Hidden in Plain Sight – How Fraud You See Is Often Just Part of the Story

Sometimes what you think your fraud exposure is, is just the tip of the iceberg

To prove fraud in the court of law, you need to be able to prove three basic elements

  1. Misstatement of Fact – The borrower lied about something on their application. This can be anything ranging from the identity, to their income, and even the the true buyer of a vehicle or home
  2. Reliance on the Misstatement by the Victim – The lender relied on the false information provided by the borrower that influences the decision that otherwise wouldn’t have been made. Because the borrower materially misrepresented important information on the application, the lender ends up funding a loan that should have likely been declined.
  3. Material loss to the victim – Due to their reliance on the false information, the lender is now at a loss

Historically lenders have used a very narrow scope to categorize fraud losses, typically focusing only on identity theft. Losses are only labeled fraud if it is confirmed that the borrower’s information has been compromised or stolen.

I can understand why the auto and mortgage industry may have this approach, as identity theft is the most blatant form of fraud, but by utilizing such a narrow definition they are tying the hands of their risk management teams.  And to be clear, what they think their fraud is, is actually only the tip of the iceberg.

Fraud Is Growing At An Alarming Rate

Fraud is growing at an alarming rate, and by focusing on only one type there is a lot of money left on the table. By broadening their definition of fraud, lenders can better categorize and address their losses. In a recent study done by Point Predictive, identity related fraud (Identity Theft & Synthetic Identity) only makes up about 20% of total fraud losses. So, this means that most of the fraud is going unnoticed and is being hidden in credit losses.

The issue here, is that fraud is controllable. I can’t count how many times I’ve heard “We don’t have a fraud problem”, but then delinquencies and write-offs are through the roof. You can’t solve a problem that you don’t know exists, but by identifying red flags, schemes, and trends these losses can be pulled out, properly categorized, and fixed.

3 Major Fraud Trends Hidden in Plain Sight

1. Credit Washing

The systematic disputing of derogatory tradelines as identity theft with the intention of improving credit history.

The first step in underwriting a loan is to check the credit worthiness of a person. If the borrower doesn’t meet the basic criteria, the application is dead on arrival. Credit history also heavily dictates the terms of the loan which could make or break the decision based on affordability.

Recently, credit washing has become a favorite of both first and third-party fraudsters due to the relative ease, the level of impact, and the level of difficulty in detection. Criminal fraudsters often use this method to scrub synthetic identities to use again. Whereas the first-party fraudsters are typically coached by those in the credit repair business, often not knowing that they are committing fraud.

The reason credit washing is such a threat is due to how difficult it is to detect. Identity theft claims have become so prevalent, that creditors can’t keep up with the volume. Due to the strict timelines placed by the FCRA, they are often rubber stamping these claims and removing the derogatory information from the borrower’s profile. Once that information is removed for identity theft, it will no longer show on future credit pulls. So, although the circumstances for the borrower are no different, they look much more credit worthy.

Point Predictive tracks credit washing activity through its consortium and has seen the impacts firsthand. On average, a borrower’s credit score increases by 23% and their tradelines decrease by almost 80%. These are both dramatic changes in credit history in a short amount of time which could ultimately change the decision of a loan.

Credit washing is a tricky trend to solve for because once the identity theft claim is confirmed, the information disappears from their credit report. Never again to be seen. But luckily, through the Point Predictive consortium approach to fraud prevention, we can see these shifts and highlight the risks for lenders. By shedding light on improper manipulation of credit, Point Predictive can help lenders protect themselves and make better decisions.

2. Income Misrepresentation

Income misrepresentation is nothing new. Unfortunately, people lie about the money they make all the time. But it has never been so easy for a borrower to misrepresent the money they make and get away with it.

Point Predictive conducted a study with its consortium lenders regarding falsified paystubs. The results were staggering. In 2020 the use of fake paystubs doubled, and lenders reported that about 10% of all paystubs they saw were altered in some way. That means that 1 in every 10 paystubs received by lenders were fraud, just last year. Fake paystub services are emboldening both first-party and third-party fraudsters alike.

During the pandemic, Point Predictive saw in increase in income misrepresentation, even after unemployment began to normalize. I see four major drivers:

  1. It’s Easy – Criminal fraudsters follow the money. The easier the scheme, the quicker the money, and the faster the fraud. Income misrepresentation has proven to be a cash cow, and the fraudsters will continue to milk.
  2. Rising Prices – Prices in both the auto and housing markets are soaring. The typical consumer can’t keep up with these increases, and in order to obtain approval they may feel like they are being forced to lie about the amount of money they make.
  3. Sustain Lifestyle – The pandemic had a major economic effect on a large part of the population. They were either laid off, furloughed, or had to close their businesses. Many people made a career shift when rejoining the workforce and in a lot of cases they weren’t making as much money. To sustain their previous lifestyle, they are required to lie about their income.
  4. Fear of Missing Out – Otherwise known as FOMO. Specifically in the housing market, consumers see this as an opportunity to “get in the game” and make an investment. They notice the consistent increase in property values, and the record low interest rates, and are worried that they may miss out. They want to get in before it’s too late. Unfortunately, with the prices of housing right now, it is much harder to get an approval so borrowers may see it as a necessary evil to not miss a good opportunity. The end doesn’t always justify the means.

3. Employer Misrepresentation

Borrowers lying about the source of incomeBorrowers lying about the source of income.

According to a recent Point Predictive survey employment misrepresentation is the second highest fraud trend that lenders are concerned with, coming in just behind income misrepresentation. Often times these fraud schemes can overlap because if the employer is fake, then the income is obviously misrepresented. But by being able to effectively catch bad employers, lenders can cut the fraud off at the root and weed out applications with a high likelihood of default.

In 2020 alone, Point Predictive saw an increase in employer related fraud of over 300% since the beginning of the pandemic. As borrowers are furloughed, or laid off, they may still need financing. Their only option is to lie about their employment, and many will pay for verification of employer services that can be found at local credit repair companies, and even certain social media platforms such as Instagram and Telegram.

Employment misrepresentation wasn’t just a pandemic related scheme however, as we continue to see fake employers used across the consortium. In fact, Point Predictive has added between 80-100 bad employers to its Negative File every week throughout 2021. Loss Exposure has more than doubled since last year, reaching an all-time high in July at just over $300M in loan value.

The easier the fraud scheme, the more likely fraudsters are willing to continue to use it. And with how cheap it is to buy a doctored paystub and hire a verification of employment service, the more we are going to see this trend continue to grow.

Broaden Your Perspective, Look Beneath The Surface

Fraud comes in all shapes and sizes and isn’t strictly identity related. Through over 250 retro tests Point Predictive has found that, on average, more than 50% of lenders’ early pay defaults are caused through material misrepresentation. This means that by shifting their definition of fraud, lenders can better identify red flags and prevent these losses in the future. It is impossible to solve a problem when you aren’t aware that it exists, so the first step is always to identify the issue. By incorporating a broader view of fraud, lenders can successfully mitigate their losses and protect their business.