One would think the whole process of applying for a home loan would be immune to fraud. Not only does the bank providing the mortgage bond send an assessor to check the property, there is also a buyer, seller, estate agent and at least one lawyer involved – and there’s the bond registration process at the deeds office.
In addition, nobody in the chain really sees the money or has access to the cash. It moves from the bank directly to the seller, who would be watching the process with a hawk’s eye as property is often a person’s biggest asset.
Yet apparently home loan fraud happens. Shanaaz Trethewey, chief operating officer of Comcorp South Africa, says home loan identity fraud has become an increasingly prevalent issue in recent years, posing a significant threat to banks and borrowers worldwide.
“SA has found itself at the forefront of this growing problem, with the South African Banking Risk Information Centre [Sabric] reporting a rise in fraud incidents in home loan applications, potentially causing losses of up to R3.4 billion in 2021,” she says.
The latest Sabric figures show that home loan fraud increased in 2022, and fraud attempts could have caused potential losses of R4.7 billion. However, actual losses due to home loan fraud were much smaller and declining. In 2022, actual losses amounted to R582 million compared to R668 million in 2021.
Curiously, attempted home loan fraud was only beaten by attempts in vehicle asset finance fraud, running to R7.7 billion in 2021 and R5.7 billion in 2022.
These figures are also astounding, given the checks and balances in place when financing a car with a bank loan and the rigorous registering procedures.
Sabric notes in its latest crime statistics report that there was an 8% rise in fraudulent applications for mortgage loans, with the numbers increasing from 2 925 in 2021 to 3 169 in 2022. “However, only 14% of reported fraudulent applications were successful during 2022,” it says.
Breaking down the modus operandi
“Despite the banks having certain safeguards such as bonds and property deed registrations for most cases of successful fraudulent applications, they still face significant expenses related to legal proceedings and eviction processes,” according to Sabric.
The banking sector watchdog says the modus operandi in cases of home loan fraud includes:
- Income fraud: Where individuals falsify or inflate income information to meet the lender’s requirements or to qualify for a larger loan amount. This was reported as the predominant problem, particularly when discrepancies were identified in the income stated on payslips.
- Property fraud: Where individuals provide false information about a property’s value, condition or intended use with the aim of obtaining a loan or securing a higher loan amount.
- Credit profile building: This involves the unlawful and deceptive practices used by individuals or entities to artificially enhance their creditworthiness or create a misleading impression of financial stability. In most cases, they deliberately transfer funds into and out of an account over an extended period without a valid reason other than to generate turnover. This activity aims to create the impression of a legitimate salary or income, even though the applicant or company did not genuinely earn that income. The intention behind this practice is to present the person or company as authentic and creditworthy.
- Using stolen or fabricated identities to apply for a home loan without the knowledge or consent of the person whose identity is being used.
- Recruiting a person with good credit to act as a “straw buyer” who applies for a loan on behalf of someone else who does not meet the lender’s criteria.
“Fraudsters aren’t always criminals and crooks waiting to get cash in hand and run away,” says Trethewey.
“The level of devious behaviour happens at every level – including with people who are going through divorces and siblings or children relative to their own parents’ assets.
“The surge in fraudulent activities during the home loan application process presents a formidable challenge for banks and credit providers. The high volume of loan applications, coupled with the need for exceptional customer service, creates an environment where detecting fraudulent applications becomes exceptionally difficult.”
Comcorp South Africa, a leading software innovator and authentication technology specialist, acknowledges the pressure banks face to streamline legitimate borrower applications while maintaining robust security measures.
“Striking the right balance between convenience and security remains an ongoing challenge within the lending industry,” says Trethewey.
Trethewey identifies three critical areas vulnerable to fraud throughout the home loan application process:
- Application process: Fraudsters often employ false identities and stolen or fabricated personal information to apply for loans.
- Counterfeit documents: The use of counterfeit documents further complicates fraud detection, as fraudsters can create convincing replicas of essential paperwork, such as payslips and bank statements, to deceive lenders.
- Signing bond contracts: When signing bond contracts, fraudsters exploit their false or stolen identities to accept and sign legal documentation.
Technology has played a pivotal role in aiding financial institutions in combating home loan identity fraud across all stages of the application process. Biometric authentication emerges as a promising solution to address identity fraud in home loans,” says Trethewey.
“By incorporating biometric data, such as facial features, banks can achieve a high level of confidence in verifying borrowers’ identities,” she adds.
“Biometrics offer several advantages over traditional authentication methods, such as passwords or PINs, due to their unique nature and increased resistance to impersonation.
“Additionally, biometrics can be employed at the final risk frontier to verify the identity of signatories on bond documents,” Trethewey adds, noting that bankers are not present when people sign documentation.
“I can think of numerous ways people who don’t have the authority place properties on the market only to be stopped later in the process,” says Trethewey.
“For instance, does the pending ex-wife arrive at the attorneys for signature or does the father whose son signed the offer to purchase arrive?
“This is the final frontier for anyone with ill intent to be stopped. The exposure here is that the lawyers are also accountable institutions and can be held liable for not accurately verifying identity due to [the] Financial Intelligence Information Act [Fica].”
“Using documents has become less reliable, and with them being able to biometrically confirm the person on the documents [is] who they [say they] are, then they are know-your-client compliant,” she says.
If only caught after the fact, banks or the wronged party in a fraudulent property transaction can face a long legal battle to repossess a home – during which both time and money are lost – and have to navigate eviction legalities.
Trethewey says technology solutions have addressed many of the challenges, such as obtaining immediate, secure, and tamper-proof authentic supporting documents such as bank statements or payslips, which are directly obtained from the source with customer’s consent.
“These technology solutions, when seamlessly integrated into the loan application process, enable banks to expedite approvals for legitimate borrowers while maintaining robust defences against fraud.
“By incorporating biometric checks, securing access to supporting documents, and staying adaptable to emerging fraud trends, technology is reshaping how banks manage risk in the lending sector.
“With technological advancements, such as biometric authentication and electronic bank statement verification, financial institutions are better equipped to combat fraud to safeguard borrowers and themselves, and maintain the integrity of the lending sector,” she says.
By: Adriaan Kruger