Spotlight SerieS
ISSUE 2
Fraud has existed in the consumer credit environment for
some time. today however, many experts agree that the
phenomenon is now increasing in the mortgage market.
A strongly performing market covers a multitude of wrongdoings. That old adage describes perfectly the experience of the Australian mortgage market over the last 10 years. But it also hints at a reckoning to come. Mortgage market participants believe that day is at hand in Australia as changes in the market cycle give the industry time to take stock.
With the market coming off record highs, the industry is in a position to see and address the critical issue of fraud - the use of deception for the purpose of obtaining a financial
benefit. The term covers a wide array of concepts, including misrepresentation of financial, employment or identity information, false valuation or intentional default following a cash-out action. For the mortgage market, fraud can include a broad cast of characters from the borrower to the broker, originator, valuer, accountant, legal adviser or lender. In its most pernicious form, it appears as a syndicate of market participants colluding to obtain loans or property by a variety of unlawful means, including providing false information.
Now more than ever, the
industry as a whole has a
responsibility to invest in
practices and procedures to
combat this growing trend.
this issue of genworth
Financial’s Spotlight series
sheds some light on the
emerging trends and attempts
to provide some simple ways
to protect against fraud.
m a n a g i n g f r au d i n
The problem of fraud is by no means at epidemic proportions. Indeed, most industry participants are at pains to emphasise that most practitioners are both honest and diligent. But, as PricewaterhouseCoopers (PwC)
points out in its recent report
Fraud in the Mortgage Industry,
even a level of mortgage fraud
of less than 1% represents serious potential losses in a multi-billion dollar industry affecting both the industry and the end consumer. It is therefore, incumbent on the mortgage market community to understand the risk of fraud and to learn to better manage that risk.
An expert in the area of mortgage fraud, RISQ Group Pty Ltd (RISQ) has seen first hand the human impact of mortgage fraud on consumers who have become financially distressed or bankrupt as a result of obtaining a loan they could not service. This is in addition to the significant financial losses faced by some lenders who have written loans supported by false applications and in some instances, false valuations.
While no reliable data is available on the incidence or cost of fraud to the Australian mortgage industry, market participants agree that it is on the rise. Peter Hall, Country Executive & Director at Genworth Financial, comments “The market
has undergone considerable change in performance levels. We have come off a booming
cycle and as an industry are now seeing problems that may have been previously masked.”
Guy Underwood, Chief Executive Officer of RISQ agrees, and further states, “Fraud involving mortgage lending is one of the greatest financial risks facing the financial sector and the general public. A flat housing market, coupled with increasing interest rates, has caused many fraudulently obtained loans to default, and when these are accompanied by inflated valuations, losses
are beginning to crystallise.” Incidents of fraud are occurring Australia-wide. For Genworth Financial, the first signs seemed to centre on New South Wales, an area that experienced the highest level of house price appreciation during the boom of 2003. This prompted Genworth Financial to play a more proactive role in working with the industry to raise awareness about the current issues and emerging trends.
Overall, the mortgage industry already has processes and procedures in place to deal with basic fraud. However fraud can be dynamic, often becoming more sophisticated as new technologies are introduced. As a result, some practices need be revised as new trends emerge. Today, some within the industry are doing this better than others.
There is a direct relationship between the recent rise in delinquencies and the rise in fraud, especially in cases where borrowers make either no mortgage payments or just one or two payments before defaulting. The advent of the cash-out component to the home loan has exacerbated the trend. Fraudulent or over ambitious valuations have enabled some fraudulent borrowers
and brokers to refinance their home loan and disappear after a few repayments. In these cases, there is a clear indication that robust checks and procedures to prevent fraud were not being followed diligently, and simple checks could have prevented a scenario where everyone loses.
while no reliable data is available on the incidence or
cost of fraud to the australian mortgage industry, market
participants agree that it is on the rise.
overall, the industry already has processes and
procedures in place to deal with basic fraud.
however fraud can be dynamic, often becoming more
sophisticated as new technologies are introduced.
The Impact of Fraud on Your Business
Understanding Verification
There’s no denying the positive impact the housing boom has had across the industry. According to the Reserve Bank of Australia, in 1997 the total value of loans advanced to individuals for the purchase of property amounted to A$77bn, which compares to A$233bn in 2006. The growth in volume has been complemented by a proliferation of products and providers. As a consequence, borrowers today have far more choice then ever before as the industry develops new innovations to support demand and compete in a changing market environment. Dramatic change over the last 10 years has seen a range of
new products such as low
documentation, no documentation, sub prime and reverse mortgages.
At the same time there has been huge growth in the number of new entrants into the market, seeking the business generated by strong
growth and product innovations. Over the 2004-05 period, membership of the MFAA grew 40 per cent, and according to PwC individual loan writer members have
grown four-fold over the last three years to 8,000.
This expansion, foreseeable in a growing market environment, has also contributed to increased fraud and negligence as some new entrants take on business
without fully understanding the importance of ensuring verification of loan application information. As a result, many take on new business without the necessary foundational
Some industry players struggle with understanding their role in dealing with fraud, largely relying on others within the industry to identify and deal with the problem. But most industry experts agree that in order to deal with this growing phenomenon, it is important that all market participants take more responsibility for the information they are handling.
Fraud impacts individual businesses in a myriad of ways. Firstly lenders, brokers and
originators can face the heavy cost of damage to personal and brand reputation, which can limit opportunities for new business and devastate existing business relationships.
Fraud can wreak havoc on business continuity, which leaves suppliers facing the cost and inconvenience of business interruption.
More tangibly, fraud can result in loss of upfront and trailing commissions as well significant
legal costs if subject to criminal or civil action.
Furthermore, many within the industry may not realise that Lenders Mortgage Insurers are not licensed to cover losses suffered as a result of a fraud perpetrated by the lender or a third party acting on its behalf in the origination chain. As a result, the lender may seek to recover the losses from those who may be considered to be liable.
as a consequence, borrowers today have far more
choice then ever as the industry develops new
innovations to support demand and to compete in a
changing market environment.
simplest, verification comes down to taking personal responsibility for information passed on by the borrower. This generally means less reliance on supplied application information or documents, and using the phone more frequently.
The most common incidences of fraud centre around false information in relation to financial standing, employment or identity. In this technology savvy age, creating fake documentation or altering existing documents has never been easier. Ultimately, verification is about independently validating the accuracy of the information received.
In consultation with a range of customers and market participants, Genworth Financial has developed a set of Minimum Verification Requirements for Lenders Mortgage Insurance proposals. Essentially, these requirements are designed to assist in providing greater clarity and to help facilitate the implementation of better policies and procedures around managing fraud.
With regard to documentation, the guidelines recommend:
• Sighting documentation or acceptable alternatives. • Verifying income, including
original pay-slips or bank statements with salary credits. For self-employed borrowers two full years of personal and business tax returns must be obtained. Interim financials are unacceptable.
• Verifying genuine savings, including obtaining original documentation from the appropriate institution. Alternatively, Internet
statements, which include the borrower(s) name; account number; itemised individual transactions and running account balance. The logo of the bank or financial institution must be clearly displayed. not conducted adequately and as
result the information being relied on was not correct. This is largely because one of the problems with verification is that it is open to interpretation; it means different things to different people.
This can also occur because staff are not properly trained. Many may think they are verifying authentic documentation when in fact they
are not, and in some cases are only checking to ensure they have the necessary documentation rather than checking for any inconsistencies. This combined with the pressure for quicker turn around times in an increasingly competitive environment has meant that ongoing vigilance has slipped.
It is important to remember that dealing with fraud at the end of the process can be far more costly than at the beginning. At its processes and practices needed as
the market starts to level off and the environment becomes increasingly competitive. Fraud then starts to become a serious problem as it continues to go undetected.
The strong economy has also seen many buyers entering the housing market for the first time. Particularly vulnerable are unsophisticated borrowers with a
poor understanding of lending laws and practices. “We are seeing a large number of mortgage frauds involving borrowers from a non-English speaking background being targeted by fraudsters within their own community, who sign them up for loans they cannot afford to repay.” says Guy Underwood.
Verification of documentation is paramount. A great proportion of fraudulent activity can occur simply because verification was
Case Study
One particular originator did all the right things when it came to managing documentation for a loan application. He determined that all the borrower information was consistent and that there was no information missing; he verified the borrower’s employment and income; and he requested and received original documents to
support that information, including pay-slips and bank statements. Although the originator was able to conduct the verification as he had seen original documents, he didn’t look closely enough: the bank statement had three different and inconsistent font types, clearly indicating that information has been altered.
it is important to remember that dealing with fraud at
the end of the process can be far more costly than at
the beginning.
An inner city property, harbour location, originally listed with local real estate agents at A$530,000. The basic two bedroom, older style unit, with a dated fit-out, and no car accommodation failed to generate much interest and as a consequence was withdrawn from sale by the vendor.
Some time later, the same property was listed with a recorded sale of A$998,000 generating some interest from local agents who thought the listing may in fact be a 'typo' and that the correct value was actually A$498,000.
The application for Lenders Mortgage Insurance was received accompanied by valuation for A$1,000,000.
Within six months, the property becomes a mortgagee in possession and sold after appropriate marketing campaign for only A$460,000.
Case Study
allow the exchange of ideas and information on market dynamics, with specific reference to valuation risk management in the residential mortgage industry.
The mortgage industry relies heavily on the valuation industry to produce accurate opinions. In recent years, the valuation industry has been undermined by increased competition, placing pressure on prices and turn-around times. Some market participants suspect this has resulted in some valuers cutting corners to continue to meet the demands of their customers, which has lead to a raft of inaccurate valuations. Loose practices, including poor execution of methodology practiced by some valuers are creating a problematic environment for all mortgage market participants, including the valuation industry itself.
In a claims situation, there is always an acceptable margin for error with valuation reports, but the industry has been seeing higher valuer negligence in recent times. This in turn has called for greater training and the standardisation of industry practices. To date, the industry has yet to achieve a national valuer registration code, but the states of New South Wales, Victoria and Queensland do require valuers to be registered and/or licensed.
A critical risk mitigant in the valuations space consists of choosing an accredited valuer from an approved panel and checking valuer accreditation
where possible. RISQ has several recommendations in relation to the use of valuation firms in general, including:
• Conduct regular reviews of valuer panels to ensure that only reputable firms and valuers are being engaged, • Carry out due diligence
on valuers before they are placed on a panel, • Conduct random reviews
of valuer files to ensure that guidelines and ‘best practice’ processes are being followed, and
• Ensure that contractual agreements with valuers are in place. (Include a right to audit and an undertaking by the valuer and its staff to act ethically and legally at all time in all contractual agreements) Genworth Financial has been working with the Australian Property Institute towards creating greater awareness of the issues facing the valuer industry, including presentations at valuer conferences. Genworth Financial is continuing to promote the upgrading of standards in the industry by establishing dialogue with lenders and valuers. In the absence of any consistent industry guidelines for valuers, Genworth Financial is instigating a series of industry forums to
The Valuation Conundrum
A broker driven deal was submitted to an originator, who in turn submitted the application – which included the borrower’s asset position – to the mortgage insurer. The insurer fed the application into its online statistical fraud screening system. The system detected an anomaly: Genworth Financial had already insured facilities on behalf of the borrower with another
lender that were not disclosed on the application.
As part of the due diligence process the insurer went to the lender and asked if they still had those loans on the books. The lender confirmed the facilities still existed, which meant the borrower had A$2,000 in mortgage repayments that weren’t disclosed on the new application.
Case Study
Key Types of Fraud in the Mortgage Market
Valuation Fraud
Includes valuations from valuers that are over-inflated or altered in any way.
Identity Fraud
Covers assumption of a false identity, complete with fraudulent documents to prove identity. This may involve apprehending a real person’s identity or manufacturing an identity.
Misrepresentation of Information
Includes false or misleading statements regarding employment, financial status or personal status. For example, statements aimed at falsely improving the borrower’s chances of successfully getting a loan.
This can also include alteration of original documentation such as bank statements or pay-slips
with the intent to deceive.
Syndicate Fraud
Refers to fraudulent collusion between different parts of the mortgage supply chain, including borrowers, originators, brokers, real estate agents, valuers, developers, accountants and legal practitioners.
Technology will be a key resource going forward in the campaign against fraud. At present, there are varying degrees of investment in technology to assist in the detection of fraud in the mortgage industry compared with other consumer credit markets. However, there are significant benefits of this type of investment as fraud becomes more advanced; some market participants believe better technology is inevitable to fight fraud at this level.
Over the last 12 months, Genworth Financial for example, has implemented sophisticated fraud-screening technology to assist in early fraud detection by predicting the relative likelihood that a policy will become delinquent. In doing so, it helps Genworth Financial to delve deeper into these high-risk applications.
Investing in
technology
Tips for Managing Fraud
• Review your verification and authentication procedures; read the policy provided by Genworth Financial and other industry bodies with a view to implementing improved controls within your business • Be proactive about
verification; pick up the phone and use an independently sourced phone number to verify employment details. Check salary deposit information and bank statement details
• Train and equip credit and other support staff; make sure staff are fully aware of the red flags that can indicate fraud and of their responsibility in managing the risk of fraud. A variety of industry groups such as RISQ have provided training tools for managing fraud, including
seminars and education sessions
• Be vigilant with
documentation; key things to look for include missing information, inconsistent information, altered fonts or spelling errors on bank statements or other official documents
• Implement a staff fraud reward initiative; celebrate vigilant staff and encourage communication between staff and the management team regarding fraud • Invest in technology;
capturing risk at early stages will decrease the cost to your organisation and the industry in the long run, so make use of the current data-matching solutions available
• Make sure you work with legitimate valuers; the valuation component is critical
• Learn to say no; some loans SHOULD NOT be approved. Turning away business can sometimes be more profitable than the consequences of enabling fraud
• Participate in industry forums; networking with peers and other market participants is a good way to increase your knowledge of fraud and how to manage it
• Be responsible and vigilant; fraud management is the responsibility of the whole mortgage industry
Genworth Financial Level 23, 259 George Street Sydney NSW 2000 1300 655 422 www.genworth.com.au
About Genworth Financial
Genworth Financial is a leading provider of Lenders Mortgage Insurance (LMI) and credit enhancement product solutions in Australia and New Zealand. Together with our customers, our aim is to make home ownership more accessible to borrowers through the provision of LMI solutions.
When you choose Genworth Financial you choose a team focused on delivering the highest levels of personalised service, whose keen ability to understand your market drives our willingness to take a commercial approach. Our success is founded on our total commitment to understanding our customers' business needs. We have developed a culture of accepting challenges and turning them into solutions that create value for our customers.
The Genworth Financial name is associated with financial strength and integrity throughout the world. Together with our predecessor business, we have insured over AU$250 billion of residential mortgages since 1965. We offer a wide range of LMI product solutions, as well as VAL Central, an online valuation workflow management system, and Genworth Financial Deposit Saver, an alternative solution to using a cash deposit for the purchase of a residential property.
Rating Company Genworth Financial Rating
Standards & Poor's "AA" (Very Strong) Moody's "Aa2" (Excellent)
Fitch "AA" (Very Strong)
Genworth Financial Internationally
Internationally, Genworth Financial, Inc. is a leading financial security company with strong and expanding global operations. With a presence in more than 25 countries, we serve more than 15 million customers. We provide innovative products that position us as leaders in growing market segments, including life and long term care insurance, individual and group annuities and investment products, managed money, payment protection insurance and Lenders Mortgage Insurance.
We invite you to learn more about us at:
www.genworth.com.au
