Exclusive: Canada housing agency pushes for better
income checks to catch fraud
Send a link to a friend
[July 18, 2018]
By Allison Martell
TORONTO (Reuters) - Canada's housing agency
has asked the country's tax authority to take a "more direct and formal
role" verifying income claimed on mortgage applications, part of a
two-year plan to tackle mortgage fraud, documents obtained by Reuters
Unlike tax authorities in the United States and the United Kingdom, the
Canada Revenue Agency (CRA) does not verify income for lenders, even
with taxpayer's consent.
That may change, as Canada's overheated housing market draws comparisons
to the United States in the years before the subprime mortgage crisis,
made worse because many borrowers overstated their income.
"The CRA is currently exploring different avenues in which to improve
how it delivers taxpayer specific information in a secure manner,
including the feasibility of securely sharing tax information with
financial institutions upon client consent," the tax agency said in an
The Canada Mortgage and Housing Corporation (CMHC) action plan, obtained
by Reuters under public records laws, shows the agency is concerned
about systemic risk posed by mortgage fraud. The agency has said
repeatedly that there is little evidence of widespread fraud in Canada,
but it also says data is limited.
"The industry's current detection tools have not kept pace with the
increasing sophistication of threat we face," says the plan, adding that
paperless transactions, pressure to close deals quickly, rising prices
and new regulations "create strong incentives for individuals or
mortgage professionals to engage in opportunistic - or criminal -
The documents describe several other initiatives, including the roll out
of Citadel, software from Equifax <EFX.N> that flags high-risk mortgage
Isabel Vives, CMHC's Manager, Mortgage Insurance Fraud Risk Management,
said the agency has been testing Citadel since January and plans to go
live within a few months.
In recent years, two Canadian lenders – Home Capital Group Inc <HCG.TO>
and Laurentian Bank of Canada <LB.TO> – have reported problems with
borrowers misrepresenting their income in limited and specific groups of
mortgages, although they did not involve unusual defaults. But as the
CMHC plan notes, rising home prices and low unemployment can mask fraud.
[to top of second column]
'For Sale' sign is pictured in the front yard of a house in Toronto,
Ontario, Canada, July 17, 2018. Picture taken July 17, 2018.
In January 2017, Equifax Canada said its data had showed a 52 percent
increase in suspected fraud since 2013, but did not say what proportion
of applications were affected.
As a government-owned provider of residential mortgage insurance, the
CMHC covers lenders' losses when insured homeowners default, including
some cases that involve fraud.
One issue flagged in the CMHC plan is the Canada Revenue Agency's
website, where taxpayers can print a copy of their notice of assessment,
showing reported income. The report says the notice of assessment is
Lenders have other ways of verifying income, for example by calling
employers, but the notice of assessment is widely used. Federal
underwriting guidelines specifically mention it as one way of verifying
Vives said the original hard copy notice of assessment was printed on
special paper, and while the online option is "wonderful" for taxpayers,
industry will need to adapt.
"It means we need to make sure that we still have good, robust income
verification," she said. "We need to evolve too."
Vives said the CMHC is also developing data-driven systems to screen for
commission fraud, cases where a lender's employee or brokers have
encouraged borrowers to exaggerate their income.
The documents reveal that CMHC will start publishing statistics on
mortgage fraud, which are not currently available in Canada. Vives says
no date has been set.
The action plan highlighted risks associated with that project.
"Upward trends will generate concern, commentary and finger pointing,"
it says. "Strong communications strategies will need to be in place."
(Reporting by Allison Martell; Editing by Chris Reese)
[© 2018 Thomson Reuters. All rights
Copyright 2018 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed.
Thompson Reuters is solely responsible for this content.