The Fraud squads
It is safe to say that almost every lender in Canada has what can be called a fraud squad - a person or department actively dedicated to lessening instances of fraud (this goes well beyond simply practicing diligent underwriting).
At Scotia Mortgage Authority, Robinson says that the focus is now on prevention, which does have a lot to do with underwriters, but it's his job to make sure they receive all the documents they need to do their job. Robinson, an ex-police officer who used to focus on mortgage fraud, does this by using some basic tools available to him, such as lists of properties to avoid and the Internet.
"One of the very simple ways I do this is through 'advanced Google searching,'" he says. "You put a name in quotation marks when you are searching for someone and that way you can pinpoint the name and get an exact match, rather than everybody with the same or similar last name. But if you then write the word 'fraud' in quotation marks with it you would be surprised at the response."
In fact, he mentions that just a few months ago one of the underwriters came up with a pending lawsuit on someone trying to take an equity payout on a property using this simple tool.
"We would have ended up paying his legal fees for him had we not found it," says Robinson, adding that the customer made no mention of it on the loan application.
Another thing the lender does is subscribe to a number of services that provide histories on properties, which is a good way to be sure there is no hidden connection between the purchaser and tenants. It also indicates whether a vendor is a company, in which case they need to be sure the buyer isn't related (not to say they wouldn't loan in that case, but it is something that needs to be disclosed, he adds).
At other times Robinson will simply receive a heads up from some of his outside sources on certain properties or lawyers to stay away from. Over at Merix Chris Mariani, CIO of underwriting, has about 25 years of underwriting experience under him and is a CFE (Certified Fraud Examiner from the Association of CFEs, a U.S. association that certifies many Canadians in the financial market).
He mentions that while fraud has been around in Canada for at least the last five years, "it has never been an issue because property prices were always increasing, so there were higher claim payments and lenders could always get their money back," he says.
He says the most common type of mortgage fraud, in which there are three, is fraud for shelter. Simply put, it's when an applicant exaggerates certain numbers in order to be approved for a higher mortgage amount than he or she is entitled to. The other two types of fraud are fraud for profit, which would be the example of stealing the title of someone's home, and fraud to further other criminal activities, such as putting a fake name or a "straw buyer" on the title of a property to be used as a marijuana grow op (there are an estimated 50,000 grow ops across Canada) so that it can't be traced back to the true source.
But with fraud for shelter, the biggest problem is that usually within a year or two the homeowners go into default. It's for this reason that due diligence on behalf of the mortgage broker is so important, as lenders have no direct contact with their clients when dealing with a broker.
A necessary risk
This brings up another problem though, which is the increased risk associated with going through the broker channel. As Robinson points out, the simple reason that there is an added degree of separation from the client makes dealing with a broker more risky, which would explain a lot of the lenders moving to the system where they only deal with a select list of "approved" brokers (for more on this, see our cover story on page 38).
"It's important for lenders to be comfortable with the brokers they deal with," he says. "And the more brokers you use, the increased chance there is of fraud occurring. We only deal with the best brokers because, let's face it, there are a lot out there."
Not to mention this gives Robinson the chance to go out and meet brokers, whether it's to discuss certain issues or to just provide tips on how to reduce the likelihood of being caught off guard by fraud.
But for many mono-line lenders, especially for those who only deal with the broker channel, it's a necessary risk, which is why relationship building becomes so important.
"We have a relationship with the broker who has a similar fiduciary duty as a bank employee," says Mariani. "The perception is that the bank has history with clients so that reduces risk, but they take the same risk when dealing with new clients, so there is really no difference. There is a higher risk in any commissioned environment, so that's why you build relationships with the brokers who perform the due diligence on their clients that you as a lender are looking for."
Both Mariani and Robinson agree that the most important step to reducing fraud is to simply know your client (KYC), which you can't do unless you meet them in person. And with a wave of new regulations being passed across the country, meeting every client in person may soon become more than just a good idea - it may simply be the law.
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