“Wilfully Blind”

Blind-Mortgage-Underwriting That’s what BC’s Civil Forfeiture Office calls Royal Bank (RBC) and Bank of Montreal (BMO), according to the Vancouver Province.

The charge results from RBC and BMO allegedly taking a blind eye to mortgage approval standards in the following case.

The two banks reportedly lent a total of $1 million+ to a suspected Vancouver criminal. The security for their mortgages was a grow-op.

BMO reportedly approved the man for $976,000 on the property—which was bought for $980,000. RBC then supposedly lent him $70,000 two days after the house was raided by police.

In both cases, the man couldn’t prove his income and had zero or little equity. The house had also been established as a known grow-op before the mortgages.

This is obviously a PR “disappointment” for the big banks (see Canada’s Biggest Mortgage Fraud for the prior one).  If true, it reinforces the point that non-bank channels are not the only occasional facilitators of mortgage fraud. Despite all their supposed checks and balances and trained underwriters, banks also make “mistakes.” Fortunately, these kinds of egregious oversights are far from commonplace.

For the record, both banks appear to have denied these allegations according to the Vancouver Province. We’ll follow up on the outcome when more is known.

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Sidebar:  BC’s Civil Forfeiture Office launched in 2006, and works with law enforcement agencies to seek the forfeiture of assets obtained through criminal activity.

  1. This case so utterly erodes the credibility of banks who claim to be taking a bath on bad mortgages due to poor market conditions.

  2. Maybe the banks will now start toning down their self-righteous position in the industry. Bad underwriting happens everywhere, including at the banks.

  3. Hi, Can someone please explain how bank employees are allowed to give mortgage advice without a license? Brokers have to take weeks of training and a 3 hour certification exam. What makes bank mortgage specialists any different?

  4. More than likely it has to do with being able to use the term “mortgage broker” – not with giving mortgage advice.
    Lots of people give mortgage advice without training or exams. People do it on this site almost every day. I don’t have a problem with that – caveat emptor.
    Al R

  5. It may be simply a theory to say that these oversights are far from commonplace … after all, what proof do we have?
    Perhaps it could be said with equal certainty that they are commonplace but simply not made public like this?

  6. Hi Tom,
    A very fair question. Thank you.
    Severe oversights of this sort are extremely rare (note the word “severe,” and “egregious” as used in the story). If such events were even remotely commonplace then default rates would be significantly higher than Canada’s 0.44%. Moreover, bank mortgage profits would be decimated and default insurers would simply cut lenders off. In short, the whole mortgage system would fall apart.
    While Canada has one of the strongest mortgage systems in the world, there will always be infrequent judgement lapses that make the headlines. Fortunately, when they become public, it usually leads to more prudent mortgage policy going forward.
    Cheers,
    Rob

  7. Hi Al
    Giving mortgage advice and processing applications are the main things a broker does. Bank employees are basically the same in that way. I really don’t see a reason why brokers need a license while bank mortgage specialists do not. The only real thing bank employees do differently is not recommend competing products.
    I think the difference with website advice is that it is opinion and not a professional recommendation that people are relying on.

  8. The roles are similar, but I think good mortgage brokers/planners would argue that they offer much more in the way of value added services that set them apart. Apologies if I’m putting words in anybody’s mouth.
    I always think of bank reps as salespeople rather than advisors. There’s a different sort of fiduciary relationship. Comments on a blog obviously do not carry the same weight as those coming from a professional (mortgage planner or bank salesperson), but given the numbers of posts from people looking for advice on which term/rate to take, refinancing issues, etc., I’d argue that people do rely on opinions posted here (at least to some degree).
    Al R

  9. To be honest, and with respect, I think you’re in dreamland to say that this (or mortgage fraud more generally) isn’t rampant, totally underestimated, completely swept under the rug, and occurring at a furious pace. I’ve seen these guys in operation–there’s hundreds of them out there, running hundreds of properties at the same time, in many different cities. It’s unbelievable. Just think of how much money there is to be laundered in this fashion, and think of how many grow-ops there are to be financed. There’s an endless supply of straw men too. They trade properties like cards. And the banks like to look the other way (when the market is rising) because they’re just interested in all the profits they’re getting (including all the payout penalties, which these guys pay like I buy martinis).
    But that’s just my two cents. I’m not an industry insider, most of whom seem more concerned about the credibility and public image of the industry than about the level of fraud taking place.

  10. Hi “You,”
    Thanks for the thoughts. I’d like to return from dreamland for a moment to address your points. ;-)
    Let’s first take a step back to re-evaluate what was said. We did not write that mortgage fraud was not totally underestimated or was not widespread.
    We said “egregious oversights are far from commonplace.”
    Conversely, common mortgage fraud happens all the time, as noted in our past articles on this website. “Common” means something as simple as fudging your income on an application.
    Your point that you have “seen these guys in operation” and “banks like to look the other way” are (objectively speaking) strong claims from someone who is not an “industry insider.” All I can do is speak from our vantage point and experience. I can say with my own personal certainty that there is absolutely no long-term benefit to lenders to underwrite fraudulent deals. None. Zero. Zipp.
    Without getting into detail, the economics of it (including the repercussions like default losses, bad PR, capital costs, and insurance considerations) make complicit fraudulent mortgage lending a fool’s game.
    Rob

  11. > Without getting into detail, the economics of it
    Completely agree when it comes to deals that are egregious. Disagree when it comes to deals that simply push the envelope. In a rising market, most of those deals can be made whole with a bit of time. Lenders stand to make a lot more money if they don’t ask too many questions.

  12. wjk
    It sounds like you are saying lenders have a policy to permit “small” frauds. Having been an underwriter with more than one lender, I can promise you that is bogus information. It makes me wonder what your source is.

  13. Hi Rob: I think you stated this well. It is odd to suggest that lenders want to do bad mortgages. Any incentives in the short run would be offset by repercussions in the long run. In my view, statements to the contrary merely reflect ignorance about the mortgage business. /Len

  14. Thanks for the thoughts. I think wjk sums up my position nicely. I’m suggesting there is a lot of myopia (or better, willful blindness, as the BC CFO put it) on the part of big banks in particular during a rising market, when profits are rolling in and people are walking around with $-shaped pupils. Approval procedures are lax, partly due to issues of practicality and partly because everyone is high on the boom. (There are lots of other industries where this takes place too–the BP oil spill being a nice example). Laundering money and financing grow-ops form a bigger part of this fraud than is commonly recognized. When the markets tank, the banks are left holding the bag for their sloppy “yes-man” approval procedures, and they look for someone to blame. In Alberta, for example, and I imagine other provinces as well, there is a behind-the-scenes witchhunt happening right now as the banks review all of the files they are taking a bath on looking for someone else to blame (and be liable). The empirical evidence–cases like these bozos getting approved without any docs (I think it’s reasonable to assume that 1 case to hit the press represents a much larger number that don’t), undermine the banks’ claim that they are careful about fraud. And in a past life, my personal observations do too.
    I didn’t mean to be a put-down when I said that you’re in dreamland (for the record I think you’re great), but I just have a more cynical view of things. I think there’s a lot of stuff going on behind the scenes right now that is glossed in statements to the effect that everything is on the up-and-up in the mortgage industry.

  15. Or in other words, it’s greed that makes the world go round.
    It reminds me of a game of musical chairs, driven by greed–the music just stopped playing and we’re witnessing everyone running around trying to find a chair. It’ll be interesting to see who’s left standing at the end. I bet the banks will have found a place to sit comfortably and put their feet up, just like Citi, Goldman, and Moody’s have, and BP will.

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