The culture of instant gratification contributes to, and complicates, the growing problem of fraud. While technology allows loan approval in seconds, it also fuels the fastest-growing type of fraud: online loan application fraud.
Loan application fraud occurs when a prospective borrower provides false or misleading information on a loan application. Common examples of loan application fraud include applicants using someone else’s identity to secure a loan or misrepresenting income or assets to obtain loan approval. In the case of identity theft, once a fraudster gains access to loan proceeds, he or she disappears with the money in hand.
Synthetic fraud, which involves the creation of fake identification, is one of the most difficult types of account or loan fraud to perpetrate and detect.
“The abundance of identity data available for purchase—including fake names, social security numbers, driver’s license numbers, and even birth certificates—exacerbates the problem,” says Jim Bullard, CUNA Mutual Group senior consultant for risk and compliance solutions. “In addition, large data breaches like those involving Equifax and Yahoo increase the amount of personally identifiable information available to create synthetic identities.”
Online applications are accessible not only to a wider set of potential members, but also fraudsters. Bullard suggests that verifying the authenticity of identities and supporting documents online is less secure than in-person. To mitigate online loan fraud, staff should:
► Validate the authenticity of submitted information by comparing it to public and private databases, including consumer credit reports. Compare the name, address, phone number, social security number, tax identification, and date of birth to validate a match.
► Confirm the prospective member has access to the deposit account presented during the application process by asking the member to send microdeposits to their account.
► Authenticate the member through out-of-wallet questions that only the legitimate applicant should know. Some typical questions include: previous address, place of birth, or names of relatives. Look for questions that can differentiate between a real member and a fraudster, and limit questions to three or four to minimize the impact to the member experience.
► Verify whether the phone number provided on the application is truly the applicant’s by contacting it directly.
► Be alert for red flags on credit reports. Watch for fraud and active duty alerts; notice of address discrepancy; suspicious documents or personal identifiable information presented by the applicant; recent and significant increases in the number of inquiries; and changes in the use of credit, especially for recently opened accounts.
Fraudsters see credit unions as ideal targets due to their eagerness to serve members. For that reason, staff should be hypervigilant. The growth of loan application fraud requires credit unions to utilize every tool and resource available.
Identity information is readily available to fraudsters, but countermeasures can be successful in preventing fraud when used consistently. Diligent staff combined with a dynamic Red Flag program can reliably and affordably identify suspicious activity and mitigate risk without impacting the member experience. The key is to find an optimal balance of friction in the loan application process.