The various guises of occupancy fraud

The various guises of occupancy fraud



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With mortgage application fraud on the rise for the fifth consecutive year, we wanted to take a closer look at one type of fraud in particular – occupancy fraud – to ascertain what it is and how individuals are committing this fraud.

This week, figures from Experian, the global information services company, has shown that fraudulent mortgage applications increased by eight per cent year on year in 2011. The study also indicated that 34 in every 1,000 applications for mortgages last year were found to be fraudulent, compared to 2006 where the figure was 15 in every 10,000 applications.

Most cases of attempted mortgage fraud are a result of people misrepresenting their personal information on applications, which is also true for occupancy fraud.

Occupancy fraud generally takes place when a borrower states on a loan application that he or she intends to occupy a property as a primary residence to secure a lower interest rate when the borrower actually intends to obtain the loan to acquire an investment property.

B&C asked Bob Sturges, Head of Communications at Omni Capital, whether individuals are unwittingly committing occupancy fraud if they buy a property but fail to state that their aim is to rent it out.

Bob responded, “This isn’t a particular problem we’ve encountered to date. However, to discourage it we have a number of prudent steps embedded in our underwriting process. First, we ask the client’s solicitors – on whom we carry out independent checks – to certify that the security property is offered either with vacant possession or, if tenanted, that an acceptable short-term tenancy agreement is in place.


“Second, an independent physical valuation of the property is undertaken in all cases. We would expect our valuer to flag up any areas of concern with regard to tenancies. Third, we obtain the services of a professional asset manager to report on any aspects of the property’s features that fall outside the narrower remit of the valuation itself. This is done with the full knowledge of the broker and does not constitute a secondary valuation.

“In the event the borrower installs a tenant without our knowledge and prior agreement, we would take the necessary steps to protect our position. I suspect, however, this is more of a problem for longer term lenders than those of us in the short-term sector.”

Jonathan Newman, Senior Partner at Brightstone Law LLP and Chairman of the AOBP, told us: “Well drafted agreements will invariably require the consent of the lender to lettings or parting with possession of a property. The conveyancing routine pre-completion will involve an investigation as to occupancy and the lender will take suitable steps to obtain waivers or postponements of rights. Thereafter, any future let will require the consent of the lender.

“Borrowers who deliberately avoid disclosing that they have let the property in order to obtain finance on advantageous terms will have misled the lender. In these circumstances, the borrower will be in breach of the standard terms and conditions of the deal, which is actionable in the usual way.

“The lender will have a choice to make in deciding whether to take action in circumstances where the security may or may not be devalued, whilst the loan itself may well continue to be serviced. Worse still, the borrower may be criminally liable for obtaining credit by deception.”

Jonathan added, “Leases post mortgage without the requisite consent will not bind the mortgagee, leaving any undisclosed, unauthorised tenant vulnerable to the repossession action.

“The lender may still enforce their security, but the process may be elongated by the existence of the unauthorised tenants who may have a right to seek suspension of warrants in certain circumstances.”

B&C also looked closer at those individuals who falsely claim ownership of a property. Bob Sturges informed us, “While I can understand that some people might not be aware of the need to inform their lender in the event they decide to rent out their property, there is absolutely no excuse for falsely claiming ownership of property. To do so is fraud, pure and simple.

“To prevent this, lenders have at their disposal an impressive array of weaponry, including proprietary and agency ID checks, skilled underwriting staff and access to specialist lawyers. In addition, the Land Registry is constantly upping its own game in the fight against fraudsters, for whom the property market remains irresistible.

“Where actual fraud does occur, it is usually as a result of two factors: the lender either drops their guard, or their defences are overwhelmed by the sophistication of the fraud. The former can happen for a range of reasons, but particularly when lenders lose sight of the need for prudency. The latter comes in various guises, often involving the use of syndicates combining the criminal intent of clients, brokers, lawyers and valuers.

“Our worst enemy is complacency. Fraudsters, whether acting alone or in combination, are astute at seeking out and exploiting weakness. On-going vigilance, combined with a proportionate use of technology and a wise selection of business partners, will reduce considerably the risks of falling victim.”

Gavin Diamond, Finance Director at Cheval Bridging Finance, believes a more common issue regarding occupancy fraud is where someone applies for a buy to let mortgage when they are actually planning to live in the property. This is usually when someone is unable to obtain a regular owner-occupied mortgage on their home, for whatever reason, and they apply for a buy to let mortgage in order to get around the regulation.

Cheval doesn’t encounter this type of fraud very often but they do have systems and checks in place to ensure that they spot a potential risk case. If they see a deal which may potentially fall into this category and they are unable to obtain the necessary comfort that the information provided is genuine, they simply won’t do the loan.

Gavin told B&C that an indicator of occupancy fraud may be, “when we spot in an enquiry that an applicant is currently renting a property they reside in and they are buying a buy to let property. In most instances, one would assume that they would buy their residential property first before going down the route of investing in a buy to let property. This can have implications for the exit strategy too as, in many instances, a long-term buy to let lender will only lend to individuals that own their own home, so we keep our eyes peeled on these types of applications.”

When a valuation is completed, information – such as who resides in the property, whether there are existing tenants or if the owner occupies the property – must be transparent at all areas of an application.

Intermediaries have a duty of care to their clients and must ensure that they do not fail to disclose information onto the lender.

 

 

When it comes to occupancy fraud, the onus lies very much with the broker to ensure that they obtain all the relevant information, stay in the loop of any changes and relay this information on to the lender and any other parties involved in a deal, such as the solicitors.

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