February 4th - 2010

Identifying fraud: use caution, common sense

Mortgage fraud continues to be a major concern for the real estate industry.

Mortgage fraud continues to be a major concern for the real estate industry. While recent changes to the Land Titles Act make it easier for defrauded homeowners to recover title or be compensated, fraudsters continue to find new ways to defraud lenders and use REALTORS® and other individuals as innocent dupes.

FINTRAC now requires salespeople and brokers to collect and verify personal information from clients, as well as track the source of funds received during a transaction. REALTORS® must ask for proof of identification of all buyers and sellers in a transaction, including corporate clients. REALTORS® are now required to keep documentation on all funds received for five years. Lawyers are also now required to verify client identification in almost all transactions.

According to RECO, more than 50 per cent of RECO investigations in the past year dealt with real estate brokers or salesperson and fraud. The Registrar's position is that any registrant who knowingly participates in mortgage fraud faces losing their registration.

Although mortgage fraud is a criminal act, the Real Estate and Business Brokers Act, 2002 gives RECO the power to investigate crimes that are relevant to a persons' fitness for registration. The Act also contains sections which make it an offence for anyone to falsify, assist in falsifying, induce or counsel anyone to falsify documentation. RECO will also report criminal activity to the local police.

RECO encourages registrants to report suspicious transactions. Registrants are often in the best position to identify and report fraudulent transactions. It is extremely important to report these transactions to RECO.

While homeowners no longer have to worry about losing title to their property, the best way to avoid the hassles and stress of dealing with real estate fraud is to purchase title insurance. REALTORS® should refer their homebuyer clients to a lawyer, who can provide them with a title insurance policy at closing, or an existing homeowner policy at any time.

Get to know the client
The best thing that REALTORS® can do to guard against fraud is to know their client and be alert for signs of fraud. Be cautious, and use common sense. If a deal seems too good to be true, it probably is.

According to RECO, REALTORS® should be wary of the following indicators:

  • A seller wants to meet somewhere other than the property she plans to sell.
  • A seller insists that the property be listed in excess of any reasonable market value.
  • The seller has just purchased the property and wants it listed again at a significantly increased value.
  • A seller from another area wants a property listed.
  • The seller finds his own buyer.

In a Winter 2009 Ontario Gazette article, “Update on Mortgage Fraud” (http://www.lsuc.on.ca/media/olg_winter09_mortgagefraud.pdf), the Law Society cautions lawyers to be diligent in deals where red flags appear, including:

  • Credits which are not referenced in the agreement of purchase and sale are granted to the purchaser.
  • Closing funds are in the form of a cheque or bank draft from a third party.
  • The same purchasers, vendors, real estate agency or mortgage broker are present in multiple transactions.
  • Higher than usual fees are offered on the transaction.

In addition, Lawyers' Professional Indemnity Company, or LAWPRO, has produced a comprehensive fraud fact sheet (http://practicepro.ca/practice/pdf/FraudInfoSheet.pdf), which lists the following red flags of fraud:

 RED FLAGS: THE CLIENT

 

 RED FLAGS: THE TRANSACTION

 

  • Does not care about property, price, interest rate, legal and/or brokerage fees
  • Uses only cell phone number for contact
  • Cannot produce title documents, survey, reporting letter, tax or utility bills
  • Does not appear familiar with property
  • Won’t permit contact with prior lawyer
  • Clients “out of sync” with property – e.g. don’t appear educated/affluent enough
  • Funds directed to third party with no apparent connection to transaction
  • Stranger who appears to control client attends to sign documents.
  • Repeat activity on single property or for single client
  • Rental and vacant properties especially vulnerable
  • Client buys and sells often, prefers to deal in cash
  • Property listing expired without sale (i.e. sale may be unregistered)
  • Frequent and quick mortgage discharges on property
  • New referral source sending lots of business
  • “Rush” deals, often with promise of more
  • Client produces small deposit relative to price
  • No amendments to Agreement of Purchase and Sale
  • Municipality or utility companies have no knowledge of client’s ownership
  • Client paying little or nothing from own funds
  • Unusual adjustments in favour of vendor, or large vendor-take-back mortgage
  • Use of counter cheques
  • Use of Power of Attorney

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For more information contact

Ontario Real Estate Association

Jean-Adrien Delicano

Manager, Media Relations

JeanAdrienD@orea.com

416-445-9910 ext. 246