Everything you need to know about lending fraud


Date: 18 May 2022

A small business realises he has been a vistim of lending fraud

One of the main concerns for business owners nowadays is fraudulent attacks - whether that be attempts to deceive the company out of money or by exploiting weaknesses to steal or leak data for financial gain.

Lending fraud is something businesses should be aware of. They need to know how to avoid all types of loan fraud that can occur. Failure to do so could lead to catastrophic losses that the company cannot overcome.

So, how do you prevent loan fraud from happening? What are the most common types of loan fraud and what are some of the warning signs that fraudulent activity is occurring? In this guide, we'll share everything there is to know about lending fraud so that you can avoid it happening within your organization.

Table of contents:

  • What is lending fraud?
  • What are the types of loan fraud?
  • Why does lending fraud occur?
  • How to prevent loan fraud from happening

Whether you're responsible for the security of the business or you're operating a small business as the owner, being aware of lending fraud is essential.

What is lending fraud?

Lending fraud - also known as loan fraud - is when fraudulent activity occurs in order to deceive the business into lending or loaning money to the fruadster.

For those who are in the position of providing loans or lending money to their customers, this is something to be aware of. You may find that some 'customers' are actually fraudsters looking to damage the company finances for their own benefit or to intentionally bring the business to its knees.

It's a growing problem with small to mid-sized businesses seeing an increase of 6.9% in fraudulent activity since 2020 alone. Spotting the signs of lending fraud is essential, as well as putting in preventative measures to stop it from happening to your business.

What are the types of lending fraud?

It's worth knowing what types of lending fraud exist and how they operate so you can look out for them for your business.

1. Personal loan fraud

If you're a business that lends money in the form of personal loans, then this is an opportunity for some fraudsters to take advantage of money that they don't intend to repay.

They do this by providing false information, 'strengthening' their financial position in order to borrow more money than they would otherwise be able to access thereby maximising the amount of money they can steal.

Unfortunately, it's one of the most common types of fraudulent activity that businesses face and it's becoming increasingly common.

2. Second and third-party fraud

Second-party fraud is an individual providing personal information to another in order to commit fraud. This is usually done through another person whether it be a family member, friend, or an accomplice in the fraudulent act.

Third-party loan frauds are where the individual committing the fraudulent activity, uses another person's identity and information without their knowledge or consent. This helps them to gain credit, again with no intention to pay it back.

3. Borrowing several loans at once

Also known as 'loan stacking', this is type of lending fraud involves a borrower taking out multiple loans in a short space of time with no intention of paying them back.

Most credit checks, inquiries and the creation of new accounts can take up to 30 days to appear on a borrower's credit history or records. That means lenders, aka you, might not be able to see if or how many outstanding loans the customer has.

Why does lending fraud occur?

Fraudsters are cunning, making it extremely difficult to keep up with them, so it's important to understand why it can happen so easily.

Businesses want to make lending easy

The fact that you're doing everything you can as a business to make the lending process easier can often hinder your own security measures - or emphasise your lack of security checks!

Convenience is important to customers, but you mustn't sacrifice the protocols you have in place to prevent lending fraud from taking place. Even if you lose a couple of customers as a result of the procedures you have in place, it's better to secure genuine customers that will pay the money back than allow fraudsters to evade detection and disappear with the money you have loaned them.

Fraudulent applications are becoming more frequent

Increasingly fraudsters are using false information or stolen information, to make fraudulent loan applications. So much so, it's hard for businesses to keep up with them. Pair that with a simple but vulnerable lending process and you've got a recipe for disaster.

Smaller businesses are targeted more frequently by some fraudsters as they do not have the security systems or manpower in place to tackle the problem that a larger multinational company can access.

The data for risk profiling in real-time is lacking

A lot of companies that lend money to others lack the credit data to conduct proper risk profiling in real-time. Fraudsters are becoming adept at pulling the wool over businesses' eyes and fleecing them for as much money as possible and businesses often do not realise until it's too late.

With loopholes in the lending process, particularly in digital lending, many businesses lack the data they need to identify and eliminate fraudulent loan applications.

How to prevent lending fraud from happening

Whilst the prospect of completely preventing fraudsters from committing lending fraud is fairly bleak, there are some tips that can help you reduce the risk of lending fraud being committed. All businesses can do more, regardless of their size, to reduce the risk of being compromised.

1. Assess the risk of lending fraud for your business.

Understanding the business risks you currently face is often the first step to helping reduce fraud in general. By doing a proper assessment of the safety measures you have in place, and the procedures that help avoid fraud from happening, will give you an understanding of what needs to change.

Whether this is done internally or through a third party is up to you, but this is the first step to take in order to reduce the risk of fraud occurring.

2. Put the right protocols and safety measures in place.

Having the right protocols and safety measures in place will help prevent any fraudulent activities from being erroneously approved, resulting in your business handing over the money blindly.

Consider what systems you have in operation and whether they're outdated. Utilise the various tools and software available nowadays that can prevent people from taking advantage of your business operations.

3. Train your employees so they are aware of the risks.

It's likely that your employees aren't properly trained on the risks of lending fraud and how to spot the tell-tale signs. Anyone who is responsible for the business and ensuring the integrity of its security should understand the dangers that are present when it comes to fraud.

Measures such as providing regular training to introducing updated software and even introducing a cybersecurity team and software all have a place when it comes to boosting your resilience against fraud.

4. Improve your cybersecurity where possible.

Talking of cybersecurity, there's always more you can do to improve the state of your security systems. Introducing additional security measures and checks and hiring a cybersecurity team, can be useful in strengthening your defences against fraud and scammers in general.

As a result of the pandemic, cybercrime is up by 600%. Therefore, businesses need to do more to keep themselves from harm's way.

5. Stay up to date with the latest in fraudulent methods.

You can learn a lot about the fraudsters by becoming familiar with their methods of attack. You know the types of lending fraud that can occur, so with that, keep your ear to the ground on the latest methods they may use to swindle your business out of money.

6. Remove the risk of genuine customers becoming victims of fraud.

Whilst it's important to look after your business operations, you have an obligation to look after your customer's data too. You hold a certain level of responsibility for your customers to stay safe when using the services of the business.

The last thing you want is for your customers to become victims themselves due to data loss or because fraudsters have pretended to be you.

Provide tips and guidance that will help keep your customers safe. Whether that's encouraging basic security awareness to business-specific tips about what the customer should expect (or not expect) from you when interacting.

Avoid your business from falling for lending fraud

It's easy for any business to fall into the trap of lending fraud, especially as it's so rife. With that said, you can utilise the guidance above to help protect your business and to minimize the chances of falling victim to fraud this year.

Copyright 2022. Article made possible by Natalie Redman for SKALE.

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