There’s been a rise in the number of misconduct cases related to suspected mortgage fraud - and they’re getting more complex, the Financial Markets Authority says

There’s been a rise in the number of misconduct cases related to suspected mortgage fraud, according to the country’s financial markets regulator.

In 2022, the regulator opened nine cases connected to potential mortgage fraud. In 2023, the number of cases went up to 16 and last year, there were 23 misconduct cases relating to suspected mortgage fraud.

“This reflects a 78% increase in 2023, followed by a further 44% increase in 2024,” the FMA’s executive director of response and enforcement Louise Unger says.

And the complexity of these cases has escalated over the 2022 to 2024 period, Unger says.

In April, the Financial Markets Authority (FMA) announced it had filed a criminal charge against an Auckland-based former financial adviser, with the FMA alleging he was dishonestly using a document.

The FMA alleges Prem Gounder, while acting as a licensed financial adviser, submitted a false document - a gifting certificate - in support of a home loan application made on behalf of a client. An investigation into this is still ongoing.

The growing number of suspected cases being reported to the FMA has alarmed the regulator, so much so that Unger has sent a letter to the chief executives of banks and non-bank deposit takers, KiwiSaver providers, industry associations and other regulators.

In the letter, Unger writes the FMA knows lenders are already aware of mortgage fraud risks and have systems in place to identify and mitigate these.

“However, we are concerned that gaps may remain across the industry.”

To help, the FMA has compiled a list of ‘red flags’ - mortgage fraud risk indicators where fraud is being done for profit by third parties - to help lenders ensure “their systems and controls are appropriate to detect and prevent mortgage fraud”.

What is mortgage fraud?

Mortgage fraud is when people intentionally misrepresent or lie about information in their loan documents, or try to illegally make a profit from a mortgage.

One example of mortgage fraud are falsified gift certificates.

When people who are trying to buy a house, and are given money as a gift for this, their lender requires them to provide a gifting certificate. This certificate makes it clear that this money is a gift towards their house deposit (rather than a loan that needs to be repaid).

But gift certificates can be falsified (situations where there has been no gifted money or the money comes from a loan which needs to be repaid). These falsified gift certificates are submitted in support of the buyer’s loan approval.

Unger says this is likely to have negative consequences for the buyer, “if the buyer (as a result of having a larger deposit purportedly available) has potentially taken on more debt than they are able to service”.

Unger says the suspected mortgage fraud cases being reported to the FMA are being carried out by third parties with people wanting to borrow having no knowledge about it.

The range of parties includes real estate agents, conveyancing lawyers, valuers, mortgage advisers and brokers, and those involved in credit and mortgage approvals.

“Where mortgage fraud is being pursued for profit (as opposed to by an individual to obtain a mortgage on a property that they would not otherwise be able to afford), this often involves more than one party acting in unison.”

The letter

In the letter, sent July 23, Unger writes: “There are a number of different parties that play a role in protecting and promoting customer interests in these transactions, including your financial institution.”

“Mortgage lenders have a responsibility to protect and support all borrowers by identifying, preventing and responding to mortgage fraud with fairness and vigilance,” Unger writes.

“Victims of this kind of mortgage fraud often face long-term financial and emotional consequences, including taking on loans larger than they should have as a result of falsely inflated property values, with these often being unaffordable.

“In some cases, victims risk losing deposits made up from First Home KiwiSaver Withdrawals, meaning they lose those savings too.”

Unger writes the regulator expects to see lenders implement “robust mortgage fraud detection and monitoring systems, with attention to red flags that may signal exploitation, and to keep these under review to ensure their effectiveness”.

Lenders should provide staff training to recognise signs of mortgage fraud, “including indicators that a borrower may be a victim, not a perpetrator”.

As part of the Conduct of Financial Institutions regime, banks and non-deposit takers have to make sure customers are treated fairly, Unger writes, and the FMA expects this to include “having appropriate policies, systems and controls to identify, prevent and respond to mortgage fraud with fairness and vigilance”.

“Early detection is not just about protecting the lender; it’s about protecting consumers too,” Unger writes.

“Lenders should respond to victims of mortgage fraud with compassion and integrity, and an open mind.”