Fraudsters head for commercial ground

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Commercial brokers may now be longing for the good old days, if they ever existed, when most fraudsters limited themselves to residential mortgage scams. Their reluctance to stray into commercial, meant only the occasional brave soul would try his luck in that more complex sphere where risk outweighed the most remote possibility of reward.

Times have officially changed, and today commercial real estate is no less a magnet for fraudsters than its residential counterpart. That means brokers dealing in the former are now increasingly as affected as those dealing in the latter.

“Commercial real estate fraud involves such things as impersonation, forgery, fraudulent instruments registered on title and the fraudulent manipulation of corporate records,” says Eric Haslett, VP of legal services at title insurance provider FCT. “The common goal of all these schemes is the intent to steal mortgage funds that are legitimately advanced.”

While misrepresentation of a property’s value and the borrower’s income don’t necessarily garner a title insurer’s interest, those forms of fraud do concern mortgage professionals.

More and more, that may be the case as fraudsters enter the commercial sphere, intent on claiming their share of a hot market where lenders are hoping to make up for cooling in the residential sector.

“With the growth of the commercial real estate market,” says Haslett, also FCT’s chief underwriter, “it is clear that while it is attracting legitimate investors it is also attracting those with the intent to defraud.”

But there are some red flags that brokers should keep an eye out for, he urges, and that may require further due diligence on their part to protect the lender, the client and, indeed, their own reputations.

1) Vacant lands
2) Client who want to complete the deal in a very short period of time
3) Private lenders and
4) Recent changes in the directors and officers of a corporation

That list means that FCT and other title insurance providers ask brokers to provide up-to-date lists of corporate directors and officers, among other key documents. The request stems from the number of past claims involving the fraudulent manipulation of registered directors and officers.

Last year, in May 2012, alone, FCT’s use of its underwriting checklist helped it avoid $11 million in fraud associated with vacant land in the GTA.
It’s one of the reasons why brokers, as well as their clients, are insisting on title insurance for the deals they arrange.

Haslett argues that coverage is best protection in ensuring that any loss through fraud is paid to the lender and keeping the broker out of “a significant and time-consuming legal case.”
But there’s growing calls within the commercial brokering sphere for the industry to adopt a new rule now brought in by the Law Society of Upper Canada and aimed squarely at dealing with the escalating number of mortgage fraud claims.

In effect this year, all lawyers involved with real estate transactions in Ontario are required to sign a yearly declaration averring that they know how to avoid fraud.

Approved, Feb. 28, the declaration is essentially a list of fraud-busting practices lawyers are expected to know and exercise. It aims to nip in the bud any claims of ignorance attorneys for borrowers have routinely made over the years, arguing they simply weren’t aware of their responsibilities to look for and, indeed, block client fraud.

The Law Society’s move is not with reason. Real estate matters accounted for some 20 per cent of all complaints its professional regulation committee received between 2006 and 2011.
The percentage is not dissimilar to those broker regulators across the country receive, both associated with commercial and residential files. That reality suggests, say some industry veterans, that brokers can’t afford not to adopt the Law Society’s extra layer of protection against fraud.

Under the terms of a broker declaration, mortgage professionals would have to increase their oversight of employees and better restrict their access to client files and the personal information of innocent Canadians used to perpetrate real estate fraud.

Lawyers in Ontario, for example, are now prohibited from allowing staff to use their Teranet diskettes and must keep their passwords private. They must also confirm their duty to supervise all non-lawyers they work with and acknowledge that they know they cannot represent both a borrower and a lender in the transfer of titled property.

Duplication of that particular prohibition would be especially problematic for commercial brokers, say industry players, pointing to the often dual role mortgage brokers play as go-between for borrowers and lenders, especially in the growing number of private deals.

Still, that notwithstanding, both commercial and residential brokers may soon find themselves facing just such a requirement as real estate fraud ramps up for the road ahead.

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