Fraud Prevention Amid COVID-19

Realtors, mortgage brokers, and lawyers must be extra vigilant when working remotely, and could see an increase of fraudulent activity during the COVID-19 pandemic. Equifax has stated that mortgage fraud has increased by 52% since 2013.  As a professional in the industry, you should be aware of the types of fraud you can encounter and what red flags to look out for.

Types of Fraud

1) Fraud for Property
Where the fraudster will defraud a property owner in order to take title to that property. This fraudster will demonstrate an intention of paying their mortgage, but may have the inability to do so. This type of fraudster will alter information or even forge documents to obtain a property. This could include:

  • Stating they are a full-time salaried employee when they are not
  • Misrepresenting the amount or source of the down payment
  • Claiming a rented property is owner-occupied
  • Not disclosing other mortgages or debts
  • Omitting information to inflate the value of the property
  • Adding purchasers’ names on the mortgage application who do not intend to take responsibility for the mortgage
  • “Straw buyer” A person with good credit is used to get a mortgage for someone else

2) Fraud for Profit
Where a fraudster will defraud a lender or other financial entity to secure funds illicitly. This fraudster may have many other persons involved in the scheme such as: home owner, mortgage brokers, appraiser, underwriter at lender and closing lawyer. They have likely committed fraud in the past and can complete multiple scams at once. These scams typically include the involvement of the homeowner or result from cases of identity theft. These schemes are more costly and more profitable than fraud for property. BMO experienced fraud for profit when they noticed “irregularities” in some mortgages in Alberta:

  •  The massive mortgage fraud scheme involved hundreds of people, ranging from applicants to mortgage brokers to bank employees to lawyers and even a Calgary MP
  •  BMO advanced about $70 million in mortgage funds, with its losses estimated at $30 million
  •  BMO’s decision to file a lawsuit (in a bid to recoup its money) is also seen as an oddity

Effects of Fraud on the Real Estate Market

  • Escalation of property prices
  • Housing affordability crisis
  • Housing bubble: Toronto has the 3rd worst risk in the world
  • Higher debt levels
  • Higher property taxes
  • Mortgage Stress Test: More people are misstating information as they are trying to beat the stress test
  • Lack of affordable rental housing

It is important to note that fraud not only affects individuals, but can ripple into the Real Estate Market and have profound effects on lenders and insurance companies as identified below:

Victims of Fraud

  • Fraud for property are perpetrated against mortgage lenders
  • Fraud for profit are mostly perpetrated against title insurance companies
  • Salient condemnation: More fraud affects us all. This could be through higher fees or insurance cost, or more stringent requirements to keep those without means from entering the market. CMHC takes measures every year to protect the market, it is not a victimless crime

Red Flags of Fraud

  • Rush closing and new clients, whether individual or corporate
  • Requests to send funds to unrelated 3rd parties
  • Changing payment instructions just before closing
  • Transactions on mortgage-free properties or vacant land
  • Transactions involving persons who are elderly, vulnerable, or out of the country
  • Transactions involving persons who may be under undue influence or pressure from other family members or acquaintances
  • Private agreements of purchase and sale
  • Deals involving high ratio mortgages
  • Deals involving equity gifts
  • Abuses of power of attorney and power of sale
  • Recent activity on title
  • Investment properties

Fraud Examples

Identity Theft
The client uses a fake ID to assume the identity of an existing property owner. The client sells or mortgages the property, or discharges mortgage from title, then gets a new mortgage from a different lender.

The paperwork looks in order, often with no encumbrances on title, but with one or more recently discharged mortgages or recent transfers. The fraudster is typically in a hurry and accommodating, and may also discourage house inspection or appraisal. Once the transaction closes, you pay proceeds to the fraudster who may make a few mortgage payments and then disappears with the funds.  The lender then sues the lawyer for the value of the mortgage.

Synthetic Identity Fraud

Synthetic identity fraud is the evolution of fraud. This is easily accomplished with virtual offices; being effectively untraceable.

  •  Costing Canadians more than $1Billion every year
  •  Uses real and fake ID in order to create a new identity
  •  Not “fake” identity; genuine documentation (ie. driver’s licenses and SINs); identity created out of ‘thin air’
  •  Approximately 200,000 driver’s licenses with fake names in Canada
  •  Fraudster usually has access to personal information (ie. bank employee); often entire syndicates with handlers
  •  Gets access to a SIN without assigned credit and different D.O.B.
  •  Makes subtle changes to profile (ie. Address, D.O.B.); locks out real individual
  •  Fraudster applies for credit; initially makes payments and maintains good credit rating

Fraudster eventually applies for mortgage, line of credit, etc., then “busts out” – maxing out credit and disappearing

Synthetic Identity Fraud Precautions

Look out for:

  • SIN doesn’t match or matches to a bunch of different identities;
  • Credit file depth is inconsistent with age of borrower;
  • Multiple applications with the same phone number;
  • Mailing address is wrong;
  • Use of secured credit cards or piggybacking to build credit;
  • Children and elderly citizens make for better targets

Fraud Prevention in a Virtual World
With no national resources in place, but only special investigation units in Toronto and Vancouver, mortgage fraud is largely underreported. Lenders are hesitant to report fraud as it is bad for business and subsequently is written off as a loss, with the average cost of real estate fraud for profit being in excess of $300,000. FCT indicates that they complete over 1,000,000 title insurance policies a year and deny about $100,000,000 of deals each year.

So how can you prevent fraud?

Banks and lenders:

  •  Shared information between lenders about known fraudsters and scams
  •  Mortgage Insurers, such as CMHC, offer a further review
  •  Fraud teams monitor documents

Day to day:

  • VPN, multi-factor authentication, strong passwords; don’t connect to open or public WIFI networks; only use familiar apps
  • Use video software that is easily accessible by clients
  • Consider videotaping the conference
  • Obtain a high-resolution copy of the front and back of acceptable ID prior to the scheduled video conference for comparative purposes
  • During the video conference make sure their collected ID matches their identity and is current
  • Have the clients show their identification at the time of signing
  • Witness the signing/execution of the documents during the signing; ensure the documents the client has are the same as the ones the lawyer/agent has (share your screen whenever possible)
  • Consider verifying the Drivers’ License on the MTO website
  • Consider reverse searches on telephone numbers
  • Look up addresses using Street View in Google Maps
  • Confirm branch transit numbers with banks
  • Preserve the clients’ privacy; be aware of who else is in the room during the video conference

It is incumbent on realtors, lenders, mortgage brokers and lawyers to do their due diligence to protect not only themselves but also their clients. COVID-19 has created a unique opportunity for fraudulent activity due to the increase in remote and virtual work.  However, with the right precautions in place, fraud can be easily identified and prevented.