No matter how diligent lenders or solicitors are, frauds and forgeries appear to be an ever-present fact of life.
In today’s climate of constantly evolving technology, it is still difficult to understand how these exceptionally developed systems still fail to combat fraud and forgery.
However, on closer inspection, technology itself combined with the customer’s understandable desire to obtain a mortgage as quickly and as efficiently as possible, could be contributing to making it easier for fraud to be committed today than say 50 years ago.
Obtaining a mortgage has moved-on from the days where holding a deposit account with the building society was a requirement and being an acquaintance of the manager was often the deciding factor in a lending decision. Quite rightly, the market has evolved so that it is now arguably the most competitive in the world and in order to meet customers’ demands it is not even imperative to meet the lender or solicitor at all.
Bearing this in mind, it is hardly surprising that identity theft, and related frauds, are the fastest growing crimes in the UK. In 2002, according to Cabinet Office figures, fraud cost UK taxpayers £1.3billion. Interestingly, no further data has been officially released since – a move by the government, which cynics might justifiably denounce as a PR exercise or cover-up.
Yet, despite the FSA, Law Society and CML Handbook all promoting compliance and careful regulation in the mortgage industry, the lending arena is still a perfect breeding ground for fraudulent activity. Obtaining a mortgage nowadays is far more complex than simply getting through the fact-find stage. Lenders and solicitors consistently work together to demand certified copies of passports, utility bills, payslips and voters’ roll checks. But, the lack of consolidation between all of these components, only serves to enhance the likelihood of fraud.
Earlier this year, Home Office minister Joan Ryan, claimed that 16,500 fraudulent passport applications were received between October 2005 and September 2006 – 50 per cent of which remain undetected to this day. By the Home Office’s own admission, “the level of undetected fraud is about 0.5 per cent of passport applications”.
Moreover, the current online going-rate for three months worth of remarkably genuine-looking payslips is a mere £35; the real upside being that dishonest consumers can feel safe in the knowledge that client confidentiality is guaranteed, to the extent that client data is only held on the vendor’s computer system for 24-hours.
Ever since, the advent of the home computer lender has had to deal with fake utility bills, to the extent that it is difficult to place any confidence in them as a form of identity.
With property prices continuing their meteoric rise, the mortgage labyrinth remains extremely lucrative for canny fraudsters, as crime continues to pose a real threat to lenders.
While it is of paramount importance for lenders to really get to know their clients, this will not always protect them from falling foul of fraud. After all, what does a lender do when a perfectly amiable client turns out to have been masquerading as somebody else, subsequently making off with significant amounts of cash?
The simple answer is that, in most cases, the lender looks to recover the loss from its solicitor which is often easier said than done. In most cases, the solicitor is as innocent a victim as the lender. If the authorities, with all of their checks, can let 10,000 fake passports slip through their fingers annually, it would be somewhat churlish to expect a solicitor to spot a counterfeit passport, or any other form of fake identification for that matter.
Moreover, even if the solicitor has been negligent, it could take the lender years to pursue the claim, tying up the lender’s capital in additional legal costs all the while. To make matters worse, even if the lender was to win the case, it will rarely – if ever – make a full recovery; after all, the lender will only recover interest at the ‘cost of funds’ rate. And all this after it has had to battle tooth and nail to prove that it was the negligence, rather than the fall in property prices or its own lending decision, which caused its loss.
In order to avoid such expensive and time-consuming legal battles, lenders are increasingly turning to title insurers to cover the risk that fraud and forgery presents to them and complement the service provided by their solicitors. In this way, if the lender incurs a loss at the hands of fraud and forgery, the claim will be paid within weeks or months. Indeed enlightened solicitors are also using title insurance to achieve better, faster and cheaper completions for their lender clients.
Title insurance also provides no fault protection, which means that there will be no arguments over the lender’s underwriting decision. This means that whether the forgery or fraud caused all of the lender’s losses becomes incidental.
Whatever attempts are made by the FSA and industry bodies, such as the Law Society and the CML, to enforce regulation in the mortgage market, fraud and forgery still continues to flourish. In fact, it is becoming increasingly difficult to prevent in a market that is continuously evolving to become more flexible and competitive than ever before. This coupled with the fact that more and more people are becoming eligible for mortgages, has led to ripe pickings for fraudsters – the consequences of which can be devastating for lenders and solicitors alike. Yet, title insurance can mitigate this risk, in turn saving lenders and solicitors precious time and money.
Julian Sinclair is the director for residential & specialist insurance at First Title