Avoiding commercial mortgage fraud: ‘Sweat the small details’

  • May 01, 2013
  • Becky Rynor

It’s bold, high-stakes and deceptively easy to pull off if lawyers and lenders don’t heed the “red flags” signalling commercial mortgage fraud, legal and financial experts warn.

 “One new thing we’ve recently seen that is fairly scary to us is fraud involving higher-priced commercial properties,” says Dan Pinnington, Vice-President of Claims Prevention and Stakeholder Relations for LAWPRO, a lawyers’ liability insurer in Ontario. He harkens back to 2007 when mortgage fraud typically involved properties in the $150,000 to $300,000 range. He says fraudsters now appear to be setting their sights on pricier chunks of corporate real estate.

“Now we’re talking properties that are in the $1- $2 million price range where the fraudsters have changed or are using corporate identity information. In some cases they have changed the corporate registration in terms of the corporate directors, officers, and so on and then presented themselves at a lawyer’s office as the owner of a property.”

He cites one recent, “very sophisticated” attempt that saw two fraudsters – one posing as the vendor, the other as the purchaser of a commercial property – approach two different lawyers in an effort to dupe a lender.

“The so-called vendors would use an ID making them appear as the people registered as the officers, or directors of a corporate entity who own a particular property. Or they would file a new Form 1 (an "Initial Return/Notice of Change by an Ontario Corporation" required under the Ontario Corporations Information Act) that would put their names as the people behind a corporate entity and then retain a lawyer to act on their behalf. Then there’s a purchaser who also retains a lawyer to act on their behalf on the deal.”

The fraudsters then approached a legitimate lender angling for a mortgage of $750,000 to $1 million based on the value of a $1.5 million property.

“We’ve seen at least two of those in the past several months, both of which went well down the line before there were suspicions of fraud – or to the point where the lawyer gathered enough information on seeing some of the red flags that they were comfortable in recognizing or declaring it was a fraud.”
Red flags could include a tendency on the part of one of the parties to push for “shortcuts or not worrying about details such as zoning or by-law issues,” says Lisa Weinstein, LAWPRO’s director of National Underwriting Policy. “Or the deposit not being very significant, or the deposit allegedly being paid directly to the vendor and not being held in trust by the agent or the lawyer. The agreement of purchase and sale could be amended after it was signed, perhaps to reduce the price.”

Unreasonably high fees offered to the lawyer can also indicate something is amiss with the deal, as can changes in the amounts being advanced, inconsistent stories, or limited contact information with a client preferring to deal only by cellphone.

“All of these red flags taken individually may or may not indicate a problem deal, but as a rule, the more of them you see, the more likely I would say it is to be one,” she says.

Farhaneh Haque, director, mortgage advice at TD Bank Group, says the biggest red flag of all could simply be “the rush deal.”

“Somebody who is in a rush, such as, ‘Oh gosh I’ve got a mortgage deal that has to close three days from now, I was working with another lender and they messed up and the deal fell apart and now I’m left with no choice and I’m under the gun and please, please, please let’s do this.’”

She says that’s when, as a lender, you have to stop and question why it is so important to close this deal in a very short amount of time.

“Train staff to recognize where you’re seeing an increased level of interest on that particular application or where you’re starting to feel pressure from any party, whether it’s the customer or the realtor or the lawyer. Slow the process down. Go back to the customer and set the right expectations about how long the process will take.” 

Haque says con artists are fine-tuning their methodologies and that means lenders have to keep pace.

“Lenders are transparent about their lending policies and many of us post that openly on our websites with the intention of educating buyers. But with the access to information, con artists become very familiar with lending policies and will go from lender to lender. The more aware they are of how the systems work, the more they find how to work within the systems.”

Haque also says knowing your customer is “really, really important” but admits it is increasingly difficult.

“With more and more mobile banking and internet banking, we don’t necessarily see the face and the tone and the demeanour of the person that is speaking to you. It’s an odd dynamic that we’re moving into because you’re not always seeing the customer up front as you’re interviewing them and you’re not seeing the same banker over the course of time.”

She says at some point in the mortgage approval process, whether the client applied on-line or over the phone, lenders should require a face-to-face interview with an employee who is fully trained to ask the right questions and verify information.

“Ask for all the documentation up front,” she recommends. “Make sure you’re asking for the originals rather than photocopies. Don’t accept anything by fax. One hundred per cent of the time meet with the end customer and interview them so that you have that rapport and relationship, so that you know you’re dealing with a true customer and not someone who is part of a scheme.”

Dan Pinnington agrees it’s all about sweating the small details.

“Lawyers are busy and will sometimes delegate work to staff who may be excellent and very thorough and in other cases may need a bit more supervision. Staff may see red flags or missing pieces of information that they don’t bring to the lawyer’s attention and these fraudsters are really persistent. They’ll really push on things, they’ll be last minute and they’ll manufacture circumstances that make it a rush. They will also often offer to pay a fee that is typically much higher than a lawyer would otherwise get.”

More information on recognizing and avoiding mortgage fraud can be found on the LAWPRO website.

Becky Rynor is a freelance writer in Ottawa.