Fraud cost the UK economy £52bn this year, according to the National Fraud Authority, which, over the past three years, has consistently attributed £1bn of that figure to mortgage fraud.
To put that figure into perspective, this year the combined profits of the top 100 UK law firms came to £5.8bn. So, anyone who thinks that risk and compliance solutions for law firms are a distress purchase is deluding themselves. Once fraud has been committed, there will almost always be financial repercussions.
Mortgage fraud, in general, means a lender has been tricked into providing a loan to buy a property in circumstances where, had the truth been known, they would never have agreed to fund the purchase. The classic scenario is where the value of a property has been grossly overstated so that the loan secured exceeds the true market value of the property. Then the lender is 'theoretically' left to bear the brunt of any of the shortfall once the fraudster defaults on loan repayments and the property is repossessed.
It's theoretical because, as everyone knows, the profession with its client-friendly indemnity cover has taken an absolute battering from lenders desperate to find someone to recoup their losses from. It is no coincidence that two of the biggest professional indemnity insurance providers on the market, AIG and XL, have purged from their books the types of firms that are costing them the most money. It's a decision that has made the renewal season hellish for those one- to three-partner firms who predominantly rely on conveyancing work.
Dirty work
Do lenders have clean hands? Are they really the innocent victims? In cases where the solicitor has actively participated in fraud, obviously the answer is yes. But what about those occasions when solicitors who aren't in cahoots with master criminals get caught up in fraud?
In those situations, lenders seem to have forgotten that they are professionally obliged to identify any borrower and obtain information on how they intend to fund loan repayments, and that often they have reviewed the same valuation report that the solicitor sees, which was likely to have been prepared by a surveyor on its own panel. So why, when everything goes amiss, do the lenders suddenly try to lay the blame at the ?feet of the solicitors?
Some lenders even went as far as marketing a financial product that provided a same-day remortgage: a fraudster's dream. A loophole in the remortgaging process allowed the fraudster to buy a property in the morning using a bridging loan, remortgage it in the afternoon at an inflated value and, as soon as the funds were drawn down, the bridging loan was paid off and the fraudster disappeared with the profit '“ all within 24 hours. Lenders were presumably prepared to take the risk on the assumption that property values would continue to rocket.
Against this backdrop, it is hardly surprising that solicitors feel aggrieved. An understandable criticism has been that lenders are prepared to rack up legal fees making claims on solicitors' professional indemnity insurance policies but they are not prepared (and never were) to pay sensible rates to their panel solicitors that would allow firms to properly undertake the onerous due diligence checks required. Solicitors are being squeezed to agree to panel rates so low that they can only turn a profit if their business turns into the legal equivalent of a call centre.
Obvious errors
It may seem trite to say that those firms with robust risk management systems in place are better positioned. But, as any insurer, broker or professional indemnity lawyer will tell you, most mistakes are made not because someone gets the law wrong but because someone misses an obvious point or a deadline.
Have you sat down as a business and actually worked out the average cost of compliance on a matter from cradle to grave (including archiving costs) so that you can work out exactly what you are prepared to spend and what your risk appetite is? You may be surprised. This is also an example of how you can get the most out of your firm's ?risk register.
With this in mind, start by conducting a practice-area-specific risk assessment and ?find out who in your firm deals with high-risk lender/borrower matters. Even if you think you ?do not do any conveyancing work, you may be shocked by the amount of 'dabbling' that goes ?on especially as the property market starts to ?wake up.
If anyone doubts this, take a few moments to spot-check a few websites and see how many firms boast specialist expertise in scores of different areas while employing fewer qualified lawyers than you can count on one hand. We have encountered 'dabblers' who have not even heard of the CML Handbook. Remember, it only takes one claim to land you with paying your excess and facing a loading on your insurance premium.
Innocent request
So what do you do if approached by a lender for information? First, if a lender asks for a copy of a file, approach with caution - even if it is presented as a seemingly innocent request to assist with an 'audit'. It could be a poorly disguised fishing exercise. Remember that a lender is not automatically entitled to see the whole file, so there is a lot to be gained by taking the time to set a firm-wide policy about what you are prepared to send in this situation.
Why do lenders send these letters? Sometimes losses just happen as a result of a genuine fall in the value of a repossessed property. In such situations, even though there is no fraud, lenders may be looking to bring a claim founded in contract for a technical breach of the CML Handbook. Look on it as the mortgagor equivalent of 'where there is blame there is a claim'.
Second, if you do get a letter from a lender or their legal adviser alleging fraud or a breach of the CML Handbook, then you need to deal with it. Having a simple procedure for a partner or other individual of equivalent status to check incoming post should mean that nothing gets buried. Pull the file out of archive and review it. If it is your own transaction, get a second pair of eyes to take a look and assess the potential exposure. Then notify your insurer that there may be circumstances giving rise to a claim and ask for their confirmation that they are happy for you to copy and send the relevant documents to the lender.
Often these letters are accompanied by a copy of a consent form signed by the borrower (completed at the time the loan was requested), which grants the lender the authority to see their part of the file in addition to any documents that the lender owns. But this does not automatically entitle them to a full copy of the file. If you do not know which parts of the file to copy and which to retain, there is nothing to be lost from consulting risk and compliance specialists and/or your insurers.
Bubble bursts
Sadly, mortgage fraud will continue. Lenders may be a little more discerning about whom they lend money to and solicitors may be getting smarter at protecting themselves from exposure. But most of the damage has already been done. We need to look to the future and start making decisions now that will shelter us from the toxic fallout that will inevitably come when the next mortgage fraud bubble bursts. SJ
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