Fraud: the greatest threat of all

Nia Williams

April 1, 2009

At the end of last year, I was taking a number of calls from brokers regarding a particular lender who seemed to be charging their clients fairly hefty upfront fees. The fees were always of a similar amount and the same names kept reappearing. We warned brokers to watch out for this kind of sharp practice, and to protect their clients from this kind of lender, and after a few weeks the complaints stopped.

But, sadly, in the last few weeks, reports are beginning to reach me of brokers attempting the same kind of fraud. And let’s be clear about this – it is fraud. Back in 1992, the NACFB was founded by 6 member brokers to stamp out exactly this practice. Back then, the reputation of the commercial finance broker industry was being tarnished by a few crooks, who would promise a customer an excellent deal, relieve them of an upfront fee, and then fail to produce the goods. This time around the approach seems to be more of a drip feed – rather than one large upfront fee the broker is extorting a series of fees. The damage this kind of activity had on the lenders’ and public’s perception was enormous and took a long time to repair. The Association has worked hard to stamp out this practice and rebuild the reputation of the industry, with real success. But now times are hard, and stories of this kind of unacceptable practice are making their way to the Exeter head office once again.

Luckily, at the moment, the problem doesn’t seem to be huge in terms of numbers. Again, as it was at the end of last year, it’s usually the same names that keep cropping up again and again. Nevertheless it is something the Association takes extremely seriously simply because only takes a few bad apples to tarnish the reputation of the whole industry. Whilst it is difficult to control the actions of brokers outside the Association, we are working to raise awareness among consumers of the benefit of using brokers who comply with a Code of Practice.

But why now?

Why, after some years have these practices resurfaced? The simple answer is that the crisis engulfing the market and the lack of funding means all brokers are having their legitimate incomes strangled. And then, for some, the old adage applies: “desperate times call for desperate measures”. With brokers and their clients alike struggling to find finance, some resort to desperate measures to secure that elusive funding.

Just to complicate matters, the way in which the fraud is committed is based on legitimate business practice. A broker will often charge an appraisal fee to look at a case – it’s just that in the case of the fraud the fee being charged is usually (although not always) larger and the key thing is that the broker or lender has little or no intention of finding the client any kind of finance in return. The key word here is one of intention; in a market where few are lending, a broker can legitimately spend a good deal of their time looking for a funder for a client but without success. But it is not unreasonable for that broker to expect some level of remuneration for putting that work in. A fraudulent broker will take the fee for work which he has no intention of undertaking. The problem with this is that intention – either way – is very difficult to prove. But if a number of clients complain about the same broker, that’s normally a good indication that things are not as they should be.

Routes to market

The fraudulent broker has two common routes to market. One, he will attempt to get clients to come to him direct with advertisements claiming large loan to values and low rates. The second route is to get other brokers to forward clients to them, claiming that they have access to funders who are still lending. After this the process is much the same.

The client contacts a broker and offers an outline of a deal. The broker says he can place that deal and asks them to submit an appraisal fee of, say, £250. The client does so, and the broker confirms receipt of the details and confirms again that the deal can be done and suggests a low rate and/or high LTV which is not generally available in the market.

The next stage is that the broker charges the client a further valuation or appraisal fee (this is not to be confused with the fees the lender is charging to actually carry out a valuation and the broker charges these in addition) of around a couple of thousand pounds. Assuming the client agrees and pays this fee the broker then says that the deal is ready to go to offer and that a final fee of around a couple of thousand is needed to complete the deal. Assuming the client is still willing to go ahead (and few get this far), the final fee is paid, the deal is then usually derailed with requirement of additional security or guarantees which the client is unable to supply. End of transaction.

Examples of fraud

We have had examples of this kind of fraud come in to us at the NACFB office and they are becoming more frequent. Sometimes it is member brokers who bring us the details after they’ve referred one of their clients and have come up against this kind of practice. Really experienced brokers should know better: if a deal looks too good to be true then it probably is. And if you do have to refer you need to carry out some due diligence.

The problem for us as an Association is often getting hard evidence; we get numerous verbal reports, but no paperwork. In addition as I said before, it’s proving the intent of the transaction which is the key. In either case, without hard evidence there’s not much we can do. But where we do find evidence that a member broker is carrying out this kind of practice then, very simply, they will be expelled from the Association.

This kind of activity is exactly the sort of thing the Association was founded to stamp out and it will not be tolerated among members. On expulsion from the Association, the other members and Patrons of the Association will be informed as to why that firm is no longer a member and the necessary authorities will also be notified to ensure that any consumer credit licence is revoked and if necessary criminal investigations can be instigated.

Zero tolerance is the only option. Fraud damages everyone in the industry: a good reputation is fragile and if the whole broker industry is tarnished by the actions of a few individuals, it will be poor consolation for the rest if all they can say is: “It wasn’t me”.

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