If you run a private lending service or small loans business, then you’re a target for loan fraudsters. Loan fraud is becoming more frequent as the years go by, with financial institutions in the US reporting $102 million of total losses in 2021-2022, and 63% of these institutions seeing an annual increase in fraud attempts.
However, major banks have a multitude of policies in place to defend against these malicious loan fraud attempts. Smaller loan services can learn a lot from the way these institutions spot and stop loan fraud, as well as in the way they report them to the relevant federal institutions.
To protect your loan service, learning about these methods and applying them in your business can be the difference between success and bankruptcy. In this guide, we’ll walk you through the ways major banks avoid these fraud attempts, and how you can apply them in your day-to-day operations.
What is Loan Fraud?
Every industry has to deal with fraud attempts and lending is no different. Loan fraud, sometimes also referred to as lending fraud, is the process of obtaining a loan by deceiving a loan's service.
The most common form of lending fraud will involve submitting a false application to receive a loan and never having to pay it back. However, some loan fraud attempts are entirely more sinister, aiming to bankrupt your loan service and take your profit for themselves.
While large banks do have to deal with loan fraud attempts, the easiest targets for scammers are small businesses providing loans and private lending services. This is because the fraudsters assume that these smaller loan services will not have sufficient policies in place to combat loan fraud.
What Are Some Examples of Loan Fraud?
One of the first and easiest steps you can take in protecting your business from loan fraud is familiarizing yourself with the different types and methods. Once you know the ins and outs of these fraud attempts, you’ll be able to spot the warning signs if and when they arise.
- False Personal Loan Applications
This is one of the most common loan fraud attempts that your loan service may come up against. To ensure that the fraudster receives the maximum amount of money they can get their hands on, they will provide false information about their financial background in the hope that this will strengthen their application. They will likely also use a stolen or false identity and address to do this.
- Proxy and False Identity Loan Applications
Also known as second-party loan applications, this loan fraud attempt involves asking another individual to make a loan application in their name on the scammer’s behalf. False identity loan applications, or third-party loan applications, are loan applications made using the identity of an individual who has not consented to their details being used.
- Loan Stacking
Since personal loans often do not appear on an individual’s credit history for up to 30 days after the application has been accepted, your loan service may not be able to see whether an individual already has outstanding loans. This opens the door for loan fraudsters to take out multiple loans in a very short space of time. Once again, this is done with the intention to take the money and run and make no attempt to pay back any of the loans.
Why Your Loans Service May Be Targeted
As well as a lack of internal security policies, small loan services and private lenders are attractive targets for fraudsters for many reasons. Although you can learn a lot from the way major banks deal with loan fraud, it’s important to know why your service may stand out. By understanding what it is that makes your business a target, you’ll be able to minimize any weak spots in your operations.
If you’re starting out in the lending industry, gaining new customers is vital to getting off the ground and achieving lasting success. To facilitate more loans and get ahead of your competition, you may expedite the process or include increased convenience in terms of paperwork and background checks.
While this is a business-minded decision and can be a great way to attract new borrowers, you should never forgo your due diligence. Remember, you don’t need to grant every applicant a loan if you don’t feel that they can rightly pay it back, just as you should never grant loans for applications you feel may be fraudulent.
It’s far better to take the long road to success and let a few potential customers go than be stopped in your tracks by unnecessary money troubles as a result of loan fraud.
The Warning Signs of Loan Fraud
Although scammers think they may have an easier time getting what they want from smaller or private lending services, we can still learn a lot from the ways major banks deal with applications. By setting your employees up to behave impartially and securely, you can avoid potential fraud at the first possible stage. Here are some of the warning signs of loan fraud to inform your employees of.
Emotional Tactics - This is a warning sign that is common across many scam and fraud attempts, but that intersects with loan fraud particularly well. The fraudster may tell you that they need their loan to pay for their own or a loved one’s medical bills, or to help them out in an emergency. As you may hear information like this from genuine applicants, it can be hard to discern whether the application is fraudulent just from this. You should be wary of any attempt to bring your sympathies into an application, and try and remain impartial when approving or declining loans.
Attempts to Fast-Track - Aside from general emotional engineering to get you to approve the loan, fraudsters may use other tactics to get you to fast-track their application’s approval. Any request to pay their application for special treatment should instead be met with a more thorough check. Make your steps for loan verification available to borrowers so you can direct them there if they feel the process is taking too long.
Referral to Other Approved Loans - In place of other verifiable documents, a fraudster may provide you with an approved loan for their chosen identity from the past to persuade you that their application is legitimate. If the institution they’ve borrowed from appears to be legitimate make sure to get in contact with that lender and cross-reference the application. Otherwise, scrutinize any documents you are provided with and do not accept anything but the approved identity documents your business requires.
Offers of Repeat Loans - If a fraudster has discerned that your organization will benefit from the further business, they may use this to their advantage. By assuring you that they’ll become a repeat customer if only you can loosen the reins on this occasion, fraudsters hope you will jump on the future promise of profit. Never drop your duties for the offer of repeat business.
General Discrepancies - As much as fraudsters try and make their stories air-tight, there will usually be some things that seem ‘off’. For example, they claim to own their own house but are very young, or their employment history indicates they should be on a much higher or lower salary than they have disclosed. General discrepancies such as this should not be ignored, and if you have any further questions for borrowers make sure to ask them.
How to Avoid Loan Fraud in Your Lending Business
Now you know how major banks train their employees to spot fraudulent applications for loans, we can take a look at the methods they use to minimize the risk of fraud and protect against it.
- Clear Terms and Conditions
One of the easiest ways to protect your firm from loan fraud is in your terms and conditions. You should display terms and conditions adequately, even before customers agree to them, and make sure to stick to them. When fraudsters attempt to bypass certain restrictions, you can refer to the terms and conditions and proceed with repercussions accordingly.
- Data Protection and Helpful Software
If fraudsters can gain access to your data, they can use this against your practice to play the system and even blackmail you or your employees. Ensuring your data protection is top-notch can protect you from a variety of malicious attacks. In terms of software, you can find programs that will flag up any unusual activity from your borrowers. For example, if a customer is accessing your site or calling from another country, you’ll be able to follow up and check why this is.
- Multiple Identity Verification
Having your clients provide two or more forms of identity verification can be a huge help in weeding out false identities. In particular, digital facial recognition and verification will ensure that those applying for a loan are who they say they are, and flag up any falsities immediately.
- Due Diligence and Interviews
It can be time-consuming combing through employment histories, address histories, and earnings reports, especially if you have already verified an applicant’s identity. However, coupled with in-depth identity verification, due diligence provides that second layer of security. Making face-to-face interviews a requirement of your application process may deter those genuine customers looking for a quick and hassle-free loan, so reassuring your customers that interviews will only be conducted in certain cases protects your business now and in the future.
- Regular Audits
Receiving regular audits is a requirement for financial institutions anyway, but this process can also help find any discrepancies in repayment or unusual payment patterns that may highlight fraud attempts. Building a partnership with lawyers, solicitors, and accountants on top of auditors is a great way to ensure that, even if a fraudster does somehow bypass the other methods you have to avoid loan fraud, your firm, employees, and genuine customers are protected.
- Report Fraud Attempts
Finally, if you do come across what you believe to be the rumblings of loan fraud, it can be almost impossible to get the definitive proof needed to report that individual to law enforcement. However, if you do come across a fraudster or find yourself the victim of loan fraud, you should complete the relevant forms and submit a report to either the FTC or FinCEN, depending on the purpose of the loan.
Sources
https://www.lawdonut.co.uk/business/blog/22/05/everything-you-need-to-know-about-lending-fraud
https://www.aura.com/learn/loan-fraud
https://www.bankofamerica.com/security-center/faq/data-compromise/
https://www.featurespace.com/the-state-of-fraud-and-financial-crime-in-the-u-s-a/
https://www.lawsociety.org.uk/topics/property/mortgage-fraud-guidance
https://www.skillsyouneed.com/rhubarb/avoid-lending-fraud.html
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