Brokers are on the front line of the battle to detect fraudulent mortgage transactions. Andrea Cornish asked Genworth’s Paul Caputo how to go in armed
With NCCP now in force, brokers have been warned that fraudulent transactions may come back to haunt them. Experts say it is no longer just the lender’s responsibility to catch out potential client fraud, and that brokers need to care about the ‘red flags’. So how can brokers conduct reasonable enquiries? We asked Genworth chief risk officer Paul Caputo for advice.
Q Is mortgage fraud on the increase?
We do get a pretty good sense of what’s occurring, and from a portfolio perspective I wouldn’t say that we’re seeing an increase in the level of fraud in Australia.
Hard fraud is obviously defrauding the lender with either over-inflated valuations and/or payment to a third party, with no real intention to actually keep the mortgage in place. Soft fraud is a little harder to detect – where a person might forget to include a credit card, or might forget that they’ve got three children rather than two - but they have the good intention of a.) wanting the home and b.) wanting to meet the repayments on that.
But no, I don’t think we’re actually seeing an increase in the level of fraud.
There’s no doubt the level of fraud often comes to the fore more in a soft market; when you’ve got very strong home price appreciation you can hide fraud because quite frankly you can’t see it – property prices actually go up 10 or 15%, when you sell it doesn’t really make a loss, so everyone seems to be happy and moves on. So there’s no doubt that in a soft market like we’ll see in the next 12 months, we’ll probably see more fraud coming through.
Q Are fraudsters becoming more sophisticated?
Fraud is always evolving and where potential loopholes exist they will try and exploit that. So as credit providers in the industry identify potential loopholes, other loopholes do get created. Are they becoming more sophisticated? Probably over the last five or six years, but I don’t think necessarily over the last two or three years. It will be interesting to see as Internet loans become more popular if that will translate into different or more sophisticated potential fraud.
Q What kind of responsibility do brokers have when it comes to detecting fraud?
Now that brokers are enshrined as an agent of the lender through NCCP, clearly we see that the broker has to be the first line of defense in identifying fraud.
Q But does the NCCP increase the responsibility of brokers in respect to fraud?
I don’t believe so in the sense that NCCP really wasn’t designed in respect to fraud. However, having said that, I do believe that a lot of the measures that have been implemented by lenders following NCCP will also make it harder for fraud to get through. For example a lot of the lenders have tightened their requirements around validation of income, making sure you have all the original documentation, all of that will help improve the quality of the underwriting and hopefully identify fraud as it comes through.
Q What can brokers do to do a better job of detecting fraud?
Fundamentally it comes down to knowing your customer. Know your customer, know their needs and actually scrutinize the documentation that is provided.
Some of the fraud that we see is very sophisticated and, quite frankly, would be impossible for the broker to identify, but the vast majority that we see could be detected through common sense and actually going through the documentation. Whether it is things like looking through the bank statements, looking for things like the spelling of ‘credit’, which we see is often spelt wrong - obvious things that should raise alarm bells. Even looking through payslips and questioning ‘should a shop assistant really be earning $150,000 a year?’.
Also, looking through their bank account details. Often you’ll have salary going in but no expenses going out, so brokers need to ask how are they surviving, if all their salary is going into one account but they’re not taking any money out?
Some of it becomes a little more sophisticated like identity fraud. Passports, the key thing is looking at the passport number and what is coded on the bottom, but I wouldn’t expect brokers to make those checks.
Q Should brokers detect fraud, what’s the best course of action?
Of course they shouldn’t submit the application. In many ways, if they have a key relationship with their lender, they should notify the lender of the potential for fraud, so they can actually send that information through to an industry group and people can identify that there is a particular concerns with this deal. It’s a hard one, because you only suspect it. It’s not as if you can raise it too highly because you may not necessarily be correct in this case. It does put them in a difficult position.