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Not so Soft on Soft Fraud

by NEXSYS News

I was intrigued the first time I heard the term soft fraud many years back.  I recall hearing someone speaking about mortgage fraud and responding to a question in which he minimized the concern because it was mainly “soft fraud”.  I recall pondering how fraud could be “soft” as in the end it can pack a pretty heft punch on the victims.  It seemed to be somewhat of an oxymoron.  According to USLEGAL.com, “Soft fraud refers to a type of fraud in which a true individual manipulates or enters fraudulent information in the credit applications for the purpose of approval.”  In contrast “Hard fraud refers to a type of fraud committed by criminal organizations with the intention to defraud an organization”.

While “hard fraud” may be a bigger concern and higher priority for governments, perhaps judicial branches of government may focus on taking a not-so-soft approach with “soft-fraud”.  Take the following case as an example which I read about yesterday, (Woman Admits Forging Signature to Obtain HELOC).  Angela Corson Smith of Montana pled guilty on July 17, 2013 to presenting a forged power of attorney document, and forged loan documents, all in order to receiving a HELOC (Home Equity Line of Credit).  It will be interesting to see what Smith is actually sentenced to this fall, but she faces possible penalties of 30 years in prison, a $1,000,000 fine, and a 5 year supervised release.

In Canada, Equifax seems to have arguably the closest pulse to mortgage fraud cases and they reported that of the $650 million of attempted fraud incidents in the Canadian Financial Sector in 2011, over $400 million was within mortgage applications (see Equifax Statistics).

Fraud for Shelter is the term that is used in Canada to refer to “mortgage applicants who plan to live in the home and misrepresent their qualifications to get approved”, so this would fall under the category of “soft fraud”.  A branch of the Government of Canada, the Criminal Intelligence Service Canada (CISC) Central Bureau, is responsible for investigating Mortgage Fraud, but their focus is on Mortgage Fraud for Profit, which are schemes which criminals undertake such as: appraisal fraud, illegal property flipping, air loans, title fraud or foreclosure fraud. (Criminal Intelligence Services Canada – Central Bureau) “In contrast to fraud-for-profit schemes, fraud for shelter typically involves individual borrowers who often intend to live in the property as law-abiding home owners. These individuals falsify their personal or financial information in order to obtain a larger mortgage than their income can support…. CISC Central Bureau focuses on fraud for shelter only when organized fraudsters target individuals struggling to make their mortgage payments and exploit them in foreclosure-fraud schemes.”

I know that in the time we have served the broker network, many mortgage brokers/agents and sometimes lender contacts, have turned a blind eye to document inconsistencies.  I read a Canadian Mortgage Trends article (CMT – Mortgage Document Fraud) a while back in which the author had spoken to a crown attorney who claimed that “he comes across document-related fraud day in and day out and cites a surprising number of cases where bank insiders claim to ‘accidentally overlook’ or turn a blind eye to doctored job letters, pay stubs, etc.”    A broker recently told me that in his formal training “soft fraud” was certainly not encouraged but its seriousness was certainly minimized as they were taught that even those who exaggerate their claims will nearly always pay their mortgage payments first before any other debt, so the chances of default are fairly slim.

In the end, I believe this remains the core issue.  As long as Derogs (mortgages going into default) remain low, as they are in Canada at about 2% annually, there will be little attention paid to “soft fraud” or “fraud for shelter”.  This, however, is short term, unwise thinking.  The worldwide financial community has already seen that “failing banking systems wreak havoc on economies and governments”, as OSFI’s Julie Dickson so aptly puts it (OSFI – Julie Dickson at 2013 Bloomberg Summit).  Lending decisions need to be made with sound information and with conservative approaches.  OSFI is certainly leading the way in Canada, and wise lenders will support this direction.  As a financial community we can no longer afford to be “soft” on “soft fraud”.  We believe critical documents associated with business transactions must be validated, thus promoting integrity at the core of every deal.

Roland Mechler is Director of Operations at NEXSYS Financial Inc.    Roland has held senior executive positions in various industries including:  engineering, manufacturing, marketing and software firms.  Roland holds a degree from Wilfrid Laurier University, in Waterloo, ON, where he studied political science and business.

5 Responses to “Not so Soft on Soft Fraud”

  1. [...] their payments, so altered documents are not really that serious a crime; it is only soft fraud (Not so Soft on Soft Fraud).  After all, this is the only way to qualify for a mortgage with A rates.  Anecdotally, I spoke [...]

  2. [...] As I pondered the reasons for this significant increase in attempted fraud within mortgage applications, I have to believe that the introduction of OSFI’s B-20 in 2012 was a significant contributor.  OSFI’s tightening made it much more difficult for first time home buyers and existing home owners to qualify for a mortgage.  From one day to the next, prospective mortgage clients became non-qualifying individuals.  Mortgage agents/brokers also suddenly saw a significant impact in their business.  The options for the applicants and the mortgage professionals is to either bow out gracefully and accept other alternatives, or partake in a little creative document formulation, more accurately referred to as “soft fraud” (link). [...]

  3. [...] to know I contained myself, and maintained good Canadian manners.  For those that missed the blog (link), here are my thoughts on “soft [...]

  4. [...] Whether or not you concur with the severity of the Canadian situation, it would be prudent as a financial professional to at least plan for the worst.  For instance, what happens if house prices suddenly drastically decrease by 10% or even 25% as some analysts suggest?  What happens if mortgage interest rates continue to rise?  As mortgage originators, are you confident that proper due diligence has been done in underwriting of the mortgages you originated?  If the borrower stated that their Total Debt Service (TDS) was 38.9%, are you confident this was accurate or is it possible that they provided some creative documents and their TDS is much higher? (Have a read of my recent blog which discusses how stiffer OSFI rules may have led to more questionable documents: How OSFI’s B-20 Has Increased Attempted Mortgage Fraud Activity in Canada) Now under the stress of higher interest rates and a house value that has decreased so sharply that the outstanding debt is higher than the house price, will the borrower be able or interested in making payments?  They probably could if the information they originally provided was correct (since servicing ratios have some built-in conservatism), but what if the supporting loan documents were not reliable.  There seems to be a prevailing attitude that “soft fraud”, (misrepresenting documents to qualify for a mortgage) is not as serious as other forms of fraud, but I believe people will be singing a different tune when mortgage in arrear numbers and default number begin to creep up. Forensic auditing of these files may suddenly turn up information that was missed with limited up front due diligence.  Suddenly, with US-like default numbers, “soft fraud” becomes an issue that makes front page news, rather than a tolerated reality (Not So Soft on Soft Fraud). [...]

  5. [...] At NEXSYS we have been the recipients of criticism in past years because of our incessant demands for due diligence in our processes.  Even when we have uncovered fraud, we have often been challenged by “mortgage professionals” with how serious it really is.  “My client will pay their mortgage, so what’s the big deal?  It’s only “soft fraud”.  Our position is consistent and uncomplicated.  Fraud is fraud, or as we worded in our blog a while back, we are “Not so Soft on Soft Fraud”. [...]

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