The risk of buy-to-let mortgages being used by to purchase residential properties has been widely reported but the FCA has widen its scope to say it will be watching for all unscrupulous behaviour.
In this week’s Marketwatch we asked our experts which areas of the first and second charge market they thought the FCA should be looking at which could be at the greatest risk of fraud.
Buster Tolfree, commercial director at Central Trust, thinks the weaknesses in some second charge lenders’ affordability assessments could attract applicants wanting to raise more money than a first charge will allow
Richard Hurst, marketing director at Vizolution, thinks the risk lies with potential borrowers stretching the truth when it comes to their occupation and the evidence they provide to support their income
Gemma Harle, managing director, TenetLime thinks the FCA should be looking at gifted deposits, packager and introducer relationships and consumer education
Buster Tolfree, commercial director at Central Trust
In my opinion the greatest current exposure to the risk of fraud is in relation to affordability (note not income) checks.
Across the second charge industry different lenders still use a wide mix of different methods in this respect.
These range from a basic debt-to-income ratio all the way through to a full affordability assessment based upon specific income and expenditure figures.
Central Trust introduced an income and expenditure assessment back in 2010 so to us, understanding the customer’s specific situation in order to influence our decision to lend is now second nature.
But not all lenders have followed suit.
This could lead to a customer taking out a second charge from a lender that uses a basic debt-to-income calculation in order to ‘game’ the first charge affordability rules they would otherwise have to meet.
The Financial Conduct Authority will announce its rules regarding second charge affordability towards the end of the year.
Over the last five years we have no doubt lost business as a result of taking the affordability high road but the importance of positive customer outcomes is paramount.
And without completing a full affordability calculation we do not believe they can be achieved.
One of the most useful tools we use in protecting ourselves from fraud in general is the telephone security check with takes place with each applicant prior to advancing the loan.
This security check includes a number of standard identification verification questions and questions the loan such as the interest rate, loan term and the distribution of funds.
The purpose is to ensure that the applicant is who they claim to be and that all parties to the loan completely understand the commitment.
Richard Hurst, marketing director at Vizolution
The topic of fraud throws up a few interesting questions such as whether the focus should be on prevention or cure.
Is it possible to catch out every instance of fraud as it happens and if so where does this responsibility lie?
Arguably an increasingly robust regulatory framework and evermore onerous mortgage conditions may actually encourage people to ‘stretch the truth’ when it comes to a mortgage application.
The most prevalent type of fraud, especially as we stagger out of recession, with rising house prices is that of false occupation and income evidence.
This area has seen much controversy over the years with fast-track mortgages and self-certification and I’d argue that the issue remains the same but those wishing to commit fraud are just having to work harder.
This may be in the form of fake pay slips or even an employer’s reference on headed paper with a logo copy and pasted from the internet.
Advisers will recognise the anomaly of a taxi driver (no offence to taxi drivers) claiming to earn £150,000 but I’d argue that it’s the job of the fraud office not advisers to spot the difference between a real and fake pay slip.
Let’s not forget that if a mortgage application fails because of customer dishonesty it is the adviser that has also been defrauded out of his or her fee.
Gemma Harle, managing director, TenetLime
One of the key weapons against mortgage fraud is online identification verification especially when dealing with a gifted deposit.
It is essential that the checks extend to both the applicant and the person who has provided the funds.
Following the FCA’s pledge to clamp down on ‘gaming’ upon implementation of the MMR, brokers should not be afraid to raise the issue with the relevant parties and report any suspicious activity to lenders.
Caution needs to be taken when dealing with packagers.
Brokers should choose them carefully and not allow them to go beyond their remit. Allowing them to speak directly to your clients is particularly dangerous. The FCA should also be looking at introducers with a view to introducing legislation to eliminate rogue operators. As always the common sense key to eliminating fraud is never to take anything at face value.
All manner of false information, such as a fake payslip, is easy to acquire from the internet so it is vitally important to cross check such details against bank statements. Honest clients will not resent such safeguards.
Buy-to-let is coming under scrutiny with a clampdown on dishonest occupancy claims. This is now classed as serious fraud by the industry and the previously casual view taken by some in the industry must change.
But it is consumers to whom the FCA’s attention should be primarily directed. Abuse of the buy-to-let process can mean all manner of consequences for brokers, while customers can play the system without much concern (except in cases of default).
Perhaps this suggests an urgent need here for consumer education of some form? In general, however, many brokers do not perform the most rudimentary of checks. Failing to do so will make it very difficult to avoid being implicated if things go wrong.
Fraudsters never stand still. They are always looking for new ways to beat the system. So make sure you do the basics. The minimal extra time taken will help ensure you don’t become an innocent victim.
