While some loan applicants default for legitimate reasons, some criminals apply for loans and lines of credit with the intent of maxing them out and not making any payments. Taking steps toward preventing application fraud can reduce the cost of debt default.

In May 2020, two men were charged with submitting a fraudulent Paycheck Protection Program loan application for a restaurant that had been closed for over two years.1 As financial institutions process large numbers of applications and work on issuing funds on short deadlines in the context of the PPP, it’s important to remember that loan application fraud is a costly issue.

Consumer debt reached almost $14 trillion during Q2 2019 after steadily increasing over the five previous years.2 With increased activity, comes increased fraud. So, as the market continues growing, implementing new measures to lessen the impact of debt default linked to fraudulent applications should be a priority.

What is loan application fraud?

While some applicants default for legitimate reasons, some criminals apply for loans and lines of credit with the sole intent of maxing them out and skirting payments.

Some criminals use their own identities to apply for loans, then go off the grid to avoid repaying them. Still, stolen or synthetic identities — also known as third-party fraud — remain the preferred method since a scammer can use multiple identities to open different credit lines.

In 2019, identity theft accounted for more than 20% of all fraud reports received by the FTC. Numbers released by that organization revealed a sharp increase in loan application fraud, with auto-loan and lease fraud increasing by 105% between 2018 and 2019, and business and personal-loan fraud rising by 116% over the same time period.3

Federal student loan fraud rose by 188% between 2018 and 2019, representing the fastest-growing identity fraud type.3

It’s estimated that more than 10% of accounts considered bad debt by banks are actually fraudulent accounts.4

Top 7 steps for preventing application fraud

Complying with Know Your Customer (KYC) and anti-money laundering best practices reduces risk, but your loan application fraud prevention efforts should go beyond these baseline requirements. Here are seven measures you can take to reduce risk further.

  1. ID verification and facial recognition

A simple step like asking for two or more forms of ID can help prevent application fraud by introducing an additional barrier for fraudsters.

For online applications, you can implement an automated ID verification solution in real time that requires the user to snap a picture of an ID along with a selfie. Liveliness technology verifies that the selfie is an image of the person and not a snapshot of a photograph, and facial recognition technology verifies that the selfie and ID match.

A simple video call is another possible alternative. Loan officers can ask a few questions to verify the applicant’s identity during the call and make sure they look like their ID photo.

  1. Identity data validation

On average, synthetic ID fraud costs $6,000 per fraudulent account. 5 Criminals who commit synthetic ID fraud use data from different real or fake identities to create a new identity that looks legitimate.

Cross-referencing identity data with public and private databases can reveal some inconsistencies and flag synthetic identities since data like a name, date of birth, address, or SSN wouldn’t match records.

  1. Financial documents from a bank or employer

Asking applicants to upload bank statements, pay stubs and other financial documents themselves means there is a risk that they could tamper with these proofs.

Instead, request permission to contact their bank or employer to verify their claims. It’s a reliable way of preventing application fraud since you can validate income, assets and other financial details.

  1. Bank account verification

Bank account verification ensures that an applicant has access to the bank account they plan on using to make payments.

You can ask for the account information and make a micro-deposit. This step verifies the existence of the bank account, and asking the applicant for the exact amount of the micro-deposit ensures they have access to the account.

  1. Knowledge-based authentication

Knowledge-based authentication helps with preventing application fraud by going beyond the data points a criminal could steal or spoof.

You can use an applicant’s credit report to generate multiple-choice questions only they would know the answer to. Examples include questions about previous addresses, other lines of credit or vehicles they have purchased in the past.

  1. Phone and social media verification

You can send a push notification through your app to perform out-of-band verification. This step verifies that the phone is a physical device registered to a mobile network and not a VoIP number.

Social media verification can confirm that an identity is genuine based on social media activity and connection with other users. If an applicant uses a fake identity, their social media presence might be nonexistent or lack the kind of pattern you would normally see when users connect with other profiles in the same geographic area.

  1. Identity risk scoring

Machine learning-based solutions like the one Fraud.net offers can analyze multiple data points and cross-reference information with different databases. This approach can flag identities that have been stolen in the past and detect synthetic identities with data points taken from multiple stolen identities.

Machine learning solutions can also look at past account activities, establish links with other loans or credit lines that were defaulted on, and analyze geolocation data to spot any discrepancies.

The Fraud.net machine learning solution helps with preventing application fraud by generating a risk score that indicates the likelihood that the application is fraudulent so loan officers can prioritize high-risk applications and perform additional identity verification steps if needed.

How Fraud.net can help

Fraud.net can help you implement a multi-layered approach to preventing application fraud for loans and other financial products. Talk to an expert today to learn more about the steps you can take to fight fraud and reduce the cost of debt default.




Article Sources:

  1. https://www.cnbc.com/2020/05/05/coronavirus-men-charged-with-fraud-over-cares-act-ppp-small-business-aid.html
  2. https://www.debt.org/faqs/americans-in-debt/
  3. https://www.ftc.gov/system/files/documents/reports/consumer-sentinel-network-data-book-2019/consumer_sentinel_network_data_book_2019.pdf
  4. https://fraud.net/s/application-fraud/