Loan Fraud

Fraud can occur at application or after drawdown. At application, borrowers inflate income, hide debts, supply forged documents, use a false identity or overvalue collateral. After drawdown, borrowers divert funds to a different use, move assets away from lenders or use the same collateral twice. Insiders sometimes help, which raises the severity. Mortgage fraud has its own variants. Occupancy fraud falsely claims the buyer will live in the home to get better terms. Appraisal fraud inflates a property value. Straw-buyer schemes use a nominee to apply for a loan on behalf of someone else. Lenders respond with document verification, independent valuation, end-use monitoring and data matching across lenders. Credit risk teams separate it from plain default by looking for evidence of deceit at application or of diversion afterwards.

A property developer asks a bank for a loan against an apartment block, supported by a valuation twice the market price prepared by a friendly valuer. The bank's credit team commissions an independent valuation and finds the gap. Further checks show that the developer had pledged the same block to another lender. The bank rejects the loan and reports the matter.