Mortgage Fraud & Exceptions to Title Insurance

An all-to-`common form of mortgage fraud ​entails a fraudster impersonating the owner of a property and purporting to grant a mortgage in favour of a private lender.

In cases involving private lenders where the loan is more than $50,000, the lender and borrower are required to be represented by separate counsel.  In these cases, the lender’s lawyer typically receives the mortgage funds from his/her client and upon registration of the mortgage transfers the funds to the borrower’s lawyer.  The borrower’s lawyer then releases the funds to his/her client.  In the case of fraud discussed in this blawg, the borrower is not in fact the property owner, but an imposter. Once the borrower receives the mortgage loan, they disappear.  The fraud is  discovered when the mortgage goes unpaid.

Depending on the degree of sophistication and impersonation of the fraudsters, the mortgage may or may not be a valid charge.  however, putting that aside, the lender’s lawyer purchased title insurance to insure against fraud, so the lender ought to be able to recover the mortgage funds through its title insurer, right? Not necessarily.

Many title insurance policies contain an exception which excludes coverage if mortgage funds are paid to any party other than the registered title holder, a prior encumbrancer, or a short list of other permitted payees.  As a result, payment of the mortgage funds by the lender’s lawyer to the borrower’s lawyer may give the insurer grounds to deny coverage. 

Lawyers acting for private lenders should always be alert to the potential for fraud and ensure that mortgage funds are advanced only to permitted payees.