This article is written by Rakhi Ankit Rajput, pursuing a Certificate Course in Real Estate Laws from LawSikho.com.

Introduction

A mortgage is a loan by a bank or other financial institution that a person can use to finance the purchase of homes or use it as per his requirement. A mortgage is different from other loans. The concept of mortgage has been existing since ancient times. Our forefathers used to mortgage their property and get money in return for fulfillment of their requirements. In legal parlance, the term ‘mortgage’ is defined under Section 58 of the Transfer of Property Act 1882. By way of mortgage, interest is created in favor of the lender in respect of property which is being mortgaged, specifically immovable property, the purpose of which is to secure the payment of money which is advanced to the lendee. And it may give rise to a pecuniary liability. Further, in recent times the phenomenon of mortgaging property and getting loans from various financial institutions and banks is on a high rise. People who want to purchase their home or want to start their new business, when in need of money, take a loan from the bank by mortgaging their immovable property as per the value of loan advanced. 

However, every coin has two sides. On one hand, taking a loan by way of a mortgage is very much prevalent and on the other hand, there is an increase in criminal practices in relation to mortgage fraud. Over the past few decades’ criminal activity, particularly in the banking and financial sector has affected our economy and the easiest weapon responsible for the same is taking loans via mortgage by declaring false, misconception, misstatement and concealing property details which are subject to being mortgaged. Thus emerged the crime of mortgage fraud.

What is mortgage fraud?

Fraud in its simple word means active concealment, misrepresentation, or misstatement of facts. The term ‘fraud’ is defined under Section 17 of the Indian Contract Act,1860. According to the Federal Bureau of Investigation (FBI), mortgage fraud is any sort of “material misstatement, misrepresentation, or omission relating to the property or potential mortgage relied on by an underwriter or lender to fund, purchase, or insure a loan.” As per the definition of the FBI, it can be seen that mortgage fraud is committed by both individual borrowers and industrialists. There are two kinds of mortgage fraud:

Fraud for profit

The persons who commit this kind of fraud are generally those who utilise their powers or authority to commit or facilitate fraud, not to secure housing but to collect money or steal cash from lenders via misusing their powers. High collusion of mortgage fraud is due to industry insiders such as bank officials, mortgage brokers, etc. 

Fraud for housing

This type of fraud is regular in nature where the borrower actively conceals or misrepresents information or misrepresents income or assets of property just to get a mortgage on the high appraised value of the property.

How does mortgage fraud happen?

Mortgage fraud is very popular with organised crime groups; even white-collar people indulge in the offence of mortgage fraud. It is so prevalent because of its low risk and high profitability. Mortgage fraud can happen by way of overvaluing properties, forged documentation, and inflating the value of a commercial property.

Borrowers with the help of the bank of finance officials conceal the relevant facts of property like price and the title so that they can avail undue profit from it. In various cases, people instead of repaying the loan amount, fly away when they fail to repay the amount and become defaulter under the purview of the commission of mortgage fraud. 

How to prevent mortgage fraud?

Legal remedies are available to recover the amount of mortgaged money if we suffer loss but prevention is better than cure. By analysing risk in the mortgage, one can prevent himself/themselves from being a victim of mortgage fraud and prevention is a more cost-effective option and of course, saves time. In respect of mortgage fraud, risk analysis is helpful. Right from cross-checking the data of the borrower to checking all the documents submitted, the screening must be duly and thoroughly done.

• Lenders should assure that the staff of the bank are able to understand why such type of risk occurs. The red flags should be highlighted to the staff, they should be made aware of such types of frauds and their penalties, and enabled to detect red flags in documents. Educating about mortgage fraud and other types of risk can help in preventing the offence.
• As a point of good practice, before allowing any loan application, the due diligence of said application and the property which is the subject matter of mortgage should be duly checked.
• The lender should in-person check the identity of the borrower, like his identity proof, title documents, and whether such person is the real owner did not.
• Lenders before probing loan applications should take the consent of all the joint owners of the subject property. 
• It should also be verified via conveyance about what the purpose of obtaining a loan by mortgaging property is.
• Proactive and reactive measures should always be taken before probing loan applications, to prevent mortgage fraud.

Legal remedies against mortgage fraud

Mortgage fraud remedies are different in each state but some common terms under which one can file a complaint/suit and recover damages or money:

• By way of injunction, home sale of fraudulent documents can be stopped mortgaged,
• Punitive damages,
• Monetary damages,
• Criminal liability of fraud, and
• Remedy under civil laws for recovery of amount.

Under Indian law, there are provisions under which suit or complaint can be filed, they are as follows:

1. Right to foreclose or sale under Section 67 of Transfer of Property Act, 1882.

As per Section 67 of the Act, a mortgagee can use this right against the mortgagor only if the principal amount is due against it. The mortgagee can deprive the mortgagor’s right over the property which he or she is mortgaged. However, this right can only be applicable to mortgages by conditional sale and certain kinds of anomalous mortgages. 

2. Right to sue for mortgage money under Section 68 of Transfer of Property Act,1882.

As per Section 68 of the Act, a mortgagee can sue the mortgagor for recovery of money under this section, if there is the default on part of the mortgagor, or he destroyed the mortgaged property or the mortgagee binds himself to repay the same or where mortgagor fails to deliver the mortgaged property to the mortgagee. 

3. Right to Sale under Section 69 of Transfer of Property Act, 1882.

As per Section 69 of the Act, the mortgagor has the power to sell the mortgaged property without the intervention of the Court when the mortgage is an English mortgage or where the mortgagee is government or where neither the mortgagor nor mortgagee is under those sects which were defined under this section. 

4. Criminal breach of trust under Section 405 of Indian Penal Code,1860.

As per Section 405 of IPC, when a mortgagor dishonestly, with malafide intention, uses forged documents to obtain a loan from the mortgagee then the mortgagee can sue him under this section.  Failure to repay a loan is a criminal offence, when there is fraudulent intention to do the same. 

5. Cheating under Section 420 of Indian Penal Code, 1860.

A mortgagee can be sued by a mortgagor for cheating under IPC when it is proved that the mortgagee used forged documents for obtaining a loan. 

6. Fraud under Section 17 of the Indian Contract Act, 1872 and Section 415 of Indian Penal Code,1860.

When it is proved that a mortgagee used forged documents to obtain a loan right from the beginning then it is evident that he can be charged for the offence of fraud. 

 7. Using as a genuine forged document under Section 471 of the Indian Penal Code, 1860.

Using forged documents to obtain a loan from a bank or mortgagee can charge mortgagor for the offence under Section 471 of IPC.

8. Civil remedy : a suit for recovery of money under Order 37 of Civil Procedure Code,1908.

The mortgagee can file suit for recovery of money under this provision if the mortgagor fails to repay the loan amount plus mortgagee fails to recover same via mortgaged property.

Throwing light upon some recent cases

In order to demonstrate how prevalent the offence of mortgage fraud is in our society, let us have a brief look at two recent cases wherein huge amounts of fraud were committed by way of false or forged mortgage documents.

Coimbatore : a gang involved in Rs. 2 crore bank loan fraud busted

Last year in February 2020, in Coimbatore, City-Crime Branch arrested a 4-member gang that obtained a loan of Rs.2 crores by pledging forged land documents. You can read more about the case by clicking here.

Gurugram : 2 cheat of Rs.15 lakh by securing loan via forged documents

In Gurugram, in the year 2011, two men booked under various charges of IPC for allegedly using forged documents and obtained a loan of Rs. 15 lakh against a property. However, they paid EMI’s for a few months and later on stopped paying installments. When the bank inquired about the same and tried to seize property which they pledged for a loan, it was revealed that the same had been sold to another one. Read more about the case here.

Consequences of mortgage fraud

A person committing mortgage fraud can be dealt with serious consequences. However, in the first aspect mortgage fraud can affect you directly i.e. when it comes to the knowledge of the lender that you have misrepresented information at the time of taking a loan than at the first instance, the bank can give you a legal notice to pay your balance amount that means you have to pay remaining balance amount as soon as you received notice or within the time specified therein. 

Mortgage fraud attracts criminal liability or punishment as it’s a serious criminal offence. Depending on the severity of the offence of mortgage fraud, it is decided whether it is covered under civil offence or criminal offence. Few penalties can be sentenced to the person who has committed mortgage fraud. Which are as follows:

• Imprisonment: Depending on the severity of the mortgage fraud, it can sometimes attract imprisonment, which means an accountable person has to be behind the bar.
• Fines: Sometimes along with imprisonment, fines are also imposed on guilty persons for committing mortgage fraud.
• Compensation: In some cases, the court can grant an order to pay compensation which is altogether different from fines. Fines are imposed on a guilty person as a punishment for wrongdoing, however, compensation to pay is in order to indemnify such injured party who has suffered.

For instance. A special Court of CBI has sentenced a 38-year-old man to life imprisonment for obtaining a loan of 2.80 Crore from Andhra Bank, fraudulently implicating forged documents against the property. 

How can mortgage fraud be avoided?

If you have a mortgage, the best thing you can do is be honest in your solicitation. So, there are a few things that can be done in order to protect oneself from being a victim of such a fraud:

• Acquire references for professional immobilizers and friends of friends and family conferences.
• Find out where the other cases in the area are compared with the property that is being searched and revised by the evaluators to verify the real value of the property.
• Acquire everything you need to know. If there is something that does not count, consult a consultant. And even with a certain document that is contagious especially in the blank, or that it could be vulnerable to fraud.
• Revise all the documents we submitted to make sure that all the information, including its number, is required and verified.
• Consult the historical tutorial to get up with which frequency has been sold and revealed the property. 
• Proper due diligence would include:

1. Duly check the KYC of a person who tries to obtain a loan via property documents.
2. Duly check property documents that the person wants to mortgage for the purpose of obtaining the loan. The bank or lender must check the physical appearance of the property. 
3. They must obey and follow all the guidelines and instructions of the RBI as prescribed from time to time because the RBI always warns that mortgage fraud is increasing day by day. 

Conclusion

While mortgage fraud is not something that any bank would like to face but somehow it is happening to an extensive degree. Mortgage fraud refers to any intentional deception or misrepresentation used to obtain a mortgage loan. It is unethical, dangerous, and illegal. As a buyer or lender, one must take all necessary measures from protecting itself from the commission of mortgage fraud. Like one must consult with a real estate lawyer who is an expert on property transactions or who can do proper due diligence on a property that is supposed to be mortgaged. If a person becomes a victim of mortgage fraud, he must immediately resort to legal remedies and file a complaint to a local authority for taking necessary actions.  However, only legal remedies are not sufficient. Before sanctioning a mortgage loan, one must take proper due diligence. Early detection of mortgage fraud can be very helpful and ease down losses due to mortgaged fraud. 

References 

• https://www.investopedia.com/articles/mortgages-real-estate/10/how-mortgage-fraud-affects-markets.asp
• https://economictimes.indiatimes.com/industry/banking/finance/banking/fraud-against-bank-is-offence-against-society-supreme-court/articleshow/24155842.cms?from=mdr
• https://curiousforlaw.com/how-to-file-a-suit-for-recovery-of-money/
• https://www.walkermorris.co.uk/publications/mortgage-fraud-risks-and-prevention-in-2021/?utm_source=Mondaq&utm_medium=syndication&utm_campaign=LinkedIn-integration

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