Summary: Mortgage fraud is increasingly widespread and complex and its consequences can be devastating. It is a criminal offence, and in Alberta several individuals have been convicted of mortgage fraud by the RCMP and/or other police forces. Participation in mortgage fraud is contrary to the Real Estate Act Rules, and industry members who breach the Rules face strong sanctions, including suspension or cancellation of their authorization. All industry professionals must play an active role in preventing mortgage fraud by identifying suspicious deals, notifying the authorities, and assisting in investigation of parties involved. [See: Real Estate Act Rules, s.42(a)(b)(g)]

There have been multiple news stories about high-profile mortgage fraud cases. The public has been made increasingly aware of it and, as a result, greater demands are being placed on Alberta mortgage brokerage professionals when it comes to mortgage fraud awareness and prevention. Mortgage professionals should ensure they have armed themselves with the knowledge and experience necessary to avoid, even unknowingly, participation in mortgage fraud.

According to the Canadian Association of Accredited Mortgage Professionals, mortgage fraud is defined as “the material misstatement, misrepresentation or omission relied upon by an underwriter or lender to fund, purchase or insure a mortgage loan.” There are two categories of mortgage fraud: fraud for housing and fraud for profit. Fraud for housing, for example, can occur if the borrowers, the intended residents of the subject property, represent that the deposit came from their own sources when in fact it is a loan that will have to be repaid to a relative. On the other hand, fraud for profit is typically perpetrated by organized crime or by individuals seeking to make money through property manipulations, seeking to acquire properties for rental purposes under the premise they are going to be residing in them or for illegal purposes, such as to facilitate grow-ops or money laundering.

This information bulletin highlights a number of mortgage fraud red flags that are specific to Alberta mortgage brokerage professionals.

What are red flags?

Red flags have been developed by organizations such as RECA through their experience of investigating mortgage fraud files. Red flags identify the more common issues found to be present as potential indicators of fraudulent real estate or mortgage brokerage transactions. Considered individually, these red flags might appear innocent enough. When two or three red flags appear in the same transaction, it can be an indication of the presence of mortgage fraud. If several red flags are present, a mortgage brokerage industry professional should exercise greater care. The transaction may require further scrutiny to determine whether it is a legitimate or fraudulent transaction.

If several red flags are present, a mortgage brokerage professional should be suspicious. For example, you are involved in a transaction where there have been a string of offers on the same property, from different buyers, all of which have collapsed because of financing, high-ratio financing is required and the source of the deposit cheque is someone other than the buyer. Considered individually, these factors appear innocent. However, when found together, they seem suspicious and this transaction may require further scrutiny to determine if it is legitimate.

RECA knows that in the interest of helping clients secure a mortgage, some mortgage brokerage professionals will work out “creative financing.” Though there is nothing wrong with being creative, ensure that any creative financing arrangements do not result in a misrepresentation to a lender or any other party.

Red flags associated with the identity of buyers/borrowers:

1. the buyer/borrower will not provide photo identification when requested
2. the transaction involves a relative of the industry member
3. existence of other offers, subject to financing, that collapsed
4. parties are “undisclosed,” appear as “care of listing brokerage,” or “nominee”
5. the land title records do not match with the seller information
6. the buyer is a numbered company seeking a high-ratio mortgage
7. corporate search shows the industry member, spouse or family member are a director
8. buyers or sellers not personally or professionally related, as “R. Smith and M. Jones”
9. partial buyer or sellers names, such as no first name or only an initial for the first name
10. information about a buyer’s income doesn’t match the industry standard
11. buyer purchases a property far from his or her employment for no apparent reason
12. buyer purchases an investment property yet does not own a principal residence
13. buyers purchases multiple properties with high-ratio mortgages with different names/name variations
14. parties have no formal office (e.g. communicate by cell, email or fax, hold meetings at restaurants)
15. the source of the deposit cheque(s) is other than the buyer
16. the deposit is provided in cash or by money order
17. the buyer or seller is represented by a person acting on a power of attorney

Red flags associated with the property value:

18. vendor take back mortgage and/or other forms of equity arrangements
19. sweat equity arrangements as opposed to a reduced price
20. vendor take back or sweat equity arrangements not referenced in the purchase contract
21. chattels are used as deposit or as partial payment
22. renovation value included in the sale price
23. property has illegal/nonconforming suites
24. property is a combination of residential and commercial components not reflected in the financing arrangements
25. commercial property has residential type financing or loan-to-values ratios
26. listed property is owned by a corporation but has mortgage in excess of 80% of property value
27. purchase price is same as, or higher than list price
28. property list price or purchase price of property is unusual for the neighbourhood
29. appraisals were provided by the parties to the trade

Red flags indicating unusual transactions:

30. quick succession of trades on one property
31. seller in the "business" of selling real estate and buys and sells many properties
32. use of "Seller's Rights Reserved" on listings
33. uncommon commission arrangements, unusual adjustment to commissions, low fees
34. listing associate's instructions refer inquiries to unlicensed person for showings or information
35. MLS information is unusual or inconsistent with the transaction; e.g. listing is removed from MLS prior to sale, sale is not reported, listing reappears at higher price, listing associate on MLS is different from the purchase contract, MLS history doesn't support pricing, etc.
36. Seller’s real estate representative is asked to produce a feature sheet on the property with an inflated price
37. one lawyer represents both parties to the transaction
38. condition allowing buyer to show unit to prospective tenants; note: most high-ratio mortgages require owner occupancy
39. all or many units of building are sold at the same time with coinciding possession dates
40. immediate possession dates
41. firm transaction with none of the usual conditions; in particular, a transaction requiring high-ratio financing, yet is unconditional
42. no counter offer
43. contract indicates unusual statement; i.e. "this is a private sale"
44. names appear to have been added to or deleted from the contract
45. not all parties named on the contract have signed it
46. purchase contract indicates both parties signed at the same time
47. no buyer's or seller's associate information provided for delivery of documents
48. schedules or addendums exist but are not indicated in the contract, or, schedules or addendums do not reference the originating contract
49. deposits are not held at brokerage; particularly applies when brokerage is not even provided with a photocopy of the deposit cheque

Red flags associated with industry member behaviour:

50. industry member’s lifestyle is not consistent with income received through the brokerage
51. industry member section of the contract not filled out
52. industry member tends to use same lawyer on most transactions
53. industry member primarily does transactions with only certain other associates
54. industry member tends to always refer clients to the same mortgage broker
55. signatures are witnessed by someone other than the real estate associate(s)
56. industry member buys and sells his/her own properties regularly
57. industry member lends down payment to client
58. number of listings or sales an industry member has posted on the MLS system does not correspond to brokerage records (possible fraudulent broker load situations)
59. industry member regularly advertises properties as "low down," "assumable," "no down," "no qualifying," "quick possession," etc
60. industry member holds both real estate and mortgage associate licence

Red flags associated with brokerage operations:

61. broker has no fraud prevention or detection policies
62. brokerage has no policies or oversight related to personal trades/deals in mortgages
63. brokerage administration staff are not trained to recognize suspicious transactions
64. brokerage does not require property title be pulled and examined with each new listing
65. brokerage does not require the original transaction documents to be filed with them
66. brokerage does not check that all transaction documents are filed with them
67. brokerage does not check background of prospective industry members and/or employees
68. brokerage does not disclose what information it has or has not verified
69. brokerage does not comply with the requirements of the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC)
70. broker does not review transactions on a regular basis
71. conveyancing staff not trained to recognize suspicious transactions
72. advertisements are not approved prior to publication and/or are not reviewed by broker

When you identify a suspicious transaction

If you have found information to be false or misleading, contact the lender and advise them of your findings. If the persons involved are other industry members (real estate associates/brokers, mortgage associates/brokers or appraisers), report the results of your review to RECA in writing.

If you suspect fraudulent and/or other illegal behaviour, contact the local police or RCMP.