While updating a document introducing decision making models that we send out to mortgage brokers around the three-week mark of our Broker Marketing Program, we discuss the issue of broker expectations in the face of consumer fraud - a matter plagued by confusion at all levels of the industry. In researching the subject we spoke to the MFAA, FBAA, two large aggregators, and ASIC without receiving a clear answer on what actions they expected brokers to take (with none of them providing the correct course of action). It was only after we sought guidance from specialist lawyers that we arrived at what might be considered an obvious conclusion.
Note that this article relates to broker responsibilities should a client intentionally produce false, doctored, or fraudulent documentation. A broker that does the same, or even 're-purposes a loan' (e.g "let's say it's for investment instead of owner-occupied") is guilty of a range of offences and their actions are usually indefensible. It should be noted that those brokers that engage in any measure of fraud are in the minority, and their "everybody does it" justification is patently false.
The only mention the MFAA mentions as it relates to application disclosure comes by way of Section 32 of their Code of Practice that states information should be kept secure and confidential except "... as may be required by law"... yet they failed to provide any guidance on what specific actions to take (or what laws might be applicable). Their compliance team told us that the "customer first" policy applies ("let the client know"), and suggested that the first report should be made to the applicable lender, although this is inappropriate since a lender may not yet be determined and lenders are not accountable for business-level compliance.
If you discovered fraudulently documentation or similar, what would your actions be?
Fraud is detailed as a 'serious indictable offence' under Section 192E of the NSW Crimes Act (other State legislation generally varies only slightly), with the relevant section stating that "(1) A person who, by any deception, dishonestly: (b) obtains any financial advantage or causes any financial disadvantage, is guilty of the offence of fraud" (a "serious indictable offence " means an indictable offence that is punishable by imprisonment for life or for a term of 5 years or more).
Additionally, those that possess , manufacture (forgery), or use false documents can be charged under Section 253, 254, and 255 of the Crimes Act (NSW). Those that have "any equipment, material or other thing designed or adapted for the making of a false document " are subject to the additional charges imposed by Section 256 , with legal precedent suggesting that the charge is most likely reserved for those that possess spreadsheet templates for producing bank statements, templates for tax returns, or similar.
The Commonwealth Criminal Code Act 1995 lists a range of relevant offences that might be prosecuted at the Federal level. Part 7.3 (Fraudulent conduct) and Part 7.4 (False or misleading statements) are most applicable sections. Manufacturing or forging tax returns is covered by Part 7.7 (Forgery and related offence). Forging a tax return (a Commonwealth document), for example, may possibly be dealt with independently of any State-level charges. According to one former ASIC prosecutor we spoke to, this type of 'double counting' is unlikely (kind of like a double jeopardy), but certain types of offences (such as those that relate to tax returns) are serious enough that the ATO may become involved, and they often manage to freeze money on the basis of "proceeds of crime " (after a loan was approved). At the very least, an offence of this type usually results in a brief being prepared and referred to the Commonwealth Director of Public Prosecutions (CDPP ).
To commit fraud as defined by the NSW Crimes Act (1900), the deception by a client has to be either intended or even reckless. Recklessness essentially means that your client is indifferent to the possibility that their conduct was deceptive. That is, they were aware that it might possibly be deceptive but decided to continue regardless.
So, as a broker, what do you do? Conceal or reveal?
Under Section 316 of the NSW Crimes Act (1900), anyone who knows or believes that a serious indictable offence has been committed and has material information that could assist with the apprehension or prosecution or conviction of the offender must bring that information to the attention of police or another appropriate body. The failure for a broker to report such an offence, without a reasonable excuse, comes with a maximum penalty of 2 years' imprisonment. An exception to this rule is where the information was received while acting in a 'prescribed profession', and a mortgage broker isn't one of them.
In light of the recent Royal Commission into Banking, Greed, and Gluttony, Paragraph 2 of Section 316 of the NSW Crimes Act (1900) is entirely relevant: "A person who solicits, accepts or agrees to accept any benefit for himself or herself or any other person in consideration for doing anything that would be an offence under subsection (1) is liable to imprisonment for 5 years". Objectively speaking, professional brokers are agents for the banks and inherit a shared but implied responsibility to assess all documentation as legitimate. Turning a blind eye, ignorance, or failing to exercise due diligence isn't an excuse for a professional that will profit from the infraction.
There's a fine line between pleasure and Hayne when it comes the HEM index. In our last article we wrote that:
"... using the Household Expenditure Measure (HEM) as the default measure of household expenditure assumes, often wrongly, that the household does not spend more on discretionary basics than allowed in HEM and does not spend anything on 'non-basics' (page 28). The index itself lends itself to irresponsible lending because it doesn’t consider the discretionary spending that invariably takes place".
The HEM index is often manipulated by brokers to support an application - a practice that is objectively a prosecutable offence. However, when does (or can) "irresponsible lending" become a crime? Einstein is often misquoted as having said that "if the facts don't fit the theory, change the facts"... and finance professionals often advocate that this criterion trumps strict concordance with reality, which they often argue, is always subject to error and re-interpretation. That said, any time a broker guides a borrower into fairyland, both the borrow and broker are conspirators of a crime.
So, you are required by law to report the nature of fraud to police. The professional obligation to potentially call in the cavalry is a difficult one, but it's necessary from an ass-covering point-of-view should the fraudster fall into the arms of a less ethical broker, gets caught, and your knowing 'involvement' is uncovered. If or when your complicity is known you will potentially be liable for 2 years in a the Crowbar Hotel (although we're told you'll more likely receive a hefty fine and be banished from the mortgage industry forever).
Prosecution against brokers under Section 316 (for failing to report incidents of fraud) are extremely rare but not entirely without precedent; the lawyers we spoke to they had all dealt with similar situations, including one involving a simple automobile financial application. According to one former ASIC prosecutor, the prosecution would have to know that the mortgage broker had full knowledge of the offence and had information that would likely result in prosecution. He went on to say that given the ongoing professional development of the mortgage industry, and the hefty compliance requirements imposed upon them, it is difficult to defend their inept and wayward ignorance.
As a broker, according to ASIC, your failure to report an offence may compromise your ability to hold a Credit Licence. As a licencee (you hold your own ACL) your livelihood is protected in a sense because you can defend your own credit actions. This points to the importance of your own ACL; as a credit representative you're likely to be removed as an authorised person immediately. your upline aggregator or licencee will be obligated to support an investigation against you in order to protect the integrity of their own licence.
Mortgage Brokers are clearly bound by the same legislation shown above. If you act dishonestly and your actions are uncovered you should probably prepare yourself for wearing an itchy ankle-bracelet - there's no defence for a professional not having an understanding of their legal obligations. Clients may not understand the consequences so it's best to provide full and complete disclosure discussing the legal consequences for making a dodgy deceleration as you on-board them into your process, and a summary of your responsibilities if they act in a deliberate criminal manner.
There's not a single broker this side of Kazakhstan that hasn't encountered dodgy paperwork as described above, or an 'uncorrected' HEM deceleration that might have made for a good chapter in Harry Potter. If we were to act on each occurrence of a nefarious clients we'd be doing substantial and untold brand damage with serious commercial consequences (we'd also create a need for a few extra prisons). This said, the issue does need to be addressed in some shared form from an industry perspective to rationalise broker behaviours (and certainly needs to be documented into SOPs at a business level). With the Royal Commission set to undermine the industry we should take the lead before changes are forced upon us by additional debilitating legislation.
The discussion booklet we send our brokers looks at having SOPs to guide known fraud-related scenarios, and having decision making models in place to address the unknown.
It should be noted that we're a marketing company that provides high-value broking marketing support. Any guidance we provide is for information purpose only. Call us on 1300 235 433 (1300 BELIEF) to learn why teaming with us is a path to massive growth.