Mortgage Fraud – an ever present risk?

The Council of Mortgage Lenders has reported (18 September 2014) that mortgage lenders had their strongest August in six years, with lending reaching £18.6 billion in August, heights which have not been reached since August 2008 (and look what followed…). That said recent press coverage indicates a slowing up - this may be as a result of the tighter lending controls that came into force in April. With borrowing for 2014 estimated to top £200 billion, will this give rise to an increase in mortgage fraud? Is it more the case that this increased lending has led to sloppy conveyancing and thus enabled greater opportunities for fraud?

Conveyancers are easy targets for fraudsters, so what is it about the updated guidance that will help protect them and the lender, where the Green Card may have failed? The Green Card was issued by the Law Society in the 1990s as a consequence of the recession and subsequent property crash. It directly addressed the increasing instances of solicitors being targeted for fraudulent mortgage transactions. Its aim was to highlight the indicators for fraudulent activity. Typically these included the traditional back to back sales with substantial price increases for no apparent reason; sales between connected parties and the manipulation of the values of new build properties in the buy to let market

Now we have the Law Society’s latest (31 July 2014) updated practice note on mortgage fraud. Is it reasonable to assume that this is an indication of more claims to come? It recognizes that mortgage fraud is still ongoing and provides a raft of examples for conveyancers to consider to stop them becoming the victims of this persistent crime. The note sets out the steps solicitors can (and should) take to protect their firms from being a target. The usual indicators are there, but the reader is also provided with helpful advice about protecting the firm, enhanced due diligence, identification of clients, how to approach verifying signatures, how/when and to whom one should report something suspicious, and money laundering.

All solicitors must be alive to the various and increasingly innovative methods used by fraudsters when buying and selling property and the use of non-bank lenders and corporate structures to disguise inflated sale prices, in addition to the list set out above.

There is a real need for high street conveyancing practices to remain in business but these firms have been the hardest hit in recent years. Insurers have been reluctant to engage with firms who have an excessively high exposure to conveyancing work and firms have seen increased premiums reflecting the fact that conveyancing is a risk area. Taking on too much work at low rates to generate the funds to pay increased premiums will only escalate claims as standards slip. The alternative is to face closure – an issue which in itself can give rise to exploitation by fraudsters. There is no easy answer to the problem.

The best advice for conveyancers is to take heed of the Law Society’s guidance. Read it from top to bottom, read it again, and then implement it.

Separate representation for lender and borrower is one issue that has vexed the profession but it can limit a firm’s’ exposure to fraud. While this is an obvious solution, it is not one that has been supported by those regulating the industry. However, insurers may take matters into their own hands and force the issue by only insuring those undertaking conveyancing work if the firm only acts for one party.

A recognition that the profession should be paid properly for handling conveyancing should reduce claims. However, consumers have become accustomed to low fees quotes which mask the complexity and value of the work being undertaken. So long as lenders maintain low fees for solicitors acting on mortgage transactions, the problem will not go away and both solicitors and their insurers will have to face the inevitable consequences.