Mortgage Fraud: ASIC gets tough on brokers

ASIC is responding to the high level of loan application fraud originating from mortgage brokers. It’s announced a significant project designed to develop industry-based and best practice solutions to prevent loan fraud, particularly in respect of the home-loan market.

Background

The watchdog made its intentions clear at the recent Senate Economic Legislation Estimates Committee meeting held in Canberra. ASIC will soon be looking at incidents of loan fraud in the home-loan market through a wide lens. Deputy Chairman Peter Kell and Senior Executive Leader Michael Saadat both echoed similar sentiments at the Senate hearing. Namely, a more indiscriminate approach is required to reign in what is now perceived as systemic incidents of loan fraud evolving at the mortgage broker level.

Since July 2010, ASIC has taken 79 actions involving loan fraud including 60 actions to ban individuals and companies from providing or engaging in credit services or holding an Australian credit licence.[1] ASIC has also commenced 13 criminal proceedings involving loan fraud.[2] In 2016, ASIC permanently banned a mortgage broker from the credit and financial services industries after its investigations resulted in the broker being convicted on eight charges under section 160D of the National Consumer Credit Protection Act 2009.[3] The watchdog’s investigation found this individual provided documents in support of eight loan applications to a major bank knowing they contained false or misleading information about the applicant's employment. Of the eight loan applications, five were approved totalling $1,608,400 with the individual receiving a $6,847.53 commission.[4] The Administrative Appeals Tribunal later upheld ASIC’s decision to permanently ban this person.[5]

ASIC Deputy Chairman Peter Kell stated that while mortgage broking in the credit sector has been a focus of ASIC’s for some time, recent patterns that have been brought to light suggest a more holistic approach is required. Only this way will ASIC be able to reduce the incidence of loan fraud at a wider industry level. A wholesale approach will also assist ASIC in working with lenders to improve their procedures for detecting such fraud.[6] A more wide-reaching approach to meaningfully address systemic behaviour also appears to address ASIC’s concerns that it has limited ability to address all allegations of loan fraud, with Mr Saadat stating that ASIC’s resources restrict it to prioritising ‘higher-risk’ incidents.[7]

Mr Kell illustrated that the incidents of home-loan fraud observed by ASIC tend to stem from two broad categories; that of rogue individual mortgage brokers facilitating fraudulent or misleading loans as part of their practice and more systemic examples of loan fraud exceeding amounts of $100 million.[8] Mr Kell warned that loan fraud is something lenders will always need to be alive to but reflected that to a degree, they already are, as evidenced by ASIC receiving several reports from the lenders themselves when they detect fraud.[9]

Despite indicating that lender reporting does happen, Mr Kell informed the Senate hearing that ASIC is undertaking a significant project around loan fraud, particularly in respect of the home-loan market, which will be looking at requiring lenders to improve their procedures for detecting applications that may involve fraud.[10] The requirements on lenders, at this stage, are unclear. Mr Saadat told the Senate hearing that the project is still being refined and is in the stages of scoping which particular aspects it will cover.[11] The intent, however, is clear in that the aim is to look more broadly at loan fraud than at individual instances with a view to developing a strategy that can deal with it more comprehensively.[12] Mr Kell noted that ASIC are observing lenders detecting fraud using a variety of methods, suggesting that an information-sharing approach to fraud detection methods and risk-minimisation strategies may form part of the project.[13]

What is clear from the Senate hearing is that ASIC clearly regard the issue of lender alertness to potential loan fraud as a separate and distinct issue to ‘responsible lending’ practices,[14] and that ASIC is looking to ‘sheet back’ some responsibility on lenders to alleviate the burden placed on ASIC as the enforcement regulator against rogue mortgage brokers.[15]