Fraud Monitoring
Finance, Loan

Loan Fraud – Prevention & Detection Full Guide

Loan fraud is a serious problem for many lenders. When we think of loan fraud, a lot of the time it’ll be the big name banks and financial institutions that are being called out. But the truth is, there are many different types of loan and mortgage fraud occurring every day, which can be hard for some businesses and people to apply for a loan. Whether it’s a high-profile celebrity bank account or an unknown small business account, the reality is that no one is immune to fraudulent activity.

This article will go over the most common methods of loan fraud and how to prevent it from happening by following best practices and procedures.

What Is A Loan Fraud?

Loan fraud occurs when a criminal uses your personal information to secure a loan, credit card, or another type of financial product illegally. A fraudster may acquire a mortgage application in your name, and leave you to pay it off. Loan fraud is a sort of identity theft since it entails the theft and use of your personal information. Loan or lease fraud was the fourth most prevalent kind of identity theft in 2020.

Loan fraud can happen in many ways, including faking credentials, filing fraudulent tax returns, stealing money from an employer or other sources, and stealing identities for financial gain. They might employ phishing schemes to steal your personally identifiable information (PII) or trick you into downloading software that allows them to get access to your device. A thief may take out many payday loans in your name. In the worst-case scenario, a fraudster may create a legal house, business, or auto loan that you would be liable for repaying.

How Does Lending Fraud Work?

During the loaning procedure, many lending institutions request a limited quantity of information. This means that identity thieves just need a few bits of information – your Social Security number (SSN) or bank account number — to acquire a loan. Some criminals seek loans and lines of credit just to max them up and avoid payments. Stolen or fabricated identities, often known as third-party fraud, continue to be the primary approach. Scammers utilise various identities to create separate credit lines in third-party fraud.

If you are a victim of loan fraud, you may be held liable for any funds taken out in your name. If you do not repay the loan, you may face a significant penalty on your credit score and perhaps criminal prosecution. For example, if a fraudster obtains a loan in your name and never repays it, late payment penalties may appear on your credit report.

Types of Loan Fraud

While there are far too many different forms of financial fraud to be aware of, nearly every scam is based on one of these nine types of fraud.

  1. Identity Theft

Any type of fraud conducted by stealing personal information is referred to as identity theft. An identity thief obtains access to your accounts and assets by using personally identifiable information (PII) such as your name, birthdate, and Social Security number (SSN). An identity thief can empty your bank account, make instant cash loans under your name, or use your credit card to its limit.

When it comes to stealing your sensitive information, criminals might send you an email, phone call, or text message pretending to be from your bank. Or they may use a cyber assault to trick you into installing malware on your devices that take your logins and passwords. They may even take your mail or unlawfully change your address in order to receive your credit card statements. The “thief” might even be a family member who opens a credit card in your name in some situations. However, by far the simplest way to steal your identity is to purchase your personal information on the Dark Web.

  1. Advance Fee Fraud

Advance fee fraud is when a thief wants you to transfer money in advance for payments, items, or services. The stated incentives might range from improved credit to money from foreign royalty, among other things. However, they are either not what was promised or never come.

One such example is a scam artist claiming to be able to obtain you a better loan or reverse mortgage in exchange for a “finder’s fee.” Once they expose you to the finance source, they will ask you to sign a contract requiring you to pay the charge.

However, once you pay, you will frequently realise that it is not what the “finder” advertised it to be. Worse, you may be disqualified for the loan. You have no remedy because you signed the contract.

  1. Cashier’s Check and Fake Check Fraud

Scammers give you a fake cashier’s check with incorrect information, which you may deposit. Then they request that you remove some or all of the funds and transmit them to them or a third party. When the cheque is proven to be a forgery, the fraudster is gone, as is the wire transfer (which cannot be reversed).

This scam can also be done using fraudulent checks. A fraudster will either wait outside a financial institution or email you a photograph of a cheque to deposit for them. Then they’ll instruct you to retain some of the money and send the remainder to them. Funds will be withdrawn from your account when the check bounces a few days later.

  1. Tax Refund Fraud and “Ghost” Tax Preparers

Tax refund fraud is a form of identity theft in which fraudsters submit false tax returns in your name. They’ll overstate your income to maximise your return, which the criminal will then deposit. A scammer may pose as an IRS agent and demands personal information or payment for unpaid taxes. You could also have to deal with a dishonest tax preparer who steals your information or falsely files for a refund in your name.

  1. Fraudulent Charities

Scammers also utilise generosity to commit fraud. Charity fraud comprises setting up a bogus charity and collecting “donations” that vanish with the thief. Scammers construct fake organisations, such as military veteran charities, that appear to be legitimate. These types of frauds are especially prevalent following natural catastrophes or major worldwide news events.

  1. Credit card Fraud

Criminals can steal your credit card information in a variety of ways. They might take your actual card, mislead you into inputting information on a phishing website or email, purchase your information on the Dark Web, or employ any of a variety of other credit card schemes. Hackers can also use your credit card details to construct a clone of your real card.

  1. Financial Account Takeovers

Account takeover occurs when an identity thief tricks you online to access one of your online bank accounts (or any account) (ATO).

This type of fraud typically works when someone obtains access to your email and password through phishing, a data breach, or an emerging cyber danger such as a man-in-the-middle attack, in which they take your credentials while utilising public Wi-Fi.  if you repeat passwords or utilise single-sign-on accounts (for example, Facebook log-in), they may access several accounts with a single takeover.

  1. Ponzi Schemes and Investment Fraud

Investment scam encourages you to put money into a fake investment. While we frequently imagine predatory frameworks such as Ponzi schemes, the most common fraud schemes are straightforward: the criminal just vanishes with your money.

Victims are frequently enticed by promises of enormous profits, low risk, and once-in-a-lifetime possibilities. To develop trust, several investment programmes target affinity groups, such as persons who have a shared religion or cultural heritage.

The alleged investors are sometimes required to sign non-disclosure agreements, which can keep victims silent after the criminals have fled.

  1. Small Business Financial Fraud

If you operate a business or are an entrepreneur, you are especially vulnerable to financial fraud. Employees might steal from your company in a variety of ways. Embezzlement and misuse of funds are the most typical frauds.

White-collar crimes typically arise when workers have financial power without monitoring or control. For example, they may utilise a business credit card or write off lost or damaged products. Because the fraudsters are frequently trusted workers, this is an emotionally painful sort of financial crime.

How to Detect Loan Fraud

Detecting loan fraud can be difficult. Loan thieves regularly switch banks or states, making detecting trends or a business trail difficult. However, there are several warning signs that banks should be aware of.

  • There are multiple business names under one person

When a person owns many firms under one name, it’s a bad sign, especially if there isn’t sufficient money to back up that claim.

  • There is no physical location or address of the business

A company that does not have a physical address should be treated with caution. However, in this day and age, having an online firm is not unusual. However, this should prompt additional enquiry. If it appears to be a physical firm, enquire about the number of workers, the nature of the business, and even a postal drop address.

  • There is a lack of references

It is customary to get references from a person or business requesting a loan. A lack of believable references is not a good indicator.

  • The earnings are inflated

Businesses typically overstate their revenues to obtain a larger loan from banks. A thorough examination of the firm is required to detect this in good time.  A seasoned financial analyst may be required to assist the lender in accepting or preventing loan applications. It is not unusual for corporations to ‘cook’ their books to impress investors and analysts.

  • There is a lack of financial audits

In circumstances where the bank is uncertain about lending money, an audit might be requested. Screening consumers before providing them credit is a common method of detecting fraud. 

Banks do not have to do everything manually; instead, they can use verification services to first confirm the identity of loan applicants and then assess the financial risk associated with those applicants by screening them through anti-money laundering databases and financial watchdog lists with real-time loan fraud detection.

How Do You Prevent Loan Fraud Risks?

Here are seven additional steps you may do to decrease loan fraud risks.

  1. ID verification and facial recognition

A simple measure such as requiring two or more pieces of identification helps to avoid application fraud by creating an extra barrier for fraudsters.

For online applications, you may utilise an automatic ID verification system in real time that asks the user to take a picture of their ID as well as a selfie. The selfie’s liveliness technology confirms that it is an image of the person and not a snapshot of a photograph. The selfie and ID are then compared using face recognition technology.

Another option is to do a basic video call. During the call, loan officials ask a few questions to verify the applicant’s identity and ensure they appear like their ID photo.

  1. Identity verification

Synthetic identification (ID) fraud costs an average of $6,000 for each fake account. Synthetic ID fraud is committed by criminals who utilise data from several genuine or false identities to create a new identity that appears valid.

Cross-referencing identification data with public and private databases can assist identify discrepancies and synthetic identities. Frequently, data such as a name, date of birth, address, or SSN will not match records.

  1. Financial documents from a bank or employer

When applicants are asked to submit bank statements, pay stubs, and other financial papers, there is a risk that they will tamper with these proofs.

Instead, ask for permission to call their bank or company to confirm their claims. Because you can check income, assets, and other financial facts, it provides a dependable method of combating application fraud.

  1. Bank account verification

Bank account verification guarantees that applicants have access to the bank account they want to use to make payments and that personal information is protected.

Request account details and make a micro-deposit of 10 to fifty cents. This step confirms that the bank account exists. Furthermore, requesting the precise amount of the micro-deposit assures that the applicant has access to the account.

  1. Knowledge-based authentication

Knowledge-based authentication helps to avoid application fraud by going beyond the data pieces that a thief may steal or fake.

Create multiple-choice questions based on an applicant’s credit record that only they would know the solution to. Include inquiries about former homes, other lines of credit, or previous vehicle purchases, for example.

  1. Phone and social media verification

To do out-of-band verification, you can send push notifications from your app. This step confirms that the phone is a real device connected to a mobile network rather than a VoIP number.

Furthermore, social media verification helps authenticate the integrity of an identity based on social media activity and connections with other individuals. If a candidate creates a false identity, their social media presence may be minimal. Alternatively, they lack the typical pattern for profile relationships in the same geographic area.

  1. Identity risk scoring

Machine learning-based systems examine a large number of data points and cross-reference information from several databases. This method can detect synthetic identities made up of data pieces obtained from several stolen identities.

Furthermore, machine learning technologies examine past account activity, build relationships with other failed loans or credit lines, and evaluate geolocation data to identify any disparities in fraud detection.

The Bottom Line

To help fraud prevention and loan fraud, we briefly outlined some ways to recognise and avoid them. In the end, however, your best bet is to be very cautious. If something seems like it’s too good to be true, and if something sounds fishy (or illegal), you’re better off not pursuing it. While it’s not an easy process to identify a loan fraud, you can certainly reduce your chances. 


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