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Mortgage Frauds

WHAT ARE THEY?

There are a number of different types of mortgage frauds, but they typically fall into three categories:

(1) Fraudulent schemes, frequently involving professionals – valuers and/or solicitors, in which the value of the property and/or the extent of the security are misrepresented and/or where simultaneous loans are applied for without reference to the other(s).

(2) Fraudulent details - misrepresenting the true identity of the borrower and/or details such as the borrower’s income.

(3) Fraudulent documents – forging the transfer into the borrower’s name or the mortgage deed.
 
Most of these frauds involve criminal offences, and should usually be reported to the Police (indeed the Land Registry frequently enquire about this before considering any question of an indemnity).

In practice, the most common types of frauds are those involving (2) fraudulent details or (3) fraudulent documents. Fraudulent schemes are relatively rare, but when they occur then can involve substantial losses because of the systematic method of depriving the lender of any or any sufficient security (see eg. Halifax Plc and Bank of Scotland Plc v Curry Popeck and Pulvers [2008] EWHC 692 (Ch)).

The provision of fraudulent details can, to a large extent be neutralised by taking adequate security and implementing early enforcement action to avoid the risk of negative equity.

The provision of fraudulent documents causes all sorts of litigation problems.

FORGERIES

In principle, a forged legal document – whether it is a transfer or mortgage - is void. The ‘victim’ will usually bear no liability, and the lender will often be left to resort to alternative remedies - see below

WHERE DO THINGS GO WRONG?

It is almost impossible to guarantee that a person who purports to be X is not in fact Y. However, lenders can at least minimise their exposure and go some way to ensuring that they have an alternative remedy by imposing a contractual obligation on the completing solicitor to verify the identity of the parties and to witness their signatures rather than simply sending out the deed for execution and hoping for the best.

Note the safeguarding requirements in section 3 of the CML Lender’s Handbook, and the Law Society’s Practice Note on Mortgage Fraud (31st July 2014).

Remember though that in the absence of clear provision, ordinarily the standard of care is one of reasonableness and the solicitor does not guarantee the identity of the signatories (see Penn v Bristol & West Building Society [1997] 1 WLR 1356 and in particular Bristol & West Building Society v Fancy & Jackson [1997] 4 All ER 582 at 612h per Chadwick J).

HOW DO YOU PROVE A FORGERY?

Proof of forgery may involve evidence of (1) the parties themselves; (2) the witness(es); (3) handwriting experts; (4) extrinsic evidence.

Bear in mind that whilst the court will often appoint a single joint handwriting expert (a) the cost of this can often be fairly prohibitive, and (b) in practice the results are often insufficiently clear – the success of the exercise often depends on obtaining adequate ‘course of business’ sample signatures.

FORMING AN EARLY VIEW

Having regard to cost/benefit, and the need to plead and run alternative remedies, it is usually desirable for lenders to form an early view on the merits of any forgery claim. In most cases, where the direct evidence is lacking or equivocal, and the only persuasive evidence is that of the ‘victim’ and any handwriting expert, the prospect of disproving a forgery (particularly where the expert is a court appointed single joint expert), is virtually nil, and litigation costs can be saved or better deployed.

ALTERNATIVE REMEDIES

In a typical forgery case in which say a wife alleges that her signature on the mortgage deed was forged by her husband:

(1) The lender may be able to rely on subrogation (on the basis that its advance was used to discharge an earlier joint mortgage);

(2) The mortgage may take effect as an equitable charge and entitle the lender to apply for the remedy of sale of the property to realise the forger’s beneficial interest (whatever that might be) under s 14 Trusts of Land and Appointment of Trustees Act 1996;

(3) The lender may be able to pursue a claim against the ‘victim’ for monies had and received if it can be shown that she has received some benefit from the advance and/or otherwise pursue the forger for a money judgment on his covenants;

(4) There may be some alternative remedy for eg. against the completing solicitors for breach of contract of retainer/breach of warranty of authority; or possibly against the witness (if genuine) for breach of warranty of authority;

(5) It might, exceptionally, be possible to estop the wife from denying liability for example if she knew of the mortgage and actively or tacitly consented to it.

The important point is that it is usually not enough to raise an alternative claim in a Reply, it has to be pleaded by way of Amended Claim Form and Amended Particulars of Claim, and this should be done as early as possible.

FORGERIES AND RECTIFICATION OF THE REGISTER

There is a very important distinction which is explained, with examples in Ruoff & Roper, Registered Conveyancing, Vol 2, Chapter 46:

Example 1
R1 is the registered proprietor of a property. R2 forges R1's signature on a transfer and at the same time obtains a mortgage on the property from lender L. R2 then applies to register the transfer and charge.

Example 2
Same as Example 1, but R2 registers the transfer and becomes the registered proprietor of the property before he obtains a mortgage from L.

In each case, R1 then discovers the fraud and applies for rectification of the register - to restore himself as the registered proprietor and to remove L's charge.

In Example 1, L's charge is based on a void disposition and the charges register will be rectified. L may qualify for an indemnity provided that its loss is not caused wholly or partly as a result of his own fraud or lack of proper care (Para 5, Schedule 8, Land Registration Act 2002)

In Example 2, the legal estate is deemed to be vested in R2 by reason of the registration (s 58 Land Registration Act 2002). He had owners powers of disposition under Section 23 Land Registration Act 2002 and consequently the charge to L was not a 'mistake' for which rectification would be available.

For a recent case concerning the approach on rectification see Barclays Bank Plc v Guy [2008] EWCA Civ 452

PROBLEMS WITH CONCEDING THE CLAIM - INDEMNITY CLAIMS AGAINST THE LAND REGISTRY