MQCC FraudWatch Program & ID Proof

Part of MortgageQuote's Industry First: "1st Defence: Active Fraud Avoidance Technology"

Mortgage FraudWatch

Mortgage Fraud Watch at MortgageQuote.ca is a policy and approached implemented since 2007. Using MortgageQuote's proprietary ACTIVE FRAUD AVOIDANCE Technology from the point of origination to the point of funding, we are doing are part to identify and avoid the high cost of mortgage fraud.

Applicant & Borrower Quick Tips:

  • Be candid
  • Be exclusive with your current licensed broker, lender and industry professional. (You are required to provide notice of cancellation - in writing - if you choose to move to a new licensed broker or lender). An email notice of cancellation is not sufficient.

See the Applicant & Borrower Checklist: Mortgage Fraud Information to learn more.

Applicant & Borrower Checklist: Mortgage Fraud Information

Mortgage brokerage professionals must ensure the borrower is aware of mortgage fraud and its consequences.

The checklist below is intended to facilitate this discussion with the borrower in order to make them aware of, and to prevent, mortgage fraud.

Please review the information below with borrowers, using the checklist to document in writing when and with whom this discussion occurred.

MORTGAGE FRAUD INFORMATION TO DISCUSS WITH BORROWERS

What is mortgage fraud?

Mortgage fraud is the intentional manipulation of personal and/or financial information by an individual to qualify for a mortgage, or to assist another individual to obtain a mortgage, that would otherwise not have been approved or been approved for a lesser amount.

Mortgage fraud includes the attempt to defraud a lender even if the lender did not approve or fund the mortgage.

 You are committing mortgage fraud if you:

• Provide false or misleading information to obtain a mortgage

• Omit relevant information in order to obtain a mortgage

• Provide false or misleading documentation to obtain a mortgage

• Alter true and correct documentation in order to obtain a mortgage

• Collude with another to use your information to obtain a mortgage for them or someone else

• Fail to report a change in your personal circumstances after a mortgage loan application has been made and prior to the mortgage being funded

 Mortgage fraud is a criminal offence and may result in:

• Serious legal actions by the lender and the mortgage insurer

• Inability to declare bankruptcy if subject to a judgement resulting from fraud

• Significant downgrading of your credit history

• A maximum of 14 years imprisonment for each fraud case

• Higher mortgage costs and insurance fee for all borrowers

• Increased activity by organized criminals in the community

• Deterioration of housing in the affected communities

 Mortgage brokerage professionals help to prevent fraud by:

• Receiving mortgage fraud detection and prevention training

• Explaining to you what mortgage fraud is and answering your questions

• Explaining to you the consequences of mortgage fraud on you and the community

Note: When a mortgage brokerage professional represents you, if you have been candid about your circumstances, they can provide you with options, advocate for you to obtain a mortgage loan lawfully, and give you confidential advice.

Note: When a mortgage brokerage represents the lender or acts as an intermediary, if you have been candid about your circumstances, they can provide you with options for you to obtain a mortgage loan lawfully.

Source: Real Estate Council of Alberta

Don't commit mortgage fraud unwittingly! Did you know this is considered mortgage fraud?

- Approaching multiple lenders simultaneously for loans on one property (i.e. “shotgunning”), either directly or via multiple mortgage brokers, simultaneously.

- Representing to each lender that the property has substantial unencumbered equity.

- Another tactic is to approach multiple lenders simultaneously for loans to one individual (i.e. “chunking”), in excess of the debt service capability of that individual.

ID Proof

Identification of Applicants (Verification of Identity & Attestation of Identity)

id.mortgagequote.ca

Legal Requirements

Mortgage Brokerages: Standards of Practice Ontario Regulation 188/08 (and other jurisdictions in which MortgageQuote operates) has a number of sections requiring brokerages to take actions to identify possible fraud:

  • Section 10 [speaks to] the duty to verify the customer’s identity;
  • Section 11 [speaks to] the duty to verify the other party’s identity;
  • Section 12 does not allow a brokerage to act for a borrower, lender or investor if the brokerage has reasonable grounds to believe the mortgage or its renewal is unlawful;
  • Section 13 requires a brokerage that has reason to doubt the borrower’s legal authority to mortgage a property to advise each prospective lender at the earliest opportunity;
  • Section 14 states that if a brokerage has reason to doubt the accuracy of information contained in a borrower’s mortgage application or in a document submitted in support of an application, the brokerage shall so advise each prospective lender at the earliest opportunity. The requirements in section 13 and 14 continue after the borrower enters into the mortgage agreement (after it is signed).

Mortgage Brokerages: Standards of Practice Ontario Regulation 188/08, section 14.2, which will go into effect on January 1, 2016, states:

“14.2 A brokerage shall not act, or do anything or omit to do anything, in circumstances where the brokerage ought to know that by acting, doing the thing or omitting to do the thing, the brokerage is being used by a borrower, lender, investor or any other person to facilitate dishonesty, fraud, crime or illegal conduct.”

Jurisdictional Reference

Part of our Mortgage FraudWatch program requires that all applicants provide two pieces of ID because it is known that people who are attempting a fraudulent transaction often do not have the ability to provide identification.

Refer to the Financial Consumer Agency of Canada website www.acfc-fcac.gc.ca

for acceptable identification for New Account Opening - we have the following:

Obtain two pieces of identification, at least one of which contains a photograph and is from List A. One piece of identification may be provided from List B.

Legal Duty to Verify Identity of customers and other parties:

Legal duty to verify customer and third party’s identity

If one of our MortgageQuote licensed mortgage professionals meet with you, they must certify the following:

Certification Statement

I certify that I have personally met with each applicant and/or guarantor and examined original copies of at least two identification documents from the list in Appendix A of Origination Standards for Fraud Avoidance. One of which includes a picture and was issued by a federal or provincial government. Signatures on the application were compared to, and matched with, the signatures on the mortgage loan application and the Agreement for Purchase and Sale. The following pieces of identification were examined. Include name of each applicant, the type of identification, the serial number and expiry date for each piece of identification examined. See VOI for names of applicants and evidence of VOI activity. Digitally Signed/Acknowledged.

Approved Identification Documents

List A

AT LEAST 1 (one) from this column

  • a valid driver's license issued in Canada;
  • a current Canadian passport;
  • a Certificate of Canadian Citizenship or Certification of Naturalization;
  • a Permanent Resident card or Citizenship and Immigration Canada Form IMM1000 or IMM1442;
  • a birth certificate issued in Canada;
  • a Social Insurance Number (SIN) card issued by the Government of Canada;
  • an Old Age Security card issued by the Government of Canada;
  • a Certificate of Indian Status issued by the Government of Canada;
  • a provincial health insurance card (except Ontario, Manitoba or PEI);
  • or a document or card with a signature and photograph on it issued by: the Insurance Corporation of British Columbia; Alberta Registries; Saskatchewan Government Insurance; the Department of Service Nova Scotia and Municipal Relations; the Department of Transportation and Public Works of the Province of Prince Edward Island; Service New Brunswick; the Department of Government Services and Lands of the Province of Newfoundland and Labrador; the Department of Transportation of the Northwest Territories; or the Department of Community Government and Transportation of the Territory of Nunavut.

List B

The second piece may be from here.

  • an employee identity card with a photograph from an employer well known in the community;
  • a signed automated banking machine (ABM) card or client card issued by a member of the Canadian Payments Association;
  • a signed credit card issued by a member of the Canadian Payments Association;
  • a signed Canadian Institute for the Blind (CNIB) client card with a photograph;
  • or a current foreign passport.

Practices for Fraud Prevention

The general public in Canada should understand that borrowing money using real estate as security is not an elementary transaction and one that deserves a great deal of understanding because the implications for both lender and borrower are significant. When things go well in a mortgage transaction, everyone is happy. When things go wrong in a mortgage transaction, some people are not happy and sometimes, complicated third parties are required to help fix the situation. Third parties are not always easy to work with because some third parties include lawyers, judges, realtors, sheriffs, appraisers, bailiffs, law enforcement and others.

The reason why such third parties are considered complicated is because the use of almost all of these third parties takes up both time and money. Some times the money is paid by the lender, sometimes the money is paid by the borrower, in all cases, time is paid by all parties involved.

Often, problems and unhappiness in a mortgage transaction, may be caused by fraud. In this day of the internet and advanced technology, one of the major concerns by both mortgage borrowers and mortgage lenders is fraud. A borrower is concerned about predatory lenders (visit www.privatelender.org to learn more); and a lender is concerned about fraudulent borrowers.

At MortgageQuote Canada Corp., our Mortgage FraudWatch program helps to minimize or eliminate the origination of fraudulent mortgage transaction. Part of our process is to follow generally acceptable fraud prevention activities. The philosophy of our fraudwatch program is based upon general, universal risk mitigation concepts however, the general public will benefit by understanding how some Canadian regulator's and industry organizations instruct some mortgage industry members on the process of fraud prevention.

Source: Various General Public and Experience

What is Mortgage Fraud?

Fraud, in mortgages, is when a person is purposefully lying when they communicate something. The lie might not be full lie, it may also be a misstatement, a point of miscommunication, a misrepresentation, or failing to say something that should be said because it might hurt the party if they say it (omission). If something is a genuine mistake or error, this is not as much a problem as when a person is actively trying to communicate a non-true item.

Why do people do Mortgage Fraud?

To get money or some other thing of benefit from another party. For example, a fraudster may apply for a mortgage from a lender in order to get money from the lender, with no intention of paying back the money.

What do Mortgage Bankers and Mortgage Brokers do about Mortgage Fraud (MF)?

As professionals, we have a professional responsibility to that mortgage fraud is "out there" and we are required to learn as much as we can about it in order to identify MF and help prevent it; if we don't we can risk our stakeholders money (borrowers, lenders and related parties).

It is a Canadian Criminal Offence to commit fraud

CCC Section 380 (Canadian Criminal Code)

"everyone who, by deceit, falsehood or other fraudulent means, defrauds the public or any person of any property, money or valuable security or any service is guilty of an indictable offence." There is no statute of limitations on fraud; so a fraud committing person can be sued at anytime, even after the fraud was committed.

As mortgage bankers and mortgage brokers, our role is to:

- underwrite a file in a good manner (at mortgagequote.ca we adhere to GAMUS (www.gamus.org).

- deal with only qualified industry professionals (at mortgagequote.ca we work with members of PEMPACTM (www.pempac.org) and select licensed mortgage professionals.

Foreclosure Stopping (FS)

FS can be legally and ethically undertaken and can benefit the homeowner if there is full written disclosure of all the terms of the FS transaction (costs, implications).

Using a Lender's Preferred Appraisal Firm

Sometimes a lender will only accept an appraisal from their own list of preferred appraisal firms in order to prevent fraud or non-fraud problems such as:

  • Air Loan Fraud
  • Inflated Value Fraud
  • Incompetent or Inexperienced Valuation

Some sub-types of Fraud

Identity Theft

Retail Transactions

For retail transactions, a telephone call is the minimum requirement for at least an initial interview AND document verification for some provinces, ie: BC.

Further Information including Red Flags:

Source: Real Estate Council of Alberta

Industry Professionals - General

Purpose: To help industry professionals evaluate whether mortgage fraud is taking place.

This bulletin applies to all industry professionals

Red flags indicate the possibility of a concern

The following red flags are sometimes found in fraudulent transactions. While these don’t guarantee fraud is taking place, they should raise suspicion, particularly if more than two or three are present.

Red Flags

Red flags associated with the true identity of the parties to the trade:

• client won’t provide photo ID, when asked

• transaction involves an associate’s relative

• existence of other offers, subject to financing, that collapsed

• parties "undisclosed," "care of listing brokerage," or "nominee"

• land title records don’t match seller information

• buyer is a numbered company seeking a high ratio mortgage

• corporate search shows the associate or the associate's spouse or family member as a director

• buyers or sellers are not personally or professionally related. For example, “R. Smith and Michael Jones”

• buyers' or sellers' names are only partially indicated; e.g. last name appears without a first name ("Smith"), or the first name is indicated by only an initial ("R. Smith")

• information about buyer's income doesn't match industry standards

• buyer purchases property far from place of employment for no reason

• buyer purchases investment property, yet does not own a principal residence

• buyer is purchasing many properties with high ratio mortgages, using different names or variations of their name

• parties have no formal office; communication is by cell phone, email and fax; meetings take place at public places

• the deposit cheque(s) is coming from someone other than the buyer

• deposit is provided in cash or by money order

• someone acting on a power of attorney represents the buyer or seller

Red flags associated with property value:

• no CMA or appraisal available, or if available, does not seem applicable

• vendor take back and/or other forms of equity arrangements

• sweat equity arrangements as opposed to a reduced price

• vendor take back or sweat equity arrangements not referenced in the purchase contract

• chattels are used as deposit or as partial payment

• renovation value included in the sale price

• property has illegal/non-conforming suites

• property is a combination of residential and commercial components that are not reflected in the financing arrangements

• commercial property has residential type financing or loan-to-values ratios

• listed property is owned by a corporation but has a mortgage in excess of 80% of property value

• purchase price is same as, or higher than, list price

• property list price or purchase price is unusual for the neighbourhood

• parties to the trade provided the appraisals

Red flags indicating unusual transactions:

  • quick succession of trades on one property
  • seller in the "business" of selling real estate, and buys and sells many properties
  • use of "Seller's Rights Reserved" on listings
  • uncommon commission arrangements, unusual adjustment to commissions, flat fees, low fees
  • listing associate refers people to an unlicensed person for showings or information
  • listing information is unusual or inconsistent with the transaction. For example, listing is removed from the listing database prior to sale, sale is not reported, listing reappears at higher price, associate named in the listing is different from the purchase contract, listing database history doesn't support pricing, etc.
  • one lawyer represents both parties to the transaction
  • condition allowing buyer to show unit to prospective tenants (most high ratio mortgages require owner occupancy)
  • all or many units of building are sold at the same time with coinciding possession dates
  • immediate possession dates
  • firm transaction with none of the usual conditions; in particular, a transaction requiring high ratio financing, yet is unconditional
  • no counter offer
  • contract indicates unusual language: for example, ”this is a private sale"
  • names appear to have been added to or deleted from the contract
  • not all parties named on the contract have signed it
  • purchase contract indicates both parties signed at the same time
  • no buyer's or seller's associate information provided for delivery of documents
  • schedules or addendums exist but are not indicated in the contract, or, schedules or addendums do not reference the originating contract
  • deposits not held at brokerage; particularly applies when brokerage is not even provided with a photocopy of the deposit cheque

Red flags associated with industry professional behaviour:

  • industry professional’s lifestyle is not consistent with income received through the brokerage
  • industry professional representative section of the contract not filled out
  • industry professional tends to use same lawyer on most transactions
  • industry professional primarily does transactions with only certain other associates
  • industry professional tends to refer clients to the same mortgage broker
  • someone other than the real estate associates witness the signatures
  • industry professional buys and sells his/her own properties regularly
  • industry professional lends down payment to client
  • number of listings or sales an industry professional has posted on the the listing database does not correspond to brokerage records (possible fraudulent broker load situations)
  • industry professional regularly advertises properties as "low down," "assumable," "no down," "no qualifying," "quick possession," etc
  • industry professional holds both real estate and mortgage associate licences

Red flags associated with brokerage operations:

• broker has no fraud prevention or detection policies

• broker does not review transactions

• conveyancing staff not trained to recognize suspicious transactions

• advertisements are not approved prior to publication and/or are not reviewed by broker

• brokerage does not check background of prospective industry professionals

Related information

Legislation

Real Estate Act Rules – sections 41(a), s.42(a)(b)

Mortgage Brokerage Professionals

To help mortgage brokerage professionals evaluate whether mortgage fraud is taking place.

This bulletin applies to mortgage brokerages, brokers, and associates.

Mortgage fraud is a criminal offence. Participation in mortgage fraud also violates the Real Estate Act Rules. Industry professionals who breach the Rules face strong sanctions, including suspension or cancellation of their authorization. Industry professionals must help prevent mortgage fraud by identifying suspicious deals and notifying authorities.

Red Flags

Red flags associated with the identity of buyers/borrowers:

  • the buyer/borrower will not provide photo ID when asked
  • transaction involves an industry professional’s relative
  • existence of other offers, subject to financing, that collapsed
  • parties are “undisclosed,” appear as “care of listing brokerage,” or “nominee”
  • land title records don’t match seller information
  • the buyer is a numbered company seeking a high-ratio mortgage
  • corporate search shows the industry professional, their spouse or family member are a director
  • buyers or sellers not personally or professionally related, as “R. Smith and M. Jones”
  • buyers' or sellers' names are only partially indicated; e.g. last name appears without a first name ("Smith"), or the first name is indicated by only an initial ("R. Smith")
  • information about buyer's income doesn't match industry standards
  • buyer purchases a property far from his or her employment for no apparent reason
  • buyer purchases an investment property, but doesn’t own a principal residence
  • buyer purchases multiple properties with high-ratio mortgages with different names/name variations
  • parties have no formal office (e.g. communicate by cell, email or fax), hold meetings at restaurants)
  • the deposit cheque(s) is coming from someone other than the buyer
  • the deposit is provided in cash or by money order
  • someone acting on a power of attorney represents the buyer or seller

Red flags associated with the property value:

  • vendor take back mortgage and/or other forms of equity arrangements
  • sweat equity arrangements as opposed to a reduced price
  • vendor take back or sweat equity arrangements not referenced in the purchase contract
  • chattels are used as deposit or as partial payment
  • renovation value included in the sale price
  • property has illegal/nonconforming suites
  • property is a combination of residential and commercial components that are not reflected in the financing arrangements
  • commercial property has residential type financing or loan-to-values ratios
  • listed property is owned by a corporation but has mortgage in excess of 80% of property value
  • purchase price is same as, or higher than list price
  • property list price or purchase price of property is unusual for the neighbourhood
  • the parties to the trade provided the appraisals

Red flags indicating unusual transactions:

  • quick succession of trades on one property
  • seller in the "business" of selling real estate and buys and sells many properties
  • use of "Seller's Rights Reserved" on listings
  • uncommon commission arrangements, unusual adjustment to commissions, low fees
  • listing associate's instructions refer questions to unlicensed person for showings or information
  • listing information is unusual or inconsistent with the transaction. For example, listing is removed from the listing database prior to sale, sale is not reported, listing reappears at higher price, associate named in the listing is different from the purchase contract, listing database history doesn't support pricing, etc.
  • Seller’s real estate representative is asked to produce a feature sheet on the property with an inflated price
  • one lawyer represents both parties to the transaction
  • condition allowing buyer to show unit to prospective tenants (most high ratio mortgages require owner occupancy)
  • all or many units of building are sold at the same time with overlapping possession dates
  • immediate possession dates
  • firm transaction with none of the usual conditions; in particular, a transaction requiring high-ratio financing, yet is unconditional
  • no counter offer
  • contract indicates unusual statement; i.e. "this is a private sale"
  • names appear to have been added to or deleted from the contract
  • not all parties named on the contract have signed it
  • purchase contract indicates both parties signed at the same time
  • no buyer's or seller's associate information provided for delivery of documents
  • schedules or addendums exist but are not indicated in the contract, or, schedules or addendums do not reference the original contract
  • deposits not held at brokerage; particularly applies when brokerage is not even provided with a photocopy of the deposit cheque

Red flags associated with industry professional behaviour:

  • industry professional seems to have an income coming from outside their brokerage
  • industry professional section of the contract not filled out
  • industry professional tends to use same lawyer on most transactions
  • industry professional primarily does transactions with only certain other associates
  • industry professional tends to always refer clients to the same mortgage broker
  • signatures are witnessed by someone other than the real estate associate(s)
  • industry professional buys and sells his/her own properties regularly
  • industry professional lends down payment to client
  • number of listings or sales an industry professional has posted on the the listing database does not correspond to brokerage records (possible fraudulent broker load situations)
  • industry professional regularly advertises properties as "low down," "assumable," "no down," "no qualifying," "quick possession," etc
  • industry professional holds both real estate and mortgage associate licences

Red flags associated with brokerage operations:

  • broker has no fraud prevention or detection policies
  • brokerage has no policies or oversight related to personal trades/deals in mortgages
  • brokerage administration staff are not trained to recognize suspicious transactions
  • brokerage does not require property title be pulled and examined with each new listing
  • brokerage does not require the original transaction documents to be filed with them
  • brokerage does not check that all transaction documents are filed with them
  • brokerage does not check background of prospective industry professionals or employees
  • brokerage does not disclose what information it has or has not verified
  • brokerage does not comply with the requirements of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
  • broker does not review transactions
  • conveyancing staff not trained to recognize suspicious transactions
  • broker does not review or approve advertisements prior to publication

When you identify a suspicious transaction

Contact the lender and tell them why you are suspicious. Report the results of your review to RECA in writing if the persons involved are other industry professionals (real estate associates/brokers, mortgage associates/brokers or appraisers).

Related information

CHECKLIST: MORTGAGE FRAUD INFORMATION FOR BORROWERS (REPRESENTING THE BORROWER)

CHECKLIST: MORTGAGE FRAUD INFORMATION FOR BORROWERS (REPRESENTING THE LENDER OR ACTING AS INTERMEDIARY)

Legislation

Real Estate Act Rules – sections 41(a), s.42(a)(b)

Information bulletins

Real Estate Appraisal Professionals

Purpose: To help real estate appraisal professionals evaluate whether mortgage fraud is taking place.

This bulletin applies to real estate appraisal professionals

Mortgage fraud is a criminal offence. Participation in mortgage fraud also violates the Real Estate Act Rules. Industry professionals who breach the Rules face strong sanctions, including suspension or cancellation of their authorization. Industry professionals must help prevent mortgage fraud by identifying suspicious deals and notifying authorities.

Appraisal agreement issues:

  • The person requests that the appraiser complete an appraisal in an unfamiliar market area or outside of the appraiser’s stated expertise.
  • The person indicates the property value expected.
  • The person requesting the appraisal for financing purposes is someone other than a lender
  • The person tries to influence the appraiser with the promise of additional work if the current appraisal value(s) meets expectations.
  • The person requesting the appraisal approached other appraisers and is not satisfied with their values.
  • The person requests that the appraiser keep everything confidential and not contact others involved in the transaction
  • The person does not intend to move into the property when a high-ratio mortgage is being sought.
  • The person does not provide information requested (leases, expense information, financial statements, etc.) and says the information is lost or with someone who is away (accountant, lawyer, etc.) and cannot be obtained.
  • The person is using a financial institution with offices in a different city
  • The person provides poorly executed documentation regarding listings, sales, leases, etc. (may be only partially completed)
  • The person misrepresents improvements or other information about the property, such as age, rental rates, expenses, etc
  • The person needs the appraisal immediately
  • The person indicates that the interior cannot be inspected for various reasons (tenant/owner away, illness, etc.) but they can provide the information regarding the makeup and condition of the interior.
  • The person will not show the subject unit(s) but rather another unit (usually one that is upgraded), and asks the appraiser to provide an appraisal on a number or all units.
  • The person indicates the property (unit) will be renovated, and the appraisal is to be completed as renovated, but is not specific about what renovations will be completed
  • The person provides sales information on other units in the same complex or other similar complexes that may or may not have closed
  • The person requesting the appraisal gives the appraiser an information package including sizes, comparables, etc.
  • The person has no formal office or home address and communication is by cell phone or e-mail, and meetings are at public places.

Other Issues

  • The person has purchased the property recently.
  • Purchase price is higher than list price.
  • The previous sale price of the same property was recent and substantially lower
  • The property has changed ownership several times over a short period of time with price increases on each change
  • The selling price appears high in comparison to the neighbourhood value range
  • In reviewing listings, offers to purchase, etc., the parties are “undisclosed,” “Care of Listing Broker,” or “nominee”
  • The property has illegal/non-conforming suites
  • Both parties to the transaction are represented by the same lawyer.
  • The listing was cancelled from the listing database prior to the sale (true sale price will be unknown)
  • All or many units of a building are sold at the same time with coinciding possession dates
  • Listed property is owned by a corporation but has a mortgage in excess of 80% of the property’s value
  • Immediate possession dates
  • Expected due diligence or conditions are missing
  • No counter offer (most transactions have some negotiation)

When you identify a suspicious transaction

The Real Estate Act Rules requires an appraiser to refuse to provide further services to a person who:

  • Instructs the appraiser to prepare an appraisal contingent on the result;
  • Attempts to unduly influence the appraiser during the appraisal process to prepare an appraisal report to a predetermined outcome;
  • Instructs an appraiser to prepare an appraisal for fraudulent or unlawful purposes.

Contact the lender and tell them why you are suspicious. Report the results of your review to RECA in writing if the persons involved are other industry professionals (real estate associates/brokers, mortgage associates/brokers or appraisers). Contact the local police or RCMP If you suspect fraudulent and/or other illegal behaviour.

The Appraisal Institute of Canada also has mortgage fraud information available for its members and the public. Please visit its website at www.aicanada.ca.

Related information

Legislation

Real Estate Act Rules – sections 41(a), s.42(a)(b), 79


Real Estate Appraisal Professionals

Purpose: To help real estate professionals evaluate whether mortgage fraud is taking place.

This bulletin applies to real estate brokerages, brokers, associate brokers and associates

Mortgage fraud is a criminal offence. Participation in mortgage fraud also violates the Real Estate Act Rules. Industry professionals who breach the Rules face strong sanctions, including suspension or cancellation of their authorization. Industry professionals must help prevent mortgage fraud by identifying suspicious deals and notifying authorities.

Red flags associated with the true identity of the parties to the trade:

• client won’t provide photo ID, when asked

• transaction involves an associate’s relative

• existence of other offers, subject to financing, that collapsed

• parties "undisclosed," "care of listing brokerage," or "nominee"

• land title records don’t match seller information

• buyer is a numbered company seeking a high ratio mortgage

• corporate search shows the associate or the associate's spouse or family member as a director

• buyers or sellers are not personally or professionally related. For example, “R. Smith and Michael Jones”

• buyers' or sellers' names are only partially indicated; e.g. last name appears without a first name ("Smith"), or the first name is indicated by only an initial ("R. Smith")

• information about buyer's income doesn't match industry standards

• buyer purchases property far from place of employment for no reason

• buyer purchases investment property, yet does not own a principal residence

• buyer is purchasing many properties with high ratio mortgages, using different names or variations of their name

• parties have no formal office; communication is by cell phone, email and fax; meetings take place at public places

• the deposit cheque(s) is coming from someone other than the buyer

• deposit is provided in cash or by money order

• someone acting on a power of attorney represents the buyer or seller

Red flags associated with the property value:

• no CMA or appraisal available, or if available, does not seem applicable

• vendor take back and/or other forms of equity arrangements

• sweat equity arrangements as opposed to a reduced price

• vendor take back or sweat equity arrangements not referenced in the purchase contract

• chattels are used as deposit or as partial payment

• renovation value included in the sale price

• property has illegal/nonconforming suites

• property is a combination of residential and commercial components that are not reflected in the financing arrangements

• commercial property has residential type financing or loan-to-values ratios

• listed property is owned by a corporation but has mortgage in excess of 80% of property value

• purchase price is same as, or higher than list price

• property list price or purchase price of property is unusual for the neighbourhood

• appraisals were provided by the parties to the trade

Red flags indicating unusual transactions:

  • vendor asks you to enter all transactions in listing database without qualifiers
  • quick succession of trades on one property
  • seller in the "business" of selling real estate, and buys and sells many properties
  • use of "Seller's Rights Reserved" on listings
  • uncommon commission arrangements, unusual adjustment to commissions, low fees
  • listing associate refers people to an unlicensed person for showings or information
  • listing information is unusual or inconsistent with the transaction. For example, listing is removed from the listing database prior to sale, sale is not reported, listing reappears at higher price, associate named in the listing is different from the purchase contract, listing database history doesn't support pricing, etc.
  • seller’s real estate representative is asked to produce a feature sheet on the property with an inflated price
  • one lawyer represents both parties to the transaction
  • condition allowing buyer to show unit to prospective tenants (most high ratio mortgages require owner occupancy)
  • all or many units of building are sold at the same time with coinciding possession dates
  • immediate possession dates
  • firm transaction with none of the usual conditions; in particular, a transaction requiring high-ratio financing, yet is unconditional
  • no counter offer
  • contract indicates unusual statement; i.e. "this is a private sale"
  • names appear to have been added to or deleted from the contract
  • not all parties named on the contract have signed it
  • purchase contract indicates both parties signed at the same time
  • no buyer's or seller's associate information provided for delivery of documents
  • schedules or addendums exist but are not indicated in the contract, or, schedules or addendums do not reference the originating contract
  • deposits not held at brokerage; particularly applies when brokerage is not even provided with a photocopy of the deposit cheque

Red flags associated with industry professional behaviour:

  • industry professional’s lifestyle is not consistent with income received through the brokerage
  • industry professional’s section of the contract not filled out
  • industry professional tends to use same lawyer on most transactions
  • industry professional primarily does transactions with only certain other associates
  • industry professional tends to always refer clients to the same mortgage broker
  • someone other than the real estate associates witness the signatures
  • industry professional buys and sells his/her own properties regularly
  • industry professional lends down payment to client
  • number of listings or sales an industry professional has posted on the the listing database does not correspond to brokerage records (possible fraudulent broker load situations)
  • industry professional regularly advertises properties as "low down," "assumable," "no down," "no qualifying," "quick possession," etc
  • industry professional holds both real estate and mortgage associate licences

Red flags associated with brokerage operations:

• broker has no fraud prevention or detection policies

• brokerage has no policies or oversight for personal trades/deals in mortgages

• conveyancing staff not trained to recognize suspicious transactions

• brokerage does not require industry professional to pull and review property title with each new listing

• brokerage does not require industry professional to file original transaction documents

• brokerage does not check background of prospective industry professionals or employees

• brokerage does not disclose what information it has or has not verified

• brokerage does not comply with the requirements of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)

• broker does not review transactions

• broker does not review or approve advertisements prior to publication

When you identify a suspicious transaction

Contact the lender and tell them why you are suspicious. Report the results of your review to RECA in writing if the persons involved are other industry professionals (real estate associates/brokers, mortgage associates/brokers or appraisers).

Related information

Legislation

Real Estate Act Rules – sections 41(a), s.42(a)(b)

Law Society of Alberta: Mortgage Fraud

Source

NOTE: If you wish to report a fraud, please use our Reporting Fraud service.

What the Law Society is Doing to Reduce Mortgage Fraud

By Don Thompson, QC, Executive Director, Law Society of Alberta (from May 2009 Advisory)

To combat mortgage fraud, the Law Society of Alberta is facilitating the following:

  • Continuously evolving internal risk management processes to identify potential high-risk members and/or conduct patterns on a proactive basis to mitigate negative impacts
  • Providing information to lawyers through the EBulletins and Advisory publications on emerging mortgage fraud risks
  • Reviewing the Rules and Code of Professional Conduct and related guidelines on an ongoing basis to determine what changes may be needed to clarify the lawyer’s proper role in real estate transactions
  • Monitoring best practices in other jurisdictions

Since a large portion of mortgage fraud involves misrepresentations about the identity, credentials or standing of various individuals in the mortgage loan process, the newly strengthened "Know Your Client"rules should help to reduce mortgage fraud.

Mortgage fraud is an industry-wide problem and can happen at any step of the transaction, so the Law Society collaborates with other professional groups, institutions and organizations involved in the real estate industry to improve fraud prevention, education and due diligence at all points in the process. This work includes liaising with law enforcement agencies, The Real Estate Council of Alberta, lenders, and government departments and agencies to strengthen our collective response.

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Mortgage Fraud Emerging as Serious Issue

By Doug McKenzie, Investigator, Law Society of Alberta (from May 2009 Advisory)

Mortgage fraud has emerged as a serious issue in recent years and published estimates show it is costing lenders and insurers billions of dollars in losses in both Canada and the U.S.A. Together with investment scheme frauds, mortgage fraud presently tops the list of concerns facing the Law Society and the Alberta Lawyers Insurance Association.

Mortgage fraud did not evolve during the most recent real estate boom, but has grown as a byproduct. Several factors have contributed to its growth:

  • Opportunities presented by rising markets: Real estate values in recent years have led some individuals to attempt purchases without adequate resources to pay for the investment. Hoping for continuing increases in property values, investors have speculated on real estate, and some have falsified applications to obtain multiple properties.
  • Depersonalization of the process for buying real estate: Lenders have been accessed without the requirement to meet anyone in person or to have an established business relationship. Money and title documents have been transferred electronically, and property appraisals have been based on computer models.
  • Easier access to information about properties and homeowners: Electronic access to the land registry system has made it easier to access information about registered real property, creating opportunities for new forms of mortgage and identity fraud.
  • Increased competition and increased pressure to close deals: More lenders and increased competition significantly reduced barriers to borrowing money. Credit standards were frequently lowered, and documentation requirements were either relaxed or not inspected when transactions were occurring at a frenzied pace. Traditional safeguards, such as hiring a lawyer, were sometimes seen as hindering the speed and cost-effectiveness of closing a deal.
  • Increasing sophistication and boldness of fraudsters: Fraudsters jumped at these opportunities, in many cases initiating multiple fraudulent activities, hoping that loan irregularities would be lost in the volume or hidden by a profitable sale on the collateral. The electronic age has facilitated information sharing among fraudsters with the result that illegal activities adapt almost as fast as methods designed to prevent and detect them.

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Types of Mortgage Fraud

(from May 2009 Advisory)

Identifying various mortgage fraud schemes enables the Law Society to identify and examine improper conduct. It leads to measures to prevent frauds from occurring and/or reduce their impact.

Value Frauds

In these types of schemes, the value of the property or income of the borrower is artificially overstated to deceive the mortgage lender. This may be done in one of several ways including:

  • FLIPS
  • * “flips”, where one or more superficial transfers of title are used to rapidly increase the apparent value of a property. Fraudsters in such schemes often do one or more of the following
    • use “straw” buyers (persons paid to act on behalf of the fraudster and whose name and credit is used for title transfer mortgage application purposes)
    • collude with personnel at a lending institution, mortgage broker, lawyer’s office, and/or appraiser
    • target or work within certain ethnic or cultural circles
  • PRICE MISREPRESENTATION
  • * misrepresentation of the original purchase price (e.g. through vendor cash-back provisions) or of the revenue potential of income-producing real estate (e.g. cash-outs on commercial property).

SHOTGUNNING

  • * approaching multiple lenders simultaneously for loans on one property (i.e. “shotgunning”), representing to each lender that the property has substantial unencumbered equity.

CHUNKING

  • * Another tactic is to approach multiple lenders simultaneously for loans to one individual (i.e. “chunking”), in excess of the debt service capability of that individual. The Law Society has seen at least one instance of this type of scheme.


Private Mortgage Financing Frauds

In these schemes, mortgage financing is raised by “private offerings” in which investors are promised high returns on real estate properties or projects (e.g. condominiums). The returns are allegedly made possible because the managers of the scheme claim to have, in the case of:

  • new projects: the ability to acquire, construct, and sell real estate developments at substantial profit
  • foreclosure acquisitions: special access to acquire such properties at prices substantially below market value

Mortgage Rescue Frauds

In these cases, fraudsters claim to provide interim financing assistance to help a cash-strapped owner avoid foreclosure, in exchange for (undisclosed/fraudulent) excessive equity interest in their property.

Bankruptcy-Mortgage Frauds

In these schemes, a fraudster may acquire titles to multiple properties with no intention of paying the mortgages. The perpetrator collects revenue from the property, then files for bankruptcy to stall foreclosure and to allow the scheme to continue.

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Emerging Mortgage Fraud Trends

(from May 2009 Advisory)

Several fraud trends have emerged or can be expected to emerge, including:

  • Fraudsters adapting quickly to enforcement efforts: The Law Society is seeing increasing use of different lawyers for successive transactions in “flip” schemes to reduce the likelihood of detection. Perpetrators may also use lawyers from different locations to try to conceal the transaction trail and thwart investigators.
  • Vulnerable lawyers increasingly being targeted: As general awareness of mortgage fraud risks increase, the Law Society is seeing some perpetrators attempting to prey on potentially more vulnerable lawyers, in particular, long-serving members who may be unduly trusting of clients.
  • Economic conditions becoming conducive to mortgage fraud: (i.e. rapidly rising prices and low interest rates). As prices and property incomes decline, the incentive and ability of fraudsters to make mortgage payments declines until properties are abandoned and the mortgages default. As a result, the Law Society has recently been seeing the fallout of mortgage fraud schemes that began some time earlier. If current low interest rates increase, further waves of mortgage fraud, previously hidden by favourable property cash-flows, may surface.
  • Proven fraud schemes being reincarnated in new ways: As real estate prices decline, proven fraud schemes such as deceptive sales contracts and hidden seller concessions may be reincarnated in newer and more clever ways (e.g. seller financing where a relationship between buyer and seller is concealed).
  • As commercial lenders tighten credit, fraudsters may turn increasingly to private lenders/investors who may not be able to perform appropriate due diligence: Lawyer involvement in such schemes may range from traditional work for the lender(s), to the grey area of accepting and paying funds for investment. Ponzi (pyramid) payments may also be made to attract additional investors into the scheme.

Some mortgage frauds have been difficult to detect because the lawyer has been involved in both sides of the transaction, while other claims have involved a lawyer who relied on false representations of another lawyer.

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Mortgage Fraud: Some Ethical Issues

By Nancy Carruthers and Ross McLeod, QC, Practice Advisors, Law Society of Alberta (from May 2009 Advisory)

The Law Society of Alberta has been concerned with mortgage fraud in this province for a number of years. It seemed to flourish during the time of our hot economy, but now that the housing market has cooled. We are seeing the fallout.

Recently, the Calgary Herald published an article in which a member of Calgary’s police force suggested mortgage fraud would not be so prevalent without the involvement of dirty bankers, realtors and lawyers. Most lawyers might take exception to this comment.

In many cases, lawyers are unwittingly involved in mortgage fraud. Fraudsters are not anxious to reveal their scheme to the conveyancing lawyer and will try to conceal it. The Practice Advisors receive regular calls from lawyers who suspect that the deal in which they are acting involves a potential fraud, or who have discovered that a fraud may have taken place on a matter which has long been closed. Here are some common questions and answers:

May I continue to act for the purchaser client if I discover that the purchaser is attempting to commit a fraud on the mortgagee?

The Code of Professional Conduct prohibits lawyers from knowingly assisting a client in a crime or fraud, and requires withdrawal if the client persists in instructions that the lawyer knows will result in a crime or fraud. Knowledge will be attributed to a lawyer when a reasonable argument cannot be made for any other interpretation of the available facts. When a lawyer suspects a client may be engaged in fraud, the lawyer should discuss these concerns with the client and otherwise exercise due diligence. If the client’s explanation is not satisfactory, withdrawal must be considered.

I have withdrawn from representing my client as I discovered he is committing a real estate fraud. Should I tell anyone? Can I?

Chapter 7 of the Code of Professional Conduct requires a lawyer to keep confidential all information concerning the business and affairs of the client acquired during the course of the professional relationship. Disclosure of certain information may, however, be allowed under the Code.

Lawyers must disclose confidential information to the Law Society when required, and must disclose such information when required by law. Disclosure is also required to prevent a crime likely to result in death or bodily harm.

Lawyers may disclose confidential information when necessary to prevent any other type of prospective crime. When disclosure is discretionary, the lawyer must evaluate the risk to the safety or property of others. In any case in which disclosure is considered, the lawyer should assess the information to be disclosed, and disclose only the minimum amount of information required to give effect to his or her ethical obligations. Secondly, the client should be given an opportunity to either make the disclosure directly, or persuade the lawyer that the apparent need for disclosure is based on incorrect information. This will ensure that confidential information is not disclosed by a lawyer in haste, or when inappropriate.

I act for the borrower/purchaser and lender, and have just discovered that the borrower has misrepresented the purchase price of the property to the lender. What do I do now?

Lawyers acting in a joint retainer have a duty to act in the best interests of all clients in the retainer. Information received from one client in connection with the matter cannot be treated as confidential, and must be shared with the other clients in the retainer. The information about the purchase price is obviously material to the lender’s decision to advance funds and must be disclosed. If the disclosure creates a conflict, the lawyer cannot continue to act. Further, if one client in a joint retainer instructs the lawyer to take steps which are not consistent with the lawyer’s obligations to other clients, the lawyer may have to withdraw. The obligation to advise the lender of the purchaser’s misrepresentation extends past the date of closing.

I previously acted for a purchaser/borrower and lender. The lender is now requesting my conveyancing file. Can I provide it?

Pursuant to Chapters 6 and 7 of the Code of Professional Conduct, a lawyer engaged in a multiple representation or joint retainer cannot withhold material information from one client, or treat it as confidential in respect of the others. Consent of the parties to allow the lawyer to act for them in a multiple retainer is required, and in obtaining that consent the lawyer must advise the clients that no material information can be withheld and any information provided to the lawyer must be disclosed to the other parties. Even if the lawyer fails to inform the clients of this obligation, the duty to share confidential information obtained during a joint retainer still exists.

The lawyer is entitled to release the file information to the lender without getting the borrower’s consent. The lawyer’s duty to maintain an even hand as between the clients also suggests that it would be prudent for a lawyer to advise the borrower of the lender’s request and to make the information available to the borrower as well. It may be best for the lawyer to maintain the original file and give both clients copies. If original documents are to be provided, the lawyer should do so with a written direction from both parties authorizing the release of the originals to one party, pursuant to appropriate terms or trust conditions. Alternatively, the parties may seek a court order authorizing the release of the originals.

I acted for the vendor, purchaser and lender in a real estate transaction. The lender wants the vendor’s file material as well. How should I respond?

This is an area of some difficulty, as the issue of whether a joint retainer existed for a common matter may be a question of fact which must be determined in each case. There is authority for the principle that privilege is not waived with respect to communications and information acquired from one of two clients, either before or after the period in which the joint retainer exists (Bank of Nova Scotia v. Lennie, [1996] A.J. No 106). There is also authority for the proposition that two clients may be represented by the same firm, even on related matters, and one client may exert a claim of privilege against the other if the clients do not have a joint interest in the subject matter of the communication (Chersinoff v. Allstate Insurance Co., [1969] B.C.J. No. 405).

Courts have found joint retainers to exist in situations where a lawyer or firm was managing a file in which two parties, although technically having conflicting interests, were engaged in a transaction intended to benefit both their interests (Gulutzen v. Wilford, [2005] O.J. No. 2423, involved a vendor and purchaser of real estate; also see Divinsky v. Bethania Mennonite Personal Care Home Inc., [2002] M.J. No. 508). It may be the case that the parties do not turn their minds to the issue of whether there is a joint retainer at the outset of the file, such that the parties and the lawyers take different positions about the nature of the retainer and the obligation to share information which may otherwise be considered to be confidential or privileged. Parties are advised, in the event of uncertainty, to submit the matter to a court for an independent determination of whether privilege exists, or whether there was, in fact, a joint retainer.

Lawyers should clearly address the issue with the clients at the outset of the retainer and, if acting for vendor, purchaser and lender, open a separate file for the vendor’s matter. Lawyers must also be alert to conflicts if they become aware of something during the course of acting for the vendor, which materially affects the interests of the purchaser or lender but which the vendor may not wish to disclose.

I act for the vendor. It appears to me that the purchaser’s lawyer may be engaged in a file involving a real estate fraud. What are my obligations?

It is possible that the other lawyer is being duped. It merits a call to the purchaser’s lawyer to advise them of your observations and concerns. The other lawyer must then consider the circumstances of the file, and his or her potential withdrawal. If the lawyer’s involvement in the fraud appears to be deliberate, it must be reported. You have a positive duty to report conduct which raises a serious question about the competence, honesty or trustworthiness of another lawyer, or which is likely to harm another person. Even trivial ethical breaches may be reportable if there is a pattern of conduct which suggests that a more serious situation exists or is developing.

The Practice Advisors are available to assist Alberta lawyers with confidential inquiries involving mortgage fraud and lawyers’ ethical obligations.

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