A new scheme was launched from 1 September 2011 to help tackle mortgage fraud, which was estimated to have cost £1bn in 2010.
The Mortgage Verification Scheme, first announced in the March 2010 budget, brings together HMRC, the Council of Mortgage Lenders and the Building Societies Association and has been refined following a pilot period. A similar scheme has operated in the US for some years.
The scheme will be limited to cases where lenders 'reasonably suspect' that mortgage fraud is taking place. So it won’t be used routinely on all loan applications, but may be considered where the application form raises questions following the lender’s review of the proposal. In the past the lender may have been forced to decline the loan where concerns arose, or seek other forms of income verification, perhaps less reliable than HMRC’s records.
Lenders can now contact a specialised HMRC unit by a secure electronic platform, which will check whether income details declared to lenders matches the income and employment details in HMRC returns. HMRC will advise lenders whether or not the details correspond with their information. Lenders pay a fee of £14 + VAT per case.
Interestingly the scheme works two ways, because HMRC may then use the borrower’s proposal to launch special tax investigations, if for example they suspect that a taxpayer has additional undeclared earnings.
CML director general Paul Smee has commented:
"Lenders have found during the pilot that the scheme has been very useful in helping them to lend responsibly. It has helped them to avoid lending in some cases where there is a risk of fraud, at the same time as giving them confidence about the borrower's credentials in some cases that they might otherwise have felt compelled to refuse."
The practicality of the scheme has been tested by a pilot, which offers encouragement that it will run smoothly and without undue delay. The cost to the lender is also low so that should not deter its use or push up the cost of mortgages.
Lenders may need to revise their application forms to obtain the borrower’s consent to receive information from HMRC, since HMRC is subject to strict confidentiality restrictions. At present it is not proposed that lenders can obtain detailed information on a proposed borrower’s financial affairs, but simply the fact of whether the income declared to them and to HMRC is consistent.
What each lender chooses then to do is a matter of policy for them. There may be circumstances in which a discrepancy is innocent. For example, depending on when a loan application is made, it may be over 12 months since the latest tax return was submitted to HMRC. If a borrower has changed jobs and increased their salary, or for self-employed applicants boosted their business significantly since then, then any difference between the two sets of information may not be an indicator of fraud.
Apart from filtering out applications with overstated income, another area of mortgage fraud detection that ought to be helped by the scheme is loan applications put forward by imposters. Applications put forward on behalf of innocent third parties ought to be caught by this new check since, unless the third party is well known to the impersonator, it is unlikely that accurate income information will be available to the fraudster. Previously, plausible information could be invented for the purposes of the application, which often was difficult to verify from credit checks or public information, but this new check gives a firm basis to test that income information.
As the scheme is implemented the benefits to lenders in reducing the money lost to fraudsters, and thus the benefits also to customers, should be welcome.
