[Articles] Mortgages scam costs banks millions

Victor

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Mortgages scam costs banks millions
19/09/04 00:00
By Louise McBride

Permanent TSB and First Active have been exposed to a multi-million-euro mortgage scam, The Sunday Business Post has learned.

Industry sources said the banks were facing losses of around €3 million after approving fraudulent mortgage applications, which, in some cases, were for properties or individuals that did not exist.

In the scam, brokers fabricated P60s, employer references, payslips and other documents to help clients falsely inflate their earnings to obtain mortgages several times their salary.

Fees of up to €5,000 are being charged by these brokers to guarantee loan approval for clients, according to Michael Dowling, president of the Independent Mortgage Advisors Federation (IMAF).


Dowling stressed that only a minority of brokers are involved.

``In more serious cases, the loan is actually drawn,'' he said. ``Some of the banks have been caught in this process and some of the loans drawn down have been for properties that didn't exist. The most frightening aspect of this whole thing is the collusion of valuers and solicitors in mortgage fraud,'' he said.

``Although solicitors may not knowingly be involved in mortgage fraud, a solicitor has to process mortgage documents on the bank's behalf. If the property doesn't exist, this requires collusion from solicitors, valuers and brokers alike.''

Dowling said there is a ``hit list'' of solicitors, accountants, valuers and brokers that lenders avoid when processing mortgage applications.

This list is exchanged among lenders who will then decline a mortgage application if anyone on this list is involved in the mortgage application.

Permanent TSB declined to comment. First Active said it could not comment due to the ongoing garda investigation into the mortgage scam. A source close to one of the banks claimed that no money had been lost in the fraud and that the debt was being recovered.

The source said that any lender dealing with mortgage brokers, including ICS Building Society, IIB Homeloans and Ulster Bank, would have been exposed to mortgage fraud.

It is understood that one lender approved 13 mortgages which turned out to be fraudulent.

The Garda Bureau of Fraud Investigation is investigating the fraud, including the activities of a Dublin broker whose office was recently raided by the Criminal Assets Bureau.

The financial regulator, the Irish Financial Services Regulatory Authority (IFSRA), is ultimately responsible for policing mortgage lenders and brokers.

While fraud is a criminal offence - which falls outside the remit of IFSRA's powers, the regulator is responsible for vetting and supervising brokers and lenders.

Victor

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Lying for a home
19/09/04 00:00
By Louise McBride

House prices have grown to such an extent that purchasers are falsifying their details on P60 tax forms to inflate their earnings so they can afford to buy new homes.

Last week, The Sunday Business Post spoke to Gary, a homeowner in the south-west who tried to apply for a mortgage through a broker about two years ago.

``The broker basically said that I wouldn't get a mortgage with my earnings at the time.

"He told me to ask my boss to fake my P60 to push up my earnings,'' he said.

Gary's boss refused to fake his P60, explaining that it was against the law to do so.

``When I went back to the broker and explained this, the broker basically told me that everyone was doing it and it was a normal thing. He was shocked that my boss wouldn't fake the P60, and even suggested that he'd get in touch with my boss himself.''

The broker suggested that Gary's boss fake about five payslips. ``My boss said there was no problem there - he would have done that for me - but regarding the P60, that was going too far.''

According to Michael Dowling, president of the Independent Mortgage Advisers Federation (IMAF), some brokers are faking P60s, employer references, payslips and other documents to help clients get mortgages several times their salary.

Fees of up to €5,000 are being charged by these brokers to guarantee loan approval for clients. However, Dowling stressed that only a minority of brokers were involved in this practice. ``In more serious cases, the loan is actually drawn,'' said Dowling.

``Some of the banks have been caught in this process, and some of the loans drawn down have been for properties that didn't exist.

``The most frightening aspect of this thing is the collusion of valuers and solicitors,'' he said.

Dowling explained that solicitors may not knowingly be involved in mortgage fraud.

``However, a solicitor has to process mortgage documents on the bank's behalf. If the property doesn't exist, this requires collusion from solicitors, valuers and brokers alike,'' he said.

According to Dowling, there is a `hit list' of solicitors, accountants, valuers and brokers that lenders avoid.

``This list is exchanged among lenders, and is the basis on which some mortgage applications are declined,'' he said.

The Garda Bureau of Fraud Investigation (GBFI) has launched an investigation into mortgage fraud, including a probe on the activities of a broker based in Dublin.

According to Dowling, the Criminal Assets Bureau recently raided the broker's office.

Any lender with a big brokerage business has been exposed to fraud, according to one lender. ``ICS, IIB, First Active, Permanent TSB (PTSB) and Ulster Bank have all been affected in one way or another,'' he said. ``Documents and valuations have been altered.''

According to a senior source, First Active and PTSB have been exposed to losses of €3 million arising from mortgage fraud. First Active would not comment on the case due to the Garda investigation.

PTSB were not available for comment.

However, one lender insisted that the debt involved was being recovered.


Regulation

As financial regulator, the Irish Financial Services Regulatory Authority (IFSRA) is responsible for policing mortgage lenders and brokers.

While fraud is a criminal activity, which falls outside the realm of IFSRA's powers, the regulator is responsible for authorising or vetting and supervising brokers and lenders. Its main tasks include promoting the best interests of consumers in financial services and fostering sound, growing and solvent financial institutions.

IFSRA's interim code of practice for mortgage intermediaries outlines the principles that brokers should work to, including to ``seek from its clients information regarding their financial situations'' and to ``act honestly and fairly in conducting its business activities in the best interests of its clients and the integrity of the market''.

The code does not outline how a broker should meet these requirements.

``Our system of regulation is principles-based,'' said a spokeswoman for IFSRA. ``We set out high level requirements within which financial services firms operate. "This allows financial services firms a certain flexibility to develop their own compliance ethos within the context of their own market, legislative backgrounds and cultures.''

The regulator is reviewing all codes, including for mortgage intermediaries. The codes, to be introduced by early 2005, will be enforceable by law under the Central Bank and Financial Services Authority of Ireland (CBFSAI) Act.

Even if only a minority of professionals are responsible for mortgage fraud, the fact that some have been able to slip through the net raises serious questions about IFSRA's vetting and policing procedures.

The gap in the regulation of other areas is also a concern.

The Irish Auctioneers and Valuers Institute (IAVI) said it had a code of conduct and a disciplinary committee for its members. However, there is no requirement on valuers to belong to the IAVI or other professional organisations. Similarly, although under review, there is no regulation of valuers.

There is also a gap in the regulation of accountants.

Currently, only auditors and insolvency practitioners are regulated under law.

``Our association has clear disciplinary procedures,'' said a spokesman for the Institute of Chartered Accountants in Ireland (ICAI). ``However, there is a grey area there, where accountants could set themselves up and anyone availing of their services would have no legal protection if something went wrong.''

The Law Society of Ireland said it was not aware of any solicitor involved in mortgage fraud. ``If a solicitor engaged in such a practice, he would be struck off the register and face a jail sentence,'' said Ken Murphy, director general of the Law Society.

The Irish Brokers' Association (IBA) said it was not aware of any of its members involved in mortgage fraud.

``We would not defend or stand over any of our members guilty of this,'' said Paul Lynch, chief executive of the IBA.


The lending explosion

An economist in the Central Bank said last autumn that relaxed lending criteria nowadays meant that many new mortgage-holders had higher mortgage repayments than their peers did in the early 1990s, even though mortgage interest rates were lower and incomes higher.

``Mortgage lending growth in recent years has been high, both by historical and international comparison,'' said Dr Allan Kearns, an economist with the Central Bank.

``Recent anecdotal evidence suggests that households are obtaining ever higher mortgage debt-to-income multiples, higher loan-to-value ratios and/or higher maturity loans.''

Although the IFSRA is aware and concerned about the explosion of mortgage lending in Ireland, it does not issue - nor does it intend to - lending criteria to financial institutions. According to a spokeswoman for the IFSRA, lending criteria are a matter for each individual institution.

``IFSRA has asked lending institutions to ensure that strong checks for loan approval are in place. It is up to each institution to determine its own lending policy and to fully satisfy themselves that the borrower is in a position to repay,'' said the IFSRA spokeswoman.

There is no doubt that the steep rise in house prices has left many homeowners with little choice but to apply for mortgages that are several times their annual incomes.

According to the Economist's house price indices, Irish house prices increased by 181 per cent between 1997 and 2004 - almost three times the average growth of other countries.

This compared with 132 per cent for Britain, 57 per cent for the US and 11 per cent for Switzerland. Such house prices have placed the deposit alone beyond the reach of many borrowers.

For someone on the average industrial wage, the deposit on a house equals a year's earnings, compared with one third in 1989, according to a report to be published by the National Economic and Social Council this November.

Victor

continued

Credit unions

There is anecdotal evidence that a growing number of homeowners are borrowing the deposit for their home from credit unions. This effectively means they are borrowing the full price of the house - placing the borrower at considerable risk of mortgage arrears.

As most credit unions are not members of the Irish Credit Bureau, lenders cannot check if an applicant is borrowing the deposit for a house.

Since May of last year, the IFSRA has been responsible for regulating credit unions. With no limit on the size of loans granted to credit union members and vague rules on internal controls, it is very likely that serious problems could arise in this sector in the coming years.

``Each credit union is responsible for setting its own credit policy, which is approved by the board of directors,'' said the spokeswoman for IFSRA. ``There is no set member's share ratio required before a loan can be granted.''

Asked about internal controls in credit unions, the spokeswoman for IFSRA said: ``There are procedures laid down in the Credit Union Act 1997 in regard to the making of loans by the credit officer, the credit committee and the board of directors.

"Each credit union sets out its own requirements in relation to the taking of security for loans.''

Credit unions must send the IFSRA their annual accounts, a copy of the auditor's report on the accounts and annual returns each year. If necessary, IFSRA can require any credit union to submit returns at any time or more frequently.

Credit unions wrote off bad debts of about €18 million last year, and are expected to write off €20 million in bad debts this year.

A number of credit unions have already come under the spotlight.

Firhouse was investigated by gardai and the Revenue Commissioners last summer for alleged serious financial irregularities.

According to the credit union's latest annual report, it has bad debts of €3.6 million.

Gurranabraher's lending practices were investigated by the Garda Siochana last year.

Although no action was required, in one case, a loan of €127,000 was granted to a credit union member with just €127 in savings.

Monaghan is reviewing its policies and procedures after running up significant bad debts. It is understood that loans to the value of €1million were granted to people who then left the country.

Mitchelstown experienced computer and administration problems earlier this year.

Cavan was investigated last summer for a conflict of interest under Section 114 of the Credit Union Act 1997. According to documentation received by this paper, a five-figure loan was granted to a member who had about 2 per cent of the loan amount in savings.

``The ongoing supervision of credit unions includes onsite inspections and offsite reviews and meetings, in addition to various reporting requirements,'' said an IFSRA spokesman. ``The investigation of fraud is, generally, a matter for the gardai.''

Asked for a list of credit unions that have come to IFSRA's attention for frauds and inappropriate practices, the regulator said it could not comment on individual credit unions.