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Into the whirlwindLindsey WhiteFinancialAdviser September 24, 2009Allegations of fraud in the City of London have raised serious questions about industry lending practises
As the
dust settles over the news of fraud at Chelsea Building Society, more investigations into mortgage fraud in the City are coming
to light. As the Chelsea
Building Society released its results for the six months ending 30 June this year a few weeks ago, it reported a £53m
impairment on loans and advances, due in large part to a £41m mortgage fraud. Half-year results showed a loss of £26m,
compared with £23m pre-tax profits for the first half of last year This news followed hard on the heels of Bradford & Bingley's admission that it faces huge potential
mortgage fraud losses and has set aside a provisional fund of £271m for fraud and professional negligence since the
beginning of last year. In recent
days another alleged mortgage fraud has emerged. This time it extends to an insurance company. The City of London police this
week arrested four men in connection with an alleged £9m fraud, though it is yet unclear which company is implicated.As Financial Adviser went to press the four
men had been bailed and currently there is no charge.Since news of Chelsea's losses broke, the building society has worked hard to distance itself from the
events, placing as much blame as possible on third parties and positioning itself as a victim. But Chelsea's actions have
sparked debate in the industry about where the responsibility lies.According to Michael Coogan, director general of the Council of Mortgage Lenders, lenders can be victims.
He said: "People may not think of lenders as victims of crime, but unless fraudsters are tackled then honest customers
are the ones who end up paying more." Like B&B, Chelsea's fraud cases arose from buy-to-let mortgages taken out at the height of the property boom.
In a statement the building society said: "Chelsea has identified that there are cases within its buy-to-let mortgage
book where fraud has occurred. This relates primarily to lending during the period 2006 to 2008 and is mainly as a result
of the artificial inflation of property values by third party professionals involved in the transactions."Unlike the self-cert lending scandals uncovered
at HBoS in 2003, Chelsea's variety of fraud, which often takes place in new-builds, involves properties being sold-on
several times amongst a group of landlords, surveyors and mortgage brokers in collusion, with the sale price being artificially
inflated at each transaction. Speaking
to Bloomberg, Stuart Bernau, the newly-appointed chairman of Chelsea, said: "If you get collusion between an intermediary,
a local valuer and perhaps a solicitor, they can start to inflate property prices. When you come to sell the property, it
is worth nothing like what you thought."Mr Bernau was appointed to the role of chairman just two weeks before the £41m fraud was announced, as chief executive
Richard Holbrook stepped down after 28 years with the building society. Chelsea finance director Andrew Parsons also resigned
in August 2009, although Jeremy Hicks, head of communications of Chelsea, said neither departure was related to the fraud.
Mr Hicks explained that Mr Parsons
left to take up a role at Friends Provident and Mr Holbrook resigned because, "he knew there would be a different strategic
plan that needed to be put in place over the next five years." Chelsea has also tried to downplay the significance of the fraud by stating that "no one individual"
is responsible for the "bad lending decisions", and by attempting to draw other parties into the mess. In a statement
the building society said: "Chelsea is not the only lender to be affected by this issue. Many other banks and building
societies have also been impacted." If anyone is to be held responsible, Chelsea seems to be singling out intermediaries, stating: "In Chelsea's
case, much of our provision is for the artificial inflation of property prices by third party professionals involved in the
transactions - fraud." However,
Mr Hicks denied Chelsea is putting the blame on brokers. He said: "There are a number of people involved. We are certainly
not pointing the finger at intermediaries."Chelsea is not the only lender keeping a watchful eye on mortgage intermediaries, as the FSA's dedicated
hotline for reporting suspicious broker applications has proved. According to an FSA spokesman, tips from lenders calling
the hotline account for many of the 65 cases and £1m of fines for fraud the FSA has brought against intermediaries in
the past three years. The spokesman
said: "All the cases we have taken are against intermediaries who are involved in overstating income, either their own
or the client's. "They
have been defrauding lenders, but lenders themselves should be vigilant about what loans they make."According to Ted Fisher, chairman of the Building Societies'
Members' Association, this lack of vigilance is exactly what led to the Chelsea fraud, thanks to "directors being
asleep at the wheel". He
said: "Though they give advice to members on security matters they are clearly not practising what they preach. They
have a direct responsibility to ensure that those people are performing properly with every type of loan they make."Everybody could see the building societies
were heading towards the buffers but they carried on with these high risk loans. They [the directors] were all too busy with
their snouts at the trough. They should be concerned with the benefits of members."According to CIFAS, the UK fraud prevention service, blame has to be shared
by brokers and lenders. Richard Hurley, communications manager of CIFAS, said: "Third party fraud is really only coming
to light now. From the point of view of who, or what, is responsible for mortgage fraud, it is difficult to say. "There are undoubtedly some bad apples
who have played a part, undoubtedly some third party involvement."CIFAS' analysis of trends for last year reported a 16 per cent growth in fraud throughout the UK. According
to the group, economic slowdown and a rise in fraud "go hand in hand". Mr Hurley said he would not be surprised if an increasing number of fraud
cases came to light in the next six to 12 months, adding: "When the tide comes out we see all the wrecks." A spokeswoman from the Building Societies'
Association said there is no evidence that other building societies have experienced fraud to the extent of Chelsea's
potential losses, although she admitted: "It is difficult to say until their individual results are published."The CML has already taken steps to combat
fraud by brokers, making changes to the standard instructions that lenders give their conveyancers to ensure that new-builds
are given accurate valuations. Since
September last year, lenders have required industry professionals acting on their behalf in transactions involving newly-built
homes to follow a new protocol for valuing property. The new process requires conveyancers to ask a series of questions to
provide clarity and transparency for lenders about price discounts and other incentives. In a statement about the new regulations the CML said: "The
changes we are making are intended to ensure that any discounts on the price of newly-built properties or other incentives
offered by sellers - or negotiated by buyers - are captured in the conveyancing and valuation process. "By ensuring that conveyancing and valuation processes capture
the true value of the property, we will be helping to reduce risk for both borrowers and lenders."Chelsea now has a team of about 15 specialists reviewing all cases
of potential fraud, while bodies like the CML and the FSA are taking steps to prevent similar cases from arising. However,
with millions of pounds of fraud already successfully perpetrated during the days of easy credit, and millions more in potential
losses lurking on lenders' books, this may be a case of closing the barn door after the horse has bolted.
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