Corporate Finance Associates Blog

When times get tougher (and sometimes even when they are not) ours and subsequently lenders’ suspicions are aroused when something obviously isn’t right with the proposition we are presented with.

It is to be expected therefore that we need to ensure that relevant checks are undertaken to ensure what we are seeing is the correct picture, indeed the Money Laundering Regulations (MLR) require that we are on top of our game in this regard.

All secured lenders are vulnerable in two key areas, defective valuations and fraud – although sometimes the fraud can be linked to the valuation. 

In most cases it is difficult to prove that a valuation is fraudulent as opposed to negligent. However, a common theme is that a non local valuer or one man band has been used to value the security property.

Lenders now insist that they instruct their own valuer and valuation report as it is the only way they can control the situation, and this is often backed up by their own due diligence methods including their local representative doing a “Drive by” assessment, Land Registry Searches (they only cost a few pounds after all), and reference to tools such as Google Earth.

Where the lender is asked to use an existing valuation as the basis for a new valuation, most, along with these additional checks, try to ensure that the valuer is local to the property.  Rewriting existing reports is a very grey area at the present time, most lenders don’t accept them and more and more, as valuers try to maximise their own fee income, they themselves won’t agree to undertake them.

The other area to be aware of is that most lenders have a point (not often advertised) at which they look for a supporting auditing valuation from another valuer.  Anomalies can often be found when these two opinions are then considered.

Ensuring that the borrower is who they say they are and that they have the ability to deal with the property is the other big challenge.

As part of the various Know Your Customer (KYC) processes we and the lender, require certified copies of the borrower’s UK Passport and two original, recent utility bills. These can then used to verify the borrower’s ID electronically.   Photocopies are NOT acceptable, and when we see them alarm bells can start ringing.  I remember a seminar put on by one of the main UK lenders where we were all shown very, very good copies indeed, of payslips, bank statements and utility bills, and they would fool a lot of people less diligent.  These were actual documents the lender had received in support of real Buy to Let applications.

The relationship between the borrower and their solicitor is also considered. Comfort is obtained where the solicitor confirms that they have acted for the borrower for a number of years. Conversely, if the borrower is unknown to the solicitor and/or the solicitor being used is not local to the borrower, then further investigation may be required.

All the above information is then considered in the context of the application.

An example from one of the lenders we work with attests that sometimes peculiarities leap out.  

“One such case was a borrower living in a scruffier part of Manchester buying a property in Holland Park and – here’s another suspicion raiser – using solicitors in Leicester!”

 “A quick check at HMLR revealed that the borrower’s residence was owned by his partner and a Companies House check on his alleged employer revealed there was no way – according to the accounts at least – that he could be earning his stated salary”.

Needless to say that application was quickly rejected. – Thankfully it wasn’t one of ours.

In order to prevent fraud, lenders are advised to verify the ID provided; ensure the valuers are local to the security property (and if not, ask why not) and establish the connection between the borrower and their solicitor.

Finally, and perhaps most importantly of all, there’s the “gut feeling” that comes from many years of experience and a general intuition that puts us on our guard.  Just questioning whether the reason for the loan makes sense in the first place, how it was introduced to us, if it will cost more to move than stay put,  what is the underlying reason, does the borrower, their stated income and occupation, their residence, the activity shown in their bank statements all tie up together?  After all, if these questions can’t be answered and the lender doesn’t have a clear understanding of who they are lending to and why, it is probable that the loan application will be turned down

Everything we do is encompassed in KYC, observance of MLR guidelines but underpinned by still treating our customers fairly, but if our help is required these areas have to be right.