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Business and economics

The (big) costs of lying on your mortgage application

Any borrower who is tempted to alter the facts in order to secure financing should think long and hard before doing so. Here’s why.

Millennial couple meeting with lawyer disputing contract termsFrom an economic standpoint, lying on a mortgage application also puts you at serious risk of getting into financial difficulties in the future (Getty Images/fizkes)

Housing affordability continues to be a major concern in Canada, especially in the bigger centres. But does that mean some borrowers might be tempted to bend the truth on their loan applications, just to get a toehold in the market? Possibly. A 2017 survey from credit rating agency Equifax found that 13 per cent of Canadians felt it was OK to tell “a little white lie” when applying for a mortgage to get the house they want. It also found a 52 per cent increase in “suspicious mortgages” since 2013. 

But it should stand to reason that it’s never a good idea to lie on a mortgage application. As Olga Coulter, senior account manager of client relations with the Canada Mortgage and Housing Corporation, explains: “Borrowers who misrepresent information and straw buyers who allow properties to be purchased in their name are committing mortgage fraud and will be liable for any financial shortfall in the event that there is default. And they may also be held criminally responsible for their misrepresentation.” 

CMHC also says that if a fraudster is convicted, it would be up to the police and courts to decide on the penalty on case-by-case basis: “It can range from a negative mark on your personal credit record to criminal prosecution,” says Leonard Catling, senior officer of media relations with CMHC. (For example, one Albertan got a 30-month sentence in 2012 for his involvement in a mortgage-fraud scheme involving nine residential properties.)

MORTGAGE FRAUD DETECTION

According to the Canadian Bankers Association, banks in Canada have a number of ways of preventing and detecting fraud. For example:

  • Fraud management teams use advanced algorithms powered by neural networks that flag suspicious activity.
  • Members of a bank’s salesforce or adjudication groups monitor customer documents (e.g. T4, Notice of Assessment, property valuation) to identify fraudulent information. 
  • If fraud is suspected or detected, it is passed on to fraud experts at the bank, who will investigate the issue further.
  • Mortgage insurers often provide additional due diligence to a mortgage application. 
  • Sometimes it’s as simple as the bank receiving a tip from someone.

Once an anomaly or suspected mortgage fraud is detected, banks will connect with the client directly and undertake the necessary next steps, as appropriate. Banks also share information with each other on known fraudsters and scams, while respecting confidentiality requirements, and are always looking to improve their fraud prevention and detection systems and procedures.

VIGILANCE IS KEY

At the moment, Coulter says there is no evidence of widespread fraud in the Canadian market. Still, the industry remains vigilant. For example, all banks have fraud and security teams “working around the clock” to ensure security measures are continuously improved. And once an application has gone through the lender’s underwriting review, it also goes through another review at the CMHC, which, as Coulter explains, has “a dedicated team of specially trained senior underwriters that are specially trained to detect fraud … and applications that have a higher probability of mortgage fraud.” 

From an economic standpoint, lying on a mortgage application also puts you at serious risk of getting into financial difficulties in the future. 

“Lying on your mortgage application to get a mortgage you may not be able to afford puts you at serious risk of falling behind when you have to renew the terms of your mortgage, or if you have a variable-rate mortgage,” says Francis Fong, chief economist at CPA Canada. 

“Canada’s regulators have, over the past 10 years or so, made it quite a bit more difficult for borrowers to get a mortgage,” adds Fong. “Stricter rules around down payments, income testing, and amortization periods are meant to ensure that borrowers are actually able to afford their mortgages not just now, but in the future when interest rates are higher.”

In addition to these checks and balances, discussions are always taking place among a number of industry partners, which, as Coulter explains, include lenders, the CRA and other law-enforcement agencies and officials. 

As part of these discussions, CMHC reportedly asked the Canada Revenue Agency to take a “more direct and formal role” in verifying incomes. (At the moment, according to information from Reuters, Canada’s tax agency doesn’t confirm the incomes of mortgage applicants, even if applicants agree to it.) If the CRA were to take on such a role, that would definitely make it harder for those who are not qualified to get a mortgage. 

Currently, CMHC is discussing the possibilities with the CRA, but the outcome is not yet known. “The discussions with CRA are about various possible areas of co-operation—it’s always about sharing knowledge and best practices and it’s all about working on joint priorities industry-wide,” says Coulter. 

Still, even if CRA income checks are not on the table just yet, there are plenty of reasons why borrowers should steer clear of lying on their mortgage applications. As Doretta Thompson, CPA Canada’s financial literacy leader, puts it: “Always be truthful in completing a mortgage application, and never sign papers that you don’t understand fully.”

AVOID FALLING VICTIM TO FRAUD

CPA Canada has a number of resources to help, including Protecting you and your money: A guide to avoiding identity theft and fraud and Fraud protection for seniors. And check out CPA Canada’s financial literacy sessions.