Borrowers may be paying the price for a spike in loan fraud.
The executive director of the Financial Services Federation (FSF), which represents finance companies, warns there’s been a rise in people using increasingly convincing looking, fake documentation to secure personal loans.
Lyn McMorran says car finance companies and other consumer finance providers are having to be more vigilant to spot forged drivers’ licences, bank statements, etc.
“The information being provided in support of the loan is so sophisticated - so professionally produced - it would suggest that there’s more than one person behind it,” she says.
“Any kind of loan fraud affects the ability of the finance company to be able to on-lend funds and that puts up the cost of borrowing to consumers.”
McMorran says the reason for the uptick is unclear, but acknowledges improved technology, which makes it easier to forge documents, might have something to do with it.
She can’t attribute the misconduct to a certain demographic of society, and doesn’t believe people are scamming the system out of desperation.
The FSF’s members say they’re happy with their loan volumes and their arrears are low.
“It’s good quality lending. They’re not seeing the desperation that a payday lender might see, for example,” McMorran says.
What will happen when interest rates go up?
She says it’s difficult to get a sense of exactly how widespread the problem is.
“Apart from cases where there have been convictions, it’s awfully hard to tell what’s going on. You don’t necessarily know that there’s been fraud until all of the sudden there are no loan repayments and the money’s gone and you can’t recover it.
“There might be stuff bobbling away under the surface that people don’t know about.”
McMorran acknowledges that if the market turns, and the fraudsters can’t meet their repayment obligations, our financial system risks being exposed.
“If interest rates go up, which they probably will, it is going to have an impact on people for sure,” she says.
“The FSF as a body is now looking at ways in which we can facilitates more information sharing amongst our members to try to prevent instances of identity fraud or the use of fraudulent account information to verify loan affordability.”
She admits the Privacy Act makes it hard to share a lot of information, but says it would be good to share trend information within the industry at the very least.
Many of the personal loan fraud cases non-bank lenders encounter aren’t big enough to report to the Serious Fraud Office (SFO).
“And when it’s reported to the police, it’s a bit like reporting your burglary at home,” McMorran says.
“There are other issues that take priority when they haven’t got enough resources to be able to fully investigate all these things. It’s part of the cost of doing business unfortunately.”
She admits that in an ideal world it would be great if the SFO was resourced to take a proactive approach towards cracking down on lower level fraud, because “ultimately it is the consumer that pays”.
When there’s a boom, there will be fraud
Commenting on higher level mortgage fraud in particular, the SFO’s chief executive Julie Read says: “We don’t do work that’s specifically preventative.
“Obviously we hope that by means of both the publicity around the cases that we do - talking about the cases and consequences - we alert people to issues.”
The SFO received five mortgage fraud complaints in the past year - up from one in 2015, two in 2014, none in 2013, one in 2012 and four in 2011.
It made five mortgage fraud prosecutions in this time.
While the numbers are small, Read acknowledges the scale of the problem is larger than it’s been in the past.
“Where there are [property] booms, there’s likely to be fraud,” she says.
Read also acknowledges that if loans are being repaid, it’s unlikely any fraud will be picked up.
“Of course, that’s quite possible in a market such as the one we have in Auckland at the moment. It may be possible for someone to sell on a property at a considerable profit and therefore repay the mortgage. If that happens… any fraud may never come to light,” she says.
Fraudsters taking advantage of hot property market but not driving up prices
Asked whether she’s scared that in five or 10 years’ time, the tide will go out and a large number of mortgage fraudsters will be exposed, she says: “Potentially if the housing market loses significant value that might expose some fraud that we’re not presently aware of.
“But I would be surprised if there is fraud at the moment, which is of itself driving high prices. I think people are definitely taking advantage of the heat in the market, but I’m not aware that there’s sufficient mortgage fraud to actually drive prices.”
Read says tougher loan-to-value ratio restrictions have the potential to dampen mortgage fraud, as they require applicants to have higher deposits - IE 40% for an investment property.
Once Phase 2 of the changes to the Anti-Money Laundering Act are implemented, this should help too.
“The use of a false name is much harder when you’ve got to comply with AML provisions, and if the real estate agent, the bank and lawyer all have to comply with them, there’s a much greater chance of those falsehoods being found out,” Read says.
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