Industry Developments: Helping to Reduce Income Fraud

by Yvonne von Jena | August 14, 2018

Canada’s housing agency, Canada Mortgage and Housing Corporation (CMHC), has asked the Canada Revenue Agency (CRA), country’s tax authority, to take a “more direct and formal role” verifying income claimed on mortgage applications, part of a two-year plan to tackle mortgage fraud, documents obtained by Reuters show.

Verifying Income

Unlike tax authorities in the United States and the United Kingdom, the CRA does not verify income for lenders, even with taxpayer’s consent. That may change, which would help lenders, mortgage insurers and other stakeholders in catching and preventing income fraud.

The tax agency said in an emailed statement, “the CRA is currently exploring different avenues in which to improve how it delivers taxpayer specific information in a secure manner, including the feasibility of securely sharing tax information with financial institutions upon client consent.”

Mortgage Fraud on the Rise

Data from the industry backs up the impact that various factors are having on consumers – higher house prices, tougher stress testing and lender requirements as well as bigger debt carrying costs as a result of increased interest rates.  According to Equifax Canada data, high-risk and suspected fraudulent mortgage activity is on the rise noting a 52% increase in suspected fraudulent mortgage applications since 2013 as of January 2017. According to data from its enterprise fraud management solution, the most prominent application tags as reported by investigators were:

  • 'Falsified Account Statements'
  • 'Falsified Documents'
  • 'Conflicting Information'

Equifax also conducted a survey to chart the attitudes and perceptions of Canadians with respect to the current housing market.  Key and telling insights were as follows:

  • 13% of Canadians felt it was okay to tell 'a little white lie' when applying for a mortgage
  • 16% believe mortgage fraud is a victimless crime
  • 8% admitted to misrepresenting the facts on a credit or loan application
  • 84% believe that the cost of home ownership is too high for first-home buyers today
  • The main factors driving up home prices are seen as 'more demand than supply' (29%) and 'foreign buyers' (27%)

 It’s Tougher to Keep Up With Fraud

In addition, it’s harder to keep up with new technologies. Says CMHC’s plan, “the industry’s current detection tools have not kept pace with the increasing sophistication of threat we face.” In addition it notes, paperless transactions, pressure to close deals quickly, rising prices and new regulations “create strong incentives for individuals or mortgage professionals to engage in opportunistic — or criminal — fraud.”

For example, one issue flagged in the CMHC plan is the Canada Revenue Agency’s website, where taxpayers can print a copy of their notice of assessment, showing reported income. The report says the notice of assessment is “easily falsified.”

Isabel Vives, CMHC’s Manager, Mortgage Insurance Fraud Risk Management, said the CMHC is also developing data-driven systems to screen for commission fraud, cases where a lender’s employee or brokers have encouraged borrowers to exaggerate their income.

 CMHC to Start Publishing Mortgage Fraud Statistics

The documents reveal that CMHC will start publishing statistics on mortgage fraud, which are not currently available in Canada, although no date has been set.