Fraud Litigation / arbitration:
Mortgage Fraud
We have been recognised by the Legal 500 as solicitors who have developed a niche in property fraud litigation. As such, PCB Litigation has been retained in relation to a number of substantial mortgage fraud cases, involving many millions of pounds and dozens of properties.
The following provides a brief overview of mortgage fraud and the criminal and civil proceedings that may follow. It is divided into the following sections:
Civil Claims for Mortgage Fraud
Criminal Prosecution for Mortgage Fraud
Please contact us for more detailed, case-specific advice.
The Problem of Mortgage Fraud
The Association of Chief Police Officers reported that mortgage fraud in the UK totalled £700 million in 2007. In the 18 months to the beginning of 2008, the FSA received more than 200 referrals from lenders suspicious about potentially fraudulent mortgage brokers.
Examples of mortgage fraud include:
- False declarations of earnings in order to obtain a higher mortgage than would otherwise be available.
- False valuations by corrupt surveyors, allowing fraudsters to obtain loans much higher than the value of the property.
- Undisclosed kickbacks by the seller of the property so that the contract price is much higher than the actual price of the property.
- Use of fraudulent documentation to make bogus applications in other people's names. The mortgage payments are then not met.
- The mortgage being for only a part of the property that was meant to be charged.
Civil Claims for Mortgage Fraud
Those who commit mortgage fraud may incur civil liabilities to the lender, for example:
- Contractually to make repayments and to pay for any shortfall once the property has been sold.
- For misrepresentation and/or deceit in relation to the mortgage application
- For conspiracy to defraud the lender
- For accessory liability for breach of trust as generally, when monies are paid to a solicitor's client account by a lender, they are held on trust for the relevant lender.
The lenders may have claims, not only against the fraudsters but also against third parties involved in the fraudulent transaction, such as:
- Mortgage brokers - who may also be faced with fines from the FSA as a consequence of their conduct.
- Surveyors - In January 2008, The Cheshire Building Society was granted summary judgment against Dunlop Haywards (DHL) Ltd and an order that that Dunlop Hayawrds make an interim payment of £10 million in damages following the overvaluing of a property. The Judge found that the surveyor's over-valuation of the property was fraudulent.
- Solicitors
- The employers of the mortgage brokers, surveyors or solicitors, who may be vicariously liable for the acts of their employees
- The recipients of the loans, where the fraudsters have made applications in the names of family and friends
- Those who have provided false financial references for the mortgage applicants
Claims against such third parties might be for:
- Breach of contract and/or negligence and/or breach of fiduciary duty, where for example the solicitor has breached duties towards the lender. Alternatively, where the mortgage fraud involves a fictitious purchaser, the solicitor might be argued to be liable as agent for an undisclosed principal or for breach of warranty of authority.
- Breach of trust, for example where the solicitors pay out the mortgage monies received from the lender in circumstances where they are aware that the mortgage monies are being misapplied.
- Dishonest assistance in the above-mentioned breach of trust
- Knowing receipt of trust monies, where monies have been paid in breach of the above-mentioned trust and the recipient's state of knowledge is such as to make it unconscionable for him to retain the benefit of the receipt.
Given the nature of such claims, extensive relief may be available to the lender at the outset of any litigation, including:
- Disclosure orders to trace assets and the identities of wrongdoers, combined with gagging orders to prevent potential defendants from becoming aware of the claims
- Freezing Orders to secure assets before the defendants have notice of the claims and can dissipate such assets. Click here to find out what to do if served with a Freezing Order.
- Search Orders to be able to gain access to premises in order to search for and seize relevant evidence on the basis that there is a serious risk that the defendants may destroy relevant evidence if they are given notice of the claims. Click here to find out what to do if served with a Search Order.
Claims need not only be brought by the lenders. Third parties against whom claims are made may bring proceedings against other parties involved in the fraud. For example, the lender may bring claims against a firm of solicitors or surveyors on the basis that it will be easier to enforce a judgment against that firm than against the individual fraudsters. In such cases, the firm may be able to bring claims against others involved in the fraud to provide an indemnity or contribution in respect of the damages that the firm has to pay to the lender. Such indemnities/contributions could be sought on the basis that:
- The firm may have a direct claim against the other parties, e.g. against the relevant employee of the firm for breach of their employment contract or duty of fidelity or possibly against various parties for conspiracy.
- The firm may also have a claim to equitable compensation in the capacity of trustee of the mortgage monies. Such claims may be against the recipients of the trust monies and those who have dishonestly assisted breaches of trust
- The other parties may be liable to the lender for the same damage enabling a claim to be made against them by the firm under the Civil Liability (Contribution) Act 1978
Criminal Prosecution for Mortgage Fraud
As well as civil claims, those involved in committing mortgage fraud may be faced with criminal prosecution. Indeed, the twin threat of criminal and civil proceedings may be very effective in ensuring the lender is repaid. If the lender is repaid, those liable to criminal conviction may be less likely to be prosecuted and may receive lesser sentences.
Criminal offences may not only be committed by the primary conspirators, but even those who have become unwittingly involved may incur criminal liabilities for dealing with proceeds of crime and/or failing to report suspicious transactions.
In a case in 2004, six people were sentenced to a total of almost 16 years imprisonment for fraudulent mortgage applications in respect of 5 properties:
- The mortgage broker who put together the applications on all 5 properties was found guilty of 5 counts of obtaining a money transfer by deception and was sentenced to 6 years' imprisonment.
- A conveyancing clerk who played a major role in processing the mortgage documentation was found guilty of 5 counts of obtaining a money transfer by deception and was sentenced to 3 years' imprisonment and ordered to pay £40,000 defence costs.
- One of the mortgage applicants was found guilty of 1 count of obtaining a money transfer by deception and was sentenced to 18 months' imprisonment.
- Another mortgage applicant pleaded guilty to 1 count of obtaining a money transfer by deception and was sentenced to 2 years' imprisonment, suspended for 2 years.
- An accountant who provided false financial references for mortgage applicants pleaded guilty to 5 counts of obtaining a money transfer by deception and was sentenced to 1 year imprisonment and ordered to pay £50,000 defence costs.
- A solicitor whose client account was used to channel funds pleaded guilty to 2 counts of assisting another to retain the benefit of criminal conduct and was sentenced to 2 years and 3 months' imprisonment.
In addition, defendants to criminal prosecutions need also to be concerned about the possibility of restraint and confiscation orders being made in respect of the benefits of their criminal conduct.
back to topSolicitors and Mortgage Fraud
Much onus has been placed on the role of solicitors in mortgage frauds. In March 2008, it was reported that the Solicitors Regulation Authority is investigating up to 60 lawyers for alleged mortgage fraud. According to the Association of Chief Police Officers, complaints against solicitors rose from 85 in 2004 to 293 in 2007.
The Law Society has issued a "Green Card" warning on property fraud and the Council of Mortgage Lenders has issued guidance in its Handbook. Some of the matters that solicitors should look out for:
- Fictitous buyer - especially if introduced by a third party not known to the solicitor. The solicitor should verify the identity and bona fides of clients and where possible actually meet the client.
- Unusual instructions - e.g. a client selling a property at a substantial profit for which no explanation has been provided
- Misrepresentation of the purchase price - The solicitor should check the true price is shown in all the documentation.
- Payment of the deposit being said to be paid direct to the seller
- Whether the deposit is being paid by someone other than the purchaser
- Contractual documentation not being fully completed by the seller's representatives
- Adjustments to the purchase price or allowances off the purchase price, e.g. for works to be carried out
- Transactions that do not follow the normal course
- Connections between parties to the transactions, particularly where one is a company.
- Whether the property has been owned by the current owner for less than 6 months
- Whether the value of the property has significantly increased in a short period of time
- Whether the client usually engages in property investment of this scale
- Whether the client seems unusually disinterested in their purchase or in the amount of the fee
- Whether there are any discrepancies between the description of the property as valued and the title and other documents obtained by the solicitor.
- Whether the mortgage is for the full value of the property
- Whether there is money left over from the mortgage which is to be paid to a third party or whether the proceeds of sale are being paid to someone other than the seller
Disclaimer
The information given above is provided as a service to its readers and does not constitute legal advice. Whilst attempts are made to provide quality information, no claims, promises or guarantees are made about the accuracy, completeness or adequacy of the information contained herein. As legal advice must be tailored to the specific circumstances of each case, and laws are constantly changing, nothing herein should be used as a substitute for the advice of a specialist in the area.
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