Risk Management, PRMIA

In April this year the FSA and mortgage lenders have joined together to set up such an information sharing hub and have established a streamlined reporting system designed to reduce the level of fraud involving mortgage loan applications. The process has been designed to allow lending firms report specific account details they deem suspicious at any point within the loan process, both after the application has been approved or before. This reporting can also relate to single or multiple loans from one customer and has been designed to also target intermediaries that are not following appropriate practice when assisting customers through the loan approval process.

Mortgage fraud comes in many forms starting with applicants that misinterpret their income or employment details so that they are able to borrow larger amounts to customers that manipulate the valuation of the asset for an over inflated loan. At the other end of the scale entirely false documentation is used to draw down funds that the borrower has no intention of paying back and that are usually destined for an entirely different purpose than funding the purchase of a property. The minor mendacious detailing on a loan application form is often missed during application approval activities and will result in a higher probability of the mortgage defaulting or in the lending not being totally secured. While this appears on the surface as a credit loss to the bank it is in reality operational in nature because the bank has made a choice to bare a risk that is outside credit policy and thus becomes a non-chosen risk.

Some intermediary brokers have a tendency to assist the more impoverished customers and some even search out these demographics of clients when professionally these firms should be adjusting a customer’s expectations appropriately. Banks usually need to measure rejection rate and the concentration defaults for loans from specific intermediaries to identify whether there is an abnormal volume before being sure that such brokers are inappropriately operating and of course then it is often too late.

It is likely that this new initiative from the FSA is going to be welcomed considering only some of the factors we have listed here. The reporting system is of course going to require formalization for its long term success. Simply reporting suspected and fraudulent loans may assist in legal discourse but most banks would prefer to eject potential applicants very early on in conveyance process. They would also prefer to review potential brokers in a shared database for a rating of professional worthiness before engaging them and that then requires a process for fair treatment. Specifically in the case a broker or customer was incorrectly listed they need to be able to resolve their standing within this mortgage fraud database but before we jump ahead of ourselves we must accept that most good systems start of as an embryonic concept and will evolve over time, this FSA aspiration is well worth watching.

More information from the FSA.