The Loan Danger Rides Again: Borrowing, Fraud and the Sub-Prime Sector
By Nick Funnell
Friday 10th August 2007
In June last year Donald Mackenzie, a seemingly unassuming Business Manager with the Royal Bank of Scotland, was convicted of defrauding his employers to the tune of £10m over a five year period. He achieved this feat by using what the Scottish Advocate General described as a ‘large, complex scheme’, creating false personal loan accounts in names similar to those of genuine bank customers. Embarrassingly for RBS, Mackenzie had previously been named their Business Manager of the Year, though you will be reassured to know that he was sacked soon after the fraud was discovered by the installation a new ‘loan guard’ system.
The modern UK economy is built on credit. According to the frightening statistics compiled at the Creditaction website, UK mortgage and personal loan debt stood at £1,271bn at the end of April 2007, a figure increasing by £1m every four minutes. In addition to the £360bn borrowed every year for mortgages, 3.8 million UK adults currently have unsecured personal loans. With such large sums ever more readily available, the financial dangers lurk like icebergs just beneath the surface. And while you can rest assured fraudsters will always be getting their hands dirty at our expense, the temptation for just a little dishonesty can overcome the best of us.
Student Loans- Teaching Us All a Lesson
Loan fraud certainly isn’t confined to private sector players like RBS- if you need a prime example of a lender ending up with egg all over its face then look no further than the government’s own student loan programmes. These hit the headlines earlier this year when alarming new scandals came to light:
In May the Universities admissions body UCAS said that it was investigating around 1500 cases of non-existent ‘ghost students’ borrowing up to £6000 a time from the state-backed Student Loan Company. It emerged that, despite receiving advice not to, for years the SLC accepted birth certificates alone as proof of identity, leaving it highly vulnerable to fraudulent applications. Nor are universities always running applications through the UCAS anti-fraud computer systems as they should, often enrolling directly to save time.
In one incident- the notorious ‘fat man’ case- investigators managed to successfully prosecute 22-stone Adeleke Adebayo after his one-man bandwagon of fraud rolled through UK campuses. He obtained £65,000 in student loans after applying for courses using 17 different identities- in some cases successfully enrolling for a second year despite never having turned up for lectures or exams in the first. Another case centered around the theft of 850 blank birth certificates from a register office in Derbyshire- leading to an estimated £1.2m fraud.
In the light of all this, the Department for Education and Skills now requires applicants to provide details of a character witness in addition to the birth certificate. In any case, Prime Minister Gordon Brown now wants to sell off the entire student loan book to private lenders, citing administrative cost savings to the taxpayer. With an estimated £16bn to be raised, and considering all the trouble that’s been caused, who could blame him?
Also in the spotlight earlier this year were the failings within the Career Development Loan (CDL) scheme, in which applicants could obtain up to £8000 each for training courses at one of around 2000 ‘approved’ training providers. Sadly, quality control procedures to effectively vet these establishments seem to have been entirely absent. Many went bust or simply disappeared off the radar screen entirely after swallowing up big chunks of CDL cash. In one case an IT training company, Train 4, never got round to taking any students despite receiving an estimated £250,000, the firm subsequently disappearing. It later emerged that the company was run by a man who had served a 12-month sentence for corruption six years previously.
All this echoes the debacle over New Labour’s infamous Learning Accounts scheme, which collapsed under similar circumstances in 2001 after losing around £400m of taxpayers’ money. It seems little has been learned in the meantime- but don’t worry, the parliamentary education committee has promised to “ask some probing questions” about the issue!
Fake Lenders and Advance Fee Scams
Often, loan fraud originates from the other side of the equation- the lender. Advance fees required up front from the borrower for to cover ‘insurance’ or other spurious costs should always be avoided, especially if the source is overseas or appears otherwise less than trustworthy. Unfortunately, when the juicy bait of quick and cheap money is dangled, there are bound to be takers. Advance fee fraud currently costs £190m annually in the UK, with around 110,000 victims- and that’s only those who admit their gullibly and inform the police.
There’s no need to get too xenophobic when it comes to advance fee scams- they don’t all originate from West Africa, Russia or the Pacific Rim. The case of Corporate Advances Ltd., a fraud run from offices in Brighton and Darlington from 1996 to 2003, hardly makes one proud to be British. Adverts placed by CA in the Canadian press offered loan facilities (from a Panamanian financial institution, no less) to business venture projects unable to gain funding elsewhere. Once the ‘offer stage’ had been reached, CA requested a $15,000 ‘administration fee’ up front, swiftly followed by a further demand for $40,000 for the application to proceed further. Predictably, no actual loan advances were ever forthcoming. The fraudsters relied on the fact that the Canadian victims would be too unfamiliar with British legal system to prosecute successfully. The Serious Fraud Office eventually closed CA down following numerous complaints compiled over in Canada, the ringleaders all receiving sizeable jail terms.
Bending the Truth for that Dream Home
Of course, mortgages remain the main reason for people in the UK to borrow large amounts of money. And with UK housing market reaching new peaks- the average price now comfortably topping £200k- the pressure is on buyers to stretch their borrowing potential up to, or beyond, its limits. Yes, dishonesty over applicants’ earnings is now an increasing problem for mortgage providers, the Building Societies Association describing the use of fake financial documentation as “rife”- and the power of the internet is only exacerbating the problem.
A quick browse on any search engine brings up website links for several companies- often based overseas- providing ‘duplicate’ P60s, payslips and bank statements on demand. Usually, very few questions are asked concerning the veracity of the information provided by the customer. Times Money journalist Mark Bridge recently put one of these companies to the test- and within 24 hours obtained for a mere £120 documents ‘proving’ he had a £65,000 salary- £37,000 more than he is actually paid. Needless to say, the website in question tiptoes carefully through the legal disclaimers in its terms and conditions, a spokesman claiming “we provide documents for novelty purposes only”.
It should be emphasised that lying on a mortgage application form is a criminal offence. But it is a crime some lenders had made disarmingly easy to commit, especially when they don’t even try to verify applicants’ income. The UK self-certification mortgage market was worth £17.3bn in 2006, having shown annual growth of nearly 18% over the previous five years. Specialist ‘self-cert’ lenders such as HBOS are increasingly taking a ‘risk-based approach’ to lending- shorthand for accepting a small percentage fraud loss in order to chase market share. Marketed to the self-employed and those with irregular income streams, self-certs inevitably crank up the overall risk profile of the UK lending market.
Sub-Prime Mortgages: Houses Built on Sand?
Self-certification and mortgage fraud are inextricably liked with the murky waters of the sub-prime sector - the industry’s name for mortgages sold to those with poor credit histories.
According to Datamonitor, the UK sub-prime sector is growing rapidly, now accounting for 5-6% of all new home loans, a business worth about £16bn a year. Many market commentators are warning that this loosening of lending criteria could lead to the sorts of difficulties recently experienced over in the US. There, mortgage lenders lost upwards of $3bn in 2005 alone due to fraud in the sub-prime sector. US figures show that applications containing misrepresentation are five times more likely than honest applications to produce default in the first six months. In around 80% of cases, it’s been the commission-hungry brokers initiating and facilitating the fraud, clearly feeling little responsibility for the ticking debt bomb being set for both lender and borrower.
While we may not all have ready access to the kind of cash obtained by Mr Mackenzie at RBS, the dangers of pushing too hard for large and unmanageable loan advances are certainly there for everyone. Just don’t be tempted into dishonesty- at the risk of sounding like a schoolteacher, it’s yourself you’ll be fooling as much as the lender.
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