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LENDING FRAUD ANALYSIS: HOW THE PROS DO IT

The defi Team defi INSIGHT, Fraud

lending fraud analysis

How prevalent is lending fraud? What are the recent trends? How great a threat is fraud to your lending practice? A Forbes article analyzing the CoreLogic Mortgage Application Fraud Risk Index mentions an 11.4% year-over-year decrease in fraud risk as of the end Q2 2019. Per the analysis, this is the first decrease since Q3 2016. The report attributes the decline to lower interest rates that generate an influx of low-risk refinance transactions. Putting some numbers to this lending fraud analysis, an estimate of one in 123 mortgage applications, or 0.81% of all applications, contained indications of fraud during Q2 2019, compared with one in 109, or 0.91% in Q2 2018.

 

The LexisNexis Risk Solutions 2019 Small and Mid-Sized Business (SMB) Lending Fraud Survey provides a contrary perspective and focuses on those most impacted by lending fraud. The report uncovered increasing fraud levels across all sizes of financial services during a two-year period, with small and mid-sized financial institutions experiencing higher levels of fraud. 

 

The LexisNexis lending fraud analysis reveals that small and mid-sized lenders have experienced a 7.3% increase in fraud, larger banks an 8.6% increase, and digital lenders a 8.2% increase. Estimated monetary losses of overall revenue for smaller banks and credit unions amount to 4.5% and 5.8% for digital lenders compared to 2.9% for larger institutions. The reason for the difference? LexisNexis believes higher rates of lending fraud experienced by small banks, credit unions, and digital lenders who focus on streamlining loan processing are the result of lower technology investments and greater reliance on human assessment of risk. 

Lending Fraud Analysis: Fight the Threat With Technology

With the volume of loans and the increasing sophistication (and ease) of perpetrating lending fraud, it’s clear that financial institutions of all sizes can benefit from recent advancements in technology. The following table summarizes the most frequently-attempted loan fraud schemes and the technology solutions that lenders are using in their loan origination process to counter them.  

 

Fraud Type How It’s Done  How to Fight It
Income Numerous websites make it easy to create fake paystubs, stepping you through the process that recommends the appropriate monthly or weekly pay ranges based upon the supposed occupation and geography. The resulting paystub appears quite authentic.  TheWorkNumber provides secure, confidential income verification.

 

PointPredictive identifies when an applicant’s income is materially overstated.

Employment Online services offer to confirm employment via phone or letter. Fees for this “service” vary. One hundred dollars for the basic service. Several hundred dollars includes a fictitious employer website, customized LinkedIn profile, phone number and email address for the HR department, and even references from former managers.  TheWorkNumber provides quick verification or refutation of an applicant’s employment information. 
Synthetic Identity Borrower identity is created and modified from data obtained from data breaches (identity theft). Usually, a fraud ring coordinates the effort and perpetrates the scheme widely to maximize gains. id:analytics evaluates synthetic identity risk base on personal information asserted on an application.

 

Point Predictive uses machine learning to determine the likelihood an application contains a synthetic identity.

Collateral Inflation  Multiple opportunities during the application process for a dishonest party to inflate vehicle or real-estate values or reduce down payments to boost profit. An astute borrower may eventually notice the discrepancies, but the paperwork can be finessed making it appear that the borrower agreed to the terms. Black Book vehicle valuation services provide automated, accurate history-adjusted values.

 

Kelley Blue Book provides a database of current, market-relevant values for new and used vehicles.

Cloud-Based Fraud Recognition and Verification Services

All of these cloud-based services can be easily integrated—using menu-driven configuration, not programming—into a modern loan origination solution to automate the process of identifying fraudulent applications. As indicated by the LexisNexis report, lenders employing these capabilities are already experiencing the benefits.

 

 

Getting Started

defi SOLUTIONS’ loan origination solutions use the latest fraud recognition technologies. Take the first step toward identifying and avoiding fraudulent loan applications by contacting our team today or registering for a demo of defi LOS.

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