Automated credit decisioning produces faster, more accurate loan decisions


The defi Team defi INSIGHT, Fraud, Originations

Loan stacking representation

Loan stacking is the practice of a borrower taking out multiple loans from different lenders within a short period, often without the other lenders’ knowledge or approval. It can help address a legitimate need for quick funding or perpetrate a scam that brings quick funding with no intent of repayment. Online lenders that focus on quick decisioning with limited verification of applicant identity or financial credentials for short-term loans face increased risk from loan stacking. 

Legitimate Loan Stacking

Loan stacking is not illegal, though many lenders have explicit policies against it. Not all stacked loans are fraudulent. When properly undertaken, they can be a financial lifeline for the borrower. After receiving funding for an initial loan, a second loan (with a higher, risk-adjusted interest rate) from a different lender aware of the initial loan can provide the funds to bridge the borrower’s financial gap. Disclosure is vital to the legitimacy of the loan. 

Fraudulent Loan Stacking

Fraudsters know how to profit from loan stacking. False identity is the key to successful fraud. Stolen personal or account information and synthetic identities provide endless variations of false identities that appear legitimate without more detailed analysis or verification. Fraud rings have sophisticated means of creating false identities, using a different one for each application simultaneously submitted to unsuspecting lenders. When a stacked loan defaults, false identities make tracking the perpetrator difficult. 

Fraudsters also know that it can take up to 30 days for credit inquiries and new accounts to appear on credit reports, making it difficult for lenders to recognize loan stacking and easy for fraudsters to obtain two or more loans with similar interest rates and payment terms. 

Even when the lender can track down the person whose stacked loan has defaulted, the legal proceedings for equitable recovery among multiple lenders can be time-consuming, with no guarantee of satisfactory closure.

Reduce the Risk of Loan Stacking Fraud

Given the ease of simultaneously submitting loan applications to multiple lenders for fraud, what are the best techniques to identify loan stacking and prevent it? Savvy lenders are enhancing their underwriting processes with lending technology to help determine whether applicants are legitimate and can pay off what they’ve borrowed. 

8 Fraud Prevention Strategies for Loan Stacking Fraud
1) Fraud Analysis Use fraud analysis to identify subtle or overt irregularities in the application by comparing identities, IP addresses, or locations used by known fraud rings to alert lenders to potentially fraudulent applications and false identities.
2) Identity and Verification Services Employ cloud-based identity analysis and verification services to flag applications with a high probability of using false information to perpetrate fraud. 
3) Alternative Credit Data Sources Leverage alternative credit data sources, such as utility payment history, rental records, and address history, to identify discrepancies between alternative data and information provided on the loan application.
4) Real-time Data Sharing Implement systems that allow real-time sharing of data among lenders to identify any recent loans taken out by the borrower.
5) Loan Limits and Monitoring Establish and enforce limits on the number of loans a borrower can have simultaneously and monitor borrower behavior and patterns to identify unusual or suspicious lending activity.
6) Automated Alerts Implement automated alerts to notify lenders of any unusual or high-risk lending activity and set up triggers for specific thresholds, such as the number of loan applications within a specific time frame.
7) Risk-based Pricing Use risk-based pricing strategies to adjust interest rates and loan terms based on the borrower’s creditworthiness and risk profile.
8) Customer Communication Establish clear communication channels with borrowers to verify information and address any discrepancies in loan applications.

There’s no single solution to prevent the risk of financial loss resulting from loan stacking. Still, smart lenders know they need the right combination of technologies that give them a decided advantage over loan-stacking borrowers without intent to repay. Fraud analytics, identity verification, and accurate assessment of an applicant’s financial strength are three capabilities that can help lenders reduce the risk of loan stacking.

Getting Started

defi SOLUTIONS is redefining loan origination with software solutions and services that enable lenders to automate, streamline, and deliver on their complete end-to-end lending lifecycle. Borrowers want a quick turnaround on their loan applications, and lenders want quick decisions that satisfy borrowers and hold up under scrutiny. With defi ORIGINATIONS, lenders can increase revenue and productivity through automation, configuration, and integrations and incorporate data and services that meet unique needs. For more information on loan stacking, contact our team today and learn how our cloud-based loan origination products can transform your business.

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