to re-sell a property very quickly for a substantially increased price. This process is called flipping, and will usually involve back-to-back sales of the property to limit the time between sales. Variations on this fraud include:
- The first mortgage is not registered against the property, and not redeemed upon completion of the second sale.
- The second purchaser may be fictitious, using a false identity or be someone vulnerable to pressure from the fraudster.
- A mortgage may only be obtained by the second purchaser and for an amount significantly higher than the value of the property. The profit goes to the fraudster.
Fraudsters will usually use at least one professional at the core of the fraud, to direct and reassure other professionals acting at the periphery. Mortgage brokers and introducers have been used in this role in the past.
Mortgage lenders often rely on other professionals to verify the legitimacy of a transaction and safeguard their interests. Lenders may not extensively verify information they receive, especially in a rising market. Institutional lenders will subscribe to the Council of Mortgage Lenders' Handbook and expect solicitors to comply with these guidelines. Private investors will rely on compliance with the Solicitors' Code of Conduct to protect their lending.
You may be approached in any of the following ways:
- You may be asked to simply transfer the title to exchange and complete the transaction. A lender who has received the loan applications and already granted the loan may approach you with packaged transactions and completed paper work.
- You may be encouraged to alter the value on the Certificate of Title for the Land Registry.
- You may be encouraged not to comply with obligations in the CML Handbook.
- You may be offered continued work at a higher margin to encourage less diligent checks.
- Fraudsters may attempt to recruit you into the fraud, especially if you have unwittingly assisted previously, or have developed an especially close relationship with other participants in the scheme.
Read the practice note