Professional negligence: mortgage fraud

In the field of professional liability, mortgage fraud and claims against professionals arising from it remain the topics of the moment.

Lenders such as Britannia have recently made it known that they are investigating losses that they have suffered and that wherever possible they will seek to recover those losses from the professionals who advised them.

Insurers of both solicitors and valuers have begun to report an increased number of claims arising from alleged frauds on lenders.

The Law Society has also reacted by publishing a new Mortgage Fraud Practice Note, which replaces the 1991 ‘Green Card’, and gives more detailed information designed to enable solicitors to identify and respond to possible mortgage fraud.

In the last wave of claims in the 1990s, some professionals were in on the frauds which came to light but most were sued for negligence. Solicitors were often alleged to have failed to spot signs that fraud was going on or that the borrower was not worth lending to. Many early claims succeeded but the professions and their insurers fought back and levelled the legal playing field in a series of test cases. The lenders’ own imprudent lending policies were also held to be responsible for many of their own losses, particularly in the cases involving the Nationwide.

The authorities which arose from the previous claims will again be the battleground for professionals and lenders making claims against them but it will be harder this time for professionals to plead ignorance. In addition, since 1999, many lenders have instructed their solicitors on the basis of the Council of Mortgage Lenders’ Handbook making it easier to determine solicitors’ duties to their lender clients because they are express rather than implied.

How then are professional defendants to lessen the pain of claims? Experience suggests there are a number of very worthwhile strategies.

First, the basis on which the decision to lend was made needs careful investigation. An imprudent decision to lend can, absent fraud, substantially reduce damages on the basis that a lender contributed to its own loss for example by lending very high multiples of borrowers’ earnings. Ask the lender for a copy of its lending file, its lending manual and criteria which will assist in determining the basis of the decision to lend. Demand documents showing the extent of fraud training given to lending staff. The lender may initially be reluctant to disclose this information because the pressure on it will be reputational as well as financial, but the defendant is entitled to it during the disclosure process. Look at what the lender has done to pursue the borrower and realise its security and how long that process took as there will often be good mitigation arguments.

Consider also whether claims for contribution can be brought against any other professionals. Solicitors will argue that the lender lent on the basis of the valuation obtained and that any advice they gave would have made little difference to the lending decision. This may be particularly effective for commercial or buy-to-let mortgages. Valuers will argue in response that a negligent valuation would have been questioned and the loan never made if the solicitor had done its job properly. Contribution claims against financial intermediaries or referees may also be available if it can be shown that they were aware that a mortgage application contained fraudulent information.

Most claims will be covered by the Professional Negligence Pre-Action Protocol and lenders should be asked to disclose, as part of this process, claims against other professionals, who should also be asked for early disclosure of their files. If they refuse, it may be possible to apply for pre-action disclosure.

The allocation of contribution between professionals will be fact sensitive, but the previous case law will again come into play. Fraud, for example, is not in theory a bar to claiming contribution and we know that the SAAMCo “cap” is to be applied after rather than before contributory negligence reductions and, it appears, after contributions are worked out.

In appropriate cases, lenders may apply for summary judgment against professionals who are obviously liable. The Commercial Court has shown that it is willing to made such orders in two recent cases involving the surveyors Dunlop Haywards. The advantage of this for other professionals is that evidence may emerge which will strengthen their position in any contribution claim, the damages against them may be reduced if certain elements of the claim are disallowed and it will also lead to a reduction in the costs of defending the claim.

Overall, history may be repeating itself on mortgage fraud but we can learn from previous experience to reduce the pain for professionals.

Andrew Horrocks is a partner and Marianne Robson is an associate director in the professional and financial disputes team of Barlow Lyde & Gilbert