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              WHITE PAPER

              PREPARED BY:

              OCTOBER 26, 2001

There is concern in the Canadian mortgage industry regarding the incidence and severity
of mortgage loan fraud, specifically in relation to the increased number of multiple property
frauds perpetrated by organized groups. Recent experience in the US has shown that
fraud, ubiquitous within the mortgage insurance industry, is continuing to grow rapidly and
create significant losses. Several US industry associations, such as the Mortgage Brokers
Association of America (MBA) have taken a more aggressive approach to fraud prevention
and awareness. In fact, it was recently proposed by the Bush Administration and the
Federal Housing Authority (FHA), in an aggressive move to crackdown on property
“flipping”, that FHA insurance would no longer be available on houses sold within six
months of acquisition by the seller.1
1 Prohibition of Property Flipping in HUD ‘s Single FamilyMortgage Insurance Programs,
docket number FR-4615 <www://wwwfha.~’ov>

As in the US, the level of complexity within the Canadian mortgage industry has increased
over time. The number of lenders in the market place, and the differentiation of mortgage
products and delivery channels has lead to increased competition for new business,
increased approval rates and reduced application processing time. For example, it is not
always standard practice to meet borrowers face to face due to e-mail and faxed

While we do not believe that Canada currently incurs the level of fraud found in the US
market, there is a concern that fraud trends may follow those experienced in the US. It is
this concern that has resulted in the formation of a Mortgage Fraud Task Force co-
ordinated by the Canadian Institute of Mortgage Brokers and Lenders (CIMBL) to ensure
that, as the Canadian mortgage industry continues to evolve, adequate controls are put in
place to protect originators, insurers and homeowners against fraud.

CIMBL formed a new Mortgage Fraud Task Force (Task Force) in August, 2001. The Task
Force contains executive representation from CIMBL, as well as representation from major
originators (lenders and mortgage brokers), insurers, and other industry participants. The
initial objective of the Task Force was to revise the CIMBL Code of Ethics and
administrative procedures to more effectively manage complaints against CIMBL
members, including fraud. This mandate was ultimately expanded to represent the broader
issue of fraud management within the industry. An initial meeting was held on August 27
Self-Regulate (encourage self-regulation within the mortgage industry), and
Protect (homeowners, lenders, insurers and other industry groups).

Specific objectives include:
Increase fraud awareness within the industry, the public, regulatory bodies and law
Develop industry-wide “best practices” to be adopted as professional standards of
business conduct and subject to increased regulatory enforcement.
Rewrite of CIMBL Code of Ethics.
Establish administrative procedures, reporting and investigative protocol dealing with
fraud, and establish penalties within CIMBL for noncompliance.
Characterize, quantify and report on industry fraud losses on an ongoing basis.
Investigate the accumulation and sharing of fraud-related information amongst impacted
originators and other industry members.
Develop ongoing liaison and dissemination of information with affiliated industry
Develop effective media and customer relations and make a commitment to protecting
Canadian home buyers as well as lenders and insurers against financial loss.

It is in the best interest of originators and insurers to work co-operatively to reduce fraud
on an industry level. Fraud management has traditionally been an internal, proprietary
function within each lending organization although, to avoid detection, it is well
documented that fraudsters often employ multiple lenders. In addition, fraud awareness
and training of all industry members
- alerting them what to look for and how to protect themselves - plays an important role in
the prevention of fraud. It is unrealistic to assume that each lender or insurer acting alone,
will have sufficient information to effectively protect themselves against fraud. It is also
unrealistic to assume that each should take individual responsibility for overall industry
education. For these reasons, industry members will not be successful in reducing fraud
losses unless they work cooperatively to improve fraud training and awareness within the
mortgage community, and improve communication regarding fraud operators and
schemes, amongst impacted organizations.

Mortgage Loan Fraud Definition

In order to perpetrate mortgage fraud, it is common to have the co-operation of an
   for incident reporting, investigation and enforcement of penalties for fraudulent or
   deceptive practices. In effect, increasing the probability of detection, and instituting
   penalties that directly affect the member’s future ability to conduct business in the industry
   will reduce the overall incidence of fraud
   For the purposes of the Task Force, a working definition of “Mortgage Loan Fraud” is:
   “Any deceit within the mortgage loan life cycle.”

   It is the assertion of the Task Force that the mortgage industry should adopt an attitude of:
   “Zero tolerance for deceit in any stage of the mortgage life cycle”.

   Fraud Types

   The following are classifications of mortgage fraud as determined by the Task Force. A
   fraudulent loan may contain characteristics relating to one or more categories:

1. Property
   - Flip, condo conversion
   - Inflated appraisal
   Misrepresentation of property characteristics or purpose
   - Forged or altered MLS listing to increase valuation
   - Commercial represented as residential
   - Multiple represented as fewer units or single
   Intent to reside
   - Rental represented as owner occupied
   Conditions not released at closing

   2. Employment
   Forged or altered employment letter or employment reference
   Forged or altered pay stub, T4, Notice of Assessment
   Inflated income or tenure
   Misrepresentation regarding employment for self

   3. Identification
   Providing forged or altered identification
   Use of “Straw” borrower or “True Name Fraud”
   Nonexistent individual, or alteration of personal information to avoid credit bureau
purchase incentive
Full or partial down payment paid directly to vendor

5. Title
Fraudulent title transfer! fraudulent mortgage discharge
Property not in name of seller

Canadian Fraud Losses

Exact industry fraud loss figures are unavailable due to the ambiguous nature of mortgage
fraud, and the lack of consistent data collection over time. It is conservatively estimated
that total exposure2 to the industry, including both conventional and insured loans, will be
upwards of $150 - $300 million in 2001. This is almost double the exposure in 1999 and
2000, when exposure is estimated at $73 million and $75 million, respectively. There
appears to have been a recent increase in fraud perpetrated by organized criminal groups
involving multiple property schemes, which would lead us to believe that the actual losses
will be higher for the remainder of 2001. The industry also believes that this trend will
continue into 2002 and that, without direct intervention, mortgage fraud will continue to
increase at an accelerated rate.

US lenders and insurers have experienced similar difficulty in quantifying mortgage fraud
losses. Published estimates have ranged between $5 billion and $30 billion annually in
1999/2000. All reports do agree however, that the incidence of mortgage fraud is

In addition to the above, the figures quoted do not take into consideration legal,
maintenance, repair, and disposal fees associated with foreclosure and resale of
fraudulent properties. Legal fees associated with obtaining summary judgment, as well as
civil and criminal prosecution of offenders are also assumed by industry members. Finally,
fraud loss estimates do not represent the significant administrative and “brown dollar” cost
of managing these loans.

2 “Exposure” includes the total amount advanced on the loan. While this does not portray
actual dollar losses to Lenders and Insurers, which may be more or less than the total
exposure given legal fees and other disposal costs, it is felt that this is the best available
measurement of fraud in that it standardizes insured and conventional loans and is the
number most readily available to all parties.
  • Industry commitment to reporting mortgage accounts and arrears on the credit

Fraud Awareness

CMHC, supported by CIMBL, held fraud awareness sessions across Canada on behalf of
the industry in 1999/2000. The sessions were extremely well received and the majority of
participants indicated that they lacked sufficient knowledge about mortgage fraud and
would welcome regular updates on current schemes and other events in the industry. The
Task Force has stated its intention to continue holding regular fraud awareness sessions
in the near future, and to further expand the scope, delivery mechanisms and potential

Of some concern is fraud awareness training and education to law enforcement agencies.
It has been noted that the reluctance of many law enforcement officers to involve
themselves in the investigation and prosecution of mortgage fraud stems, to a large
extent, from their lack of knowledge and understanding of the mortgage industry in
general, and mortgage fraud schemes in particular. Fraud awareness, including training
sessions at the various police colleges may be considered going forward.


The mortgage industry in Canada has been evolving at a dramatic pace. In a competitive
and automated world, it is becoming increasingly difficult to “Know Your Client”. This, and
a lack of reporting mechanisms and enforceable penalties, has presented greater
opportunities to perpetrate mortgage fraud in a relatively risk free environment.

While the financial impact of increased mortgage loan fraud is borne primarily by lenders
and insurers, mortgage fraud impacts the reputation of the industry as a whole. It is
therefore in the best interest of the industry to act quickly, and to work collectively to enact
changes that will reduce the incidence of mortgage fraud in Canada. CIMBL is well
positioned to facilitate solutions on behalf of the industry, and it is via the CIMBL Mortgage
Fraud Task Force that future initiatives will be launched.