When a little white lie can land you in court

Mortgage fraud schemes can involve numerous individuals in many different roles. Make sure you don’t get caught in the fray.

Canada’s heated housing economy — especially in Ontario and BC — has, unsurprisingly perhaps, triggered a spike in mortgage fraud, a trend that is likely to continue despite initiatives in both provinces to curb the recent buying frenzy.  

RBC economist Robert Hogue told the Toronto Star in September that Toronto is likely to mimic Vancouver’s experience in the wake of market-cooling policies. “Sales in that West Coast city increased 22.3 per cent in August from the same month last year, when the provincial government first introduced a 15 per cent foreign buyers tax,” the paper reported. “‘Our view is that the market has largely adjusted to Ontario’s Fair Housing Plan and should maintain balance between supply and demand,’” Hogue said.  

With the average housing cost in many cities unlikely to drop significantly, if at all, Equifax Canada conducted a mortgage fraud survey released in early 2017. “Data suggests high-risk and suspected fraudulent mortgage activity is on the rise,” it reported. Its research found a 52% increase in suspected fraudulent mortgage applications since 2013. Of the applications flagged, 67% were from Ontario and 12% were from BC.


The reason for such a dramatic increase seems obvious — the cost of a home in numerous Canadian cities is so high, many prospective purchasers are fabricating their applications in order to qualify for a mortgage. According to Equifax, “Falsified account statements and falsified documents were the most prominent application tags [followed by] conflicting information.”

The survey discovered that 13% of Canadians believed it was OK to tell “a little white lie” when applying for a mortgage, such as inflating how much money they made, while 16% saw mortgage fraud as a victimless crime. And 8% were willing to admit they had misrepresented facts on a credit or loan application.

Not long after Equifax released its findings, Toronto-based mortgage broker Scott Nazareth told betterdwelling.com that he believed mortgage fraud was more prevalent than people perceived it to be. He estimated it was as high as 20%, or one in five applicants. As for the cause of the recent increase in fraudulent mortgage activities, he attributed it to people rushing to buy a home before the cost surged even higher.

Nazareth said a large segment of people who commit mortgage fraud are sales, contract and seasonal workers. “Mortgages require at least a two-year tenure in their job, and usually up to three to four years’ industry tenure for a bank or credit union to consider their income as part of a mortgage qualification,” he said. “This hurdle, or relative difficulty, posed by CMHC/Genworth/Canada Guaranty and financial institutions themselves motivates borrowers to omit important employment details.”

The truth, of course, is that the little white lie — a description Nazareth also used — could land a person in court facing charges of making a false statement in writing to obtain credit. “If you get a loan for $5,000 or less, you could face a summary conviction [with a maximum fine of $5,000 and/or six months of jail time] or an indictable offence [with prison time of up to two years],” notes creditcards.ca. “Borrow more than $5,000 and you could face an indictable offence and up to 10 years of jail time.”

It’s not likely that being found guilty of reporting an inflated annual income, or a similar deliberate falsification, could result in jail time for a first offender in Canada. But if the fraud was more serious, the legal consequences could be considerable. In January 2015, for example, a 67-year-old mother and her two sons were sentenced to prison for their roles in what the Hamilton Spectator described as “a complex $1.2-million mortgage fraud.”

According to the newspaper, “The fraud involved properties being bought and then sold at inflated rates to ‘straw buyers’ in 2007 and 2008. These mortgages would then default. The buyers — who obtained mortgages using fake identities — were typically vulnerable people who received little money. Assistant Crown attorney Kevin McKenna described the crimes as ‘extremely sophisticated’ and ‘extremely sinister.’ Superior Court Justice Robert Nightingale repeatedly asked where the obtained money went. But there was never a clear answer.”

The eldest son, 43-year-old Allan Mohammed, described as the kingpin of the scheme, was sentenced to three-and-a-half years. His brother, Andre Mohammed, 35, was sentenced to seven months, and the mother, Shan Lal, received 14 months.

But it’s not just prospective buyers embellishing their financial assets or con artists committing identity theft who commit mortgage fraud. Some brokers have jumped into the fray as well.


In a case that some saw as having elements of the US sub-prime lending scandal that triggered the 2008 worldwide economic depression, Home Capital Group Inc., a respected Canadian nonbanking lending firm, became embroiled in its own mortgage predicament.

Traditionally, Home Capital had focused on “classic mortgages,” by lending to those who didn’t qualify for traditional bank loans, such as the self-employed, immigrants, those with no credit history or people who had undergone a bankruptcy. Home Capital prospered and survived 2008 but, according to a September article in the Financial Post, shifted its focus to “a suite of fully insured mortgage products that were guaranteed by the Canadian government. They called the program Accelerator.” Ironically, this program, designed to reduce the company’s risk profile, would play a central role in the scandal that brought it to the brink of collapse less than a decade later.

Accelerator was a success, despite changes in financial regulations that affected it on several occasions. By the middle of this decade, however, Home Capital had become aware of problems involving some Accelerator brokers and underwriters.

One in particular, FP reported, “was processing as much as six times the $10 million per month level [Home Capital had set as a target].” A report commissioned by the company revealed that the employee in question “was pushing through an average of 151.8 deals per month, with the next most prolific underwriter coming in at just 49.2 deals. ‘The volumes should have given an indication of something being very wrong,’ said a person familiar with the situation.”

That discovery led to Home Capital suspending relationships with 45 brokers in July 2015 for falsifying the income of accepted borrowers. Sixty percent of the mortgages obtained with false documentation were in the Accelerator program, FP said. The company also cut ties with a number of its broker partners — third-party deal-makers — after their practices were deemed not up to Home Capital’s standards.

The lender’s woes worsened in April when the Ontario Securities Commission accused it of making “materially misleading statements” to investors and named its current CFO and two former CEOs in a statement of allegations, the Globe and Mail reported. By withholding information about fraud by mortgage brokers in its broker channel, Home Capital allegedly violated securities laws, the OSC said.

There are several types of schemes that fall under the umbrella of mortgage fraud and can involve numerous individuals in many different roles. Consequently, there is no universal approach to investigating these different wrongdoings.

The Association of Certified Fraud Examiners, however, stresses one overriding requirement for investigators. “A key to detecting, preventing, and investigating mortgage fraud is to understand the weaknesses and stress points in the mortgage loan process,” it noted.


“Those who commit mortgage fraud understand how to exploit those weaknesses. Consequently, to become better at enacting controls, detecting red flags, and investigating fraud, examiners must look at the mortgage loan process as a fraudster would. Mortgage fraud is primarily committed by, or with the assistance of, industry insiders (such as builders, property sellers, loan officers, appraisers, realtors, attorneys, and title agents). Moreover, mortgage fraud can be perpetrated at any stage of the mortgage process, but the majority is perpetrated at origination — the process whereby a borrower applies for a new loan and a lender processes the borrower’s loan application. Fraud can be committed by anyone who has access to the loan application and supporting documents. Therefore, it is important to have an understanding of the key players in the loan process, including their roles and responsibilities, as well as the fraud schemes most likely to be associated with the key players during a mortgage loan transaction.”

That advice is germane to many cases forensic accountants have to tackle. Before examining how a fraud was committed, it is essential to have a thorough understanding of how a business or profession is supposed to function and whether it does so in practice. Like a good home inspector, a forensic investigator needs to know where to look and what to test in order to assess whether the foundation is solid or on shaky ground.