Eyes Wide Shut: Rights, Remedies,
Risks and Mortgage Fraud
MBABC 10th Annual Conference and Trade Show
Presented May 8, 2012
Grant Mayovsky, Partner
Robert Dawkins, Partner
Defining the Problem
Mortgage fraud =
1. A
deliberate
use
of
misstatements,
misrepresentations or omissions to fund,
purchase or secure a loan.
2. A scheme designed to obtain mortgage financing
under false pretences, such as using fraudulent
or stolen identification or falsifying income
statements.
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Overview
•
•
•
•
•
The Changing Landscape
Identity Fraud
Legal Protections for Property Owners and
Allocation of Risk
Scenarios – Allocation of Liability
Passing the Hot Potato: An Overview of Mortgage
Broker Exposure
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The Lending Formula: 3C’s Cashflow +
Collateral + Character = Loan
•
•
In the last few years we have seen an increase in
the number of mortgage fraud cases
• “Impersonation” is the central theme in each of these
•
Fuelled by:
1. The Internet
2. Technology

fake identification and document reproduction
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Cashflow Concerns: Make it up!
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The Mortgage Fraud Equation
Also fuelled by:
3. The nature of the “hot” real estate market and the competitive lending
environment
4. Organized crime
5. Lack of Due Diligence

know the people with whom you do business
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Overview: Identity Theft
• Identity theft refers to all types of crime in which
someone wrongfully obtains and uses another
person's personal data in some way that involves
fraud or deception, typically for economic gain.
• It is estimated that identity theft and related fraud
costs the Canadian economy about $2 billion
annually.
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Identity Theft – Mortgage Fraud
• Mortgage fraud often requires that one of the parties
to the transaction commits identity theft of the true
owner.
• Perpetrators are invariably organized and usually
require multiple participants.
• All lenders and brokers are susceptible to mortgage
fraud and cooperation is required to prevent losses
from these events – standard of reasonable due
diligence expected.
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Solving the Loss Equation:
Immediate vs. Deferred Indefeasibility
• Some provinces have adopted a system of “immediate
indefeasibility”, whereas others have adopted a system of
“deferred indefeasibility”. The approach adopted has a significant
impact on imposing the risk of fraud onto one category of
innocent victims over another.
Why mortgage brokers care?
• Where loss falls could affect the validity of mortgage, the
potential liability of mortgage brokers as an avenue of recovery,
the nature of claims which may be made and overall risk.
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Immediate Indefeasibility Favours
Good Faith Purchaser
• The difference between immediate indefeasibility and
deferred indefeasibility boils down to one simple fact
scenario: Whether a good faith purchaser for value,
without knowledge of fraud on the part of the vendor, can
obtain an indefeasible title from the fraudster.
• Deferred indefeasibility favoured the true owner affected
by the fraud.
• Immediate indefeasibility favours the good faith
purchaser.
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Innocent Purchaser Receives Good
Title
• For example, if the purported vendor of a property forged
the signature of the true owner on a transfer document
that was then registered in the land titles system, thereby
depriving the true owner of their right in the land, then
under a system of immediate indefeasibility the innocent
purchaser would receive the title.
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Deferred Indefeasibility – Title Reverts
to Original Owner
• Under this same scenario, with a system of deferred
indefeasibility, the land would be returned to the true
owner.
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BC – Land Title Act Amended on November 27,
2005 – Immediate Indefeasibility
• Void instruments – interest acquired or not acquired
25.1 (1) Subject to this section, a person who purports to acquire land
or an estate or interest in land by registration of a void instrument
does not acquire any estate or interest in the land on registration of
the instrument.
(2) Even though an instrument purporting to transfer a fee simple estate
is void, a transferee who
(a) is named in the instrument, and
(b) in good faith and for valuable consideration, purports to acquire the
estate,
is deemed to have acquired that estate on registration of that
instrument.
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Scenario 1
• An impostor obtains a mortgage against land that is
not his.
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Scenario 1
• Application
• Signed a void instrument
• s. 25.1(1) applies – can’t acquire an interest in land by registration
of a void instrument
• s. 25.1(2) does not apply because a mortgage is not a transfer of
“a fee simple estate” (title to the land)
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Original Owner Wins:
F.I. Loses Mortgage
• Result
• The mortgage must be removed from title
• The lender has a claim against the impostor / others (mortgage
broker)?
• No claim exists against the Land Title and Survey Authority
Assurance Fund (the “Assurance Fund”) because the lender did
not rely on an inaccuracy in the register of land titles
• The title certificate is correct
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Scenario 2
• An impostor sells the land of the true owner to a good
faith purchaser for value and the good faith purchaser
obtains a mortgage
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True Owner Loses Title:
• Application
• The transfer is a void instrument
• But s. 25.1(2) exception applies to protect the good faith
purchaser because the transfer is a transfer of a fee simple estate
• “Deemed to have acquired that estate on the registration of that
instrument”
=immediate indefeasibility
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Good Faith Purchaser Maintains Title:
Subject to Mortgage(s)
• Result
• The good faith purchaser gets the land
• The new mortgage remains on title
• The former owner deprived of the land has a claim against the
impostor and a claim against the Assurance Fund because he has
been denied his interest in his land because of the
“conclusiveness of the register”
• Validity of mortgage = no broker liability to lender as mortgage
stays on title but risk remains at common law
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Scenario 3
• An impostor sells the land of the true owner to a
fraudster. The fraudster obtains a contemporaneous
mortgage against the land which gets registered on
title.
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Scenario 3
• Application
• s. 25.1(1) – the transfer itself is a void instrument.
• The mortgage itself is likely a void instrument because the lender
purportedly took from the fraudster better title than the fraudster
had. The fraudster had nothing because he obtained the title by
fraud. The title is void and therefore the instrument is void.
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True Owner Wins:
Mortgage Lenders Lose:
• Result
• The title gets returned to the true owner.
• The mortgage gets knocked off title.
• The lender has a claim against the impostor and the fraudster and
others (mortgage broker).
• The lender may have a claim against the Assurance Fund
depending on whether or not it relied on registered title certificate
before advancing the funds.
• If the lender relied on solicitor’s undertakings then there is no
claim to the Assurance Fund.
Vancouver City Savings Credit Union v. Hu, 2005 BCSC 712
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Mortgage Fraud Formula
Hindsight is 20 / 20 – Suspicious Circumstances
1. Relevant Parties Distance Themselves

Want to avoid direct contact with lender – mortgage brokers may
be used for this purpose

Prefer to deal with financial institutions that are not present in
community where property is located
2. New unsolicited customers, without referral
3. No original asset or income documents presented – fax or copied and
emailed
4. The property is usually clear title

vacant land / abandoned

equity take-out financing

possibly involves transfer, but less common
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Mortgage Fraud Formula (cont’d)
Hindsight is 20 / 20 – Suspicious Circumstances (cont’d)
5. Purpose of Loan ill-defined – story unusual
6. No negotiation of loan terms

interest rate not priority in discussions – just wants mortgage
placed

no apparent concern re: broker fees and commissions or other
terms (i.e. repayment, penalties, etc.)
7. Borrower picks the lawyer or notary

also usually a long distance from the property to be mortgaged
8. Account opened and a portion of funds used for mortgage payments
9. Lawyer delivers the funds to someone other than vendor (or defined
loan transaction purpose) or to an address that is different than the
mortgaged property (Third Party Beneficiaries)
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Mortgage Fraud Formula (cont’d)
Hindsight is 20 / 20 – Suspicious Circumstances (cont’d)
10. Recent credit bureau activity

a way to get personal information

Numerous attempts to obtain loan
11. The F.I. employee or broker is a top producer
12. Limited personal contact between F.I. and borrower
13. Everything is a rush!

almost no attempt to verify what is on paper

double-check employment information – one call may be all it
takes / verify numbers through independent directory and call

Google
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The Badges of Mortgage Fraud
(cont’d)
Property



Overvaluation
Misrepresentation of character or use
Intent to reside
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The Badges of Mortgage Fraud
(cont’d)
Employment




Forged or altered employment letters
Forged or altered pay stubs
Inflated income or tenure
Other schemes
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The Badges of Mortgage Fraud
(cont’d)
Identification



Forged or altered ID
Nominee borrower
Alteration of personal info to avoid credit history
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The Badges of Mortgage Fraud
(cont’d)
Equity




Bogus gift
Equity withdrawn prior to closing
Down payment provided by undisclosed third party
Full or partial down payment paid directly to vendor
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Passing the Hot Potato: Broker
Liability
• Reputational and Business Risk
• Possible Sources of Liability:
• Contract
• Common Law:
•Negligence
•Negligent Misrepresentation
•Fraudulent Misrepresentation
• Equity: Trust, Tracing, Knowing Assistance, Knowing Receipt,
Unjust Enrichment
• Professional Sanctions
• Privacy and BPCPA
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Passing the Hot Potato: Broker
Liability
FICOM Bulletin BULLETIN NUMBER: MB 04-005
• “Increasingly this office is being made aware of occasions where
mortgage brokers are failing to verify client information that is being
passed on to lenders. As a result, instances where lenders are
receiving misleading or false information is becoming more frequent.
Occurrences of this nature can tarnish the reputation and professional
image mortgage brokers have within the lending community and
amongst the general public.”
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Broker Liability
• “Mortgage brokers need to recognize that lenders rely on the
information they receive regarding potential borrowers. Mortgage
brokers cannot say that it is not their responsibility to verify the
information being given to them during the application process.
Lenders indicate they assume that mortgage brokers have verified the
information before forwarding it on.”
• This office takes the position that a mortgage broker has a duty
to ensure the information being sent to a lender has been
verified.
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Broker Liability
• Regulator Expects “Reasonable Due Diligence”
• Trust but Verify – Most People, Mostly Honest, Most of the Time
• Some dishonest - some will “fudge” when in need of money
• Consider red flags - Distance x Money = Risk
• Obtain or verify information with third party sources (i.e.
employment)
• Terms of Agreements, allocation of Risk Between FI and Broker –
apply most onerous and best practices to all
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Broker Liability: Contract
• Financial Institution Agreements
• Fulfill obligation honestly and in good faith, exercising reasonable
skill, care and diligence, in accordance with recognized
professional and industry standards, applicable laws and
terms of agreement
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Broker Liability: Contract
• Verify identity with original ID
• Ensure dealings with client face-to-face
• Ensure source of all documentation provided by client is known,
verified, validated and trustworthy
• Be vigilant to screen for possible fraudulent or misrepresented
information relating to identity, income, down payment, support
documentation, credit history and other information
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Broker Liability: Contract
• Review and validate all supporting documentation and information
provided to FI for accuracy, authenticity and integrity
• Inform FI if mortgage for benefit of someone other than the client
applying for the mortgage
• Inform FI of any fact that may be useful or relevant to the
Mortgage Application
• Promptly forward new information to FI – Duty may not end with
presentation of application
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Broker Liability: Contract
• Liability and Indemnity
• Broker is “responsible and liable for all Mortgage Applications
submitted by the Broker”
• Duty to indemnify “from and against all loss, liability, claim,
damage or expense, whether direct, indirect or consequential,
and including legal fees on a solicitor/client basis, which may be
brought against [the FI] arising from or in connection with the
servies provided by the Broker…”
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Broker Liability: Contract
• What does it all Mean?
• Substantial obligations under contracts to complete due diligence
on information provided in applications
• Risk of substantial liability if not, including direct, indirect and
consequential loss
• Loss of business lines – termination of agreements
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Liability: Common Law
• Potential for Claims by FI’s or Real Owners
• Negligence (both)
• Negligent Misrepresentation (FI)
• Fraudulent Misrepresentation (FI) – includes recklessness and
wilful blindness
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Lessons Learned
• Mortgage Fraud is an issue and exposure for brokers
• Trust but verify information from your clients
• Develop and document standard best practices and
processes, ensure known by staff and followed
• Ensure you enter into transactions eyes wide open, no
one deal is worth sacrificing your reputation and livelihood
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Thank You!
Grant Mayovsky
gmayovsky@blg.com
604-640-4165
Robert Dawkins
rdawkins@blg.com
604-640-4027
VAN01: 3049099
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