Mortgage fraud is an ever present issue for lenders and one that can have devastating consequences for those affected. Indeed, the Council of Mortgage Lenders (CML) is so acutely aware of just how important combating fraud is to the community, that it has dedicated an entire page on its website to this subject matter.

The CML identifies four categories of mortgage fraud: application, identity, registration and valuation. Whilst mitigation of registration and valuation fraud is undertaken by the imposition of stringent standards on third parties such as the Land Registry, valuers and conveyancing specialists; responsibility for the mitigation of application and identity fraud primarily rests with the lender. However, as the level of fraud on mortgages and insurance policies has more than doubled since the start of the credit crunch, going from 18 cases per 10,000 applications in 2007 to 38 cases in every 10,000 in 2012, there is arguably a question mark over the efficiency of the mechanisms implemented.

The lender is required by statute, and by the PRA and FCA, to establish and maintain effective systems and controls to prevent them being used to further financial crime, and the FCA has issued guidance on this. Specifically in relation to application fraud, the CML has identified credit checks, National Hunter searches, SIRA, CIFAS checks, plausibility of income checks and internal systems checks as ‘fraud pre-emption’ measures. However, as sophisticated and elaborate as these pre-emption measures appear, fraudsters can be equally as sophisticated and find ways around them.

This is precisely the reason why we have had case law including well-known bridging lenders where, despite the ID checks, fraud was not detected due to the high quality of the fake ID. It is worth noting that none of the checks and balances implemented could prevent fraud arising from the identity of the law firm in question, as was the case in Lloyds TSB Bank plc v Markandan & Uddin [2012] 2 All ER 884.

In the absence of a foolproof risk mitigation regime, title insurance offers a perfect risk transference tool. The unique advantage of the Titlesolv product being that the lender is not required to prove negligence in order to recover losses. At Titlesolv we have extensive first-hand experience of successfully and painlessly managing mortgage fraud claims, offering non loss based products and settling all claims within six months of acceptance of a valid claim. One of our most recent claims related to a mortgage for £161,035 which was registered as a first legal charge. There were two borrowers, Mr X and Mrs X. The mortgage fell into arrears and a claim for possession was made by the lender (our insured) against the borrowers. Mr X filed a defence to the possession proceedings alleging that he had no knowledge of the loan and that his wife, Mrs X had obtained the loan fraudulently. A claim was made because the alleged fraud adversely affected the rights of the lender under the mortgage as it was not possible to obtain possession. Mrs X admitted the fraud to the police but only received a caution. The claim was investigated, accepted and settled for £168,619 comprising the loan amount plus accrued interest.

Within the lender fraternity, title insurance is typically regarded as a transaction enabler that delivers due diligence cost reductions. In the context of recent fraud cases, the utility of the product now extends its reach to an essential risk management tool. Mortgage fraud techniques are becoming increasingly unpredictable and technologically driven as the Land Registry continues to tighten its rules for obtaining compensation. Thus, even more important than the question of efficacy of fraud detection mechanisms will be the question of whether self-insurance against mortgage fraud losses is an appropriate risk management mechanism, particularly when benchmarked against the efficiency with which such matters can be resolved using title insurance.    

1. Lenders need to reassess whether their current processes are adequate for effective management of fraud risk.

2. Lenders must carefully consider their fraud risk exposure in an increasingly sophisticated fraud risk climate.

Titlesolv is a trading name of London & European Title Insurance Services Limited authorised and regulated by the Financial Conduct Authority

By Harcharan Lidher, Claims Manager at Titlesolv