Industry Thoughts

12 common red flags for loan application fraud

September 5, 2023

minute read

  • Brianna Valleskey
    Head of Marketing

Loan application fraud poses a significant threat to lenders, jeopardizing financial stability and customer trust.

And as the financial landscape evolves, so do the tactics of fraudsters. Not only did 80% of risk and ops leaders said they saw a YOY increase in frauda ttempts during 2023, but we uncovered some alarming statistics for lenders: Over 60% of fraudulent personal loan application documents, and 46% of fraudulent SMB loan application documents match the pattern of first-party fraud. These individuals are inflating their salaries or hiding evidence of risky revenue practices and present a much higher risk of delinquency. (Learn more in our 2024 Document Fraud Report.) 

Lenders must remain vigilant and equipped to identify suspicious activity early on. In this blog post, we'll discuss 12 common red flags for loan application fraud and offer insights into how lenders can stay one step ahead.

12 red flags for loan application fraud 

While not all of these are definitive proof of loan application fraud, they are risk signals that should be noted and warrant a closer review of applicants.

1. Forged or Altered Documents: If the submitted documentation, such as pay stubs, bank statements, or tax documents, appears to be forged or altered, it's a clear indication of potential document fraud. Look for inconsistencies in fonts, signatures, formatting, and any visible signs of tampering, as well as any fraud signals in the metadata or embedded text (with the help of an AI document fraud detection solution). 

2. Incomplete or Blank Sections: Loan application forms with sections left intentionally incomplete or left entirely blank might suggest that the applicant is trying to hide certain information. Fraudsters may do this to prevent detection of false claims or to evade close scrutiny of their financial situation.

3. Inconsistent Information: When information provided by an applicant contradicts itself or is inconsistent across documents, it's a clear sign of potential fraud. Lenders should closely examine discrepancies in addresses, employment history, income details, and more.

4. Lack of Documentation: Applicants who provide insufficient documentation or avoid providing requested information could be hiding critical details about their financial situation, potentially indicating fraudulent intent.

5. Unusually High Income: Applicants claiming excessively high incomes that seem out of proportion to their occupation or industry might be inflating their earnings to secure a larger loan. Verification of income sources is essential to detect such fraud.

6. Sudden and Unexplained Changes: Rapid changes in financial behavior, such as a sudden surge in credit inquiries, opening multiple new accounts, or large deposits with no clear source, can indicate that an applicant is attempting to manipulate their credit profile.

7. Frequent Changes in Address: Applicants who provide multiple addresses in a short period or who frequently change residences might be attempting to obscure their true identity or financial history.

8. Unusual Loan Purpose: If the stated purpose of the loan doesn't align with the applicant's financial situation or history, it's worth investigating further. Be wary of requests for loans that seem unrelated to the applicant's needs or goals.

9. Borrower's History of Default: A history of frequent loan defaults, bankruptcies, or late payments raises concerns about an applicant's ability and intention to repay a new loan.

10. Falsified Employment Information: False or exaggerated employment information, such as claiming to work at a non-existent company, can be a red flag for potential fraud. Verify employment details through official channels.

11. Unusual Collateral or Guarantors: If an applicant offers collateral or guarantors that seem unusual or unrelated to the loan, it could be an attempt to secure a loan they have no intention of repaying.

12. Pressure to Rush the Process: Applicants who exhibit impatience or pressure to expedite the loan approval process might be trying to preempt close scrutiny of their application and true financial situation.

Tips for preventing loan application fraud 

Preventing loan application fraud through effective document review is crucial for maintaining the integrity of the lending process. To effectively combat loan application fraud, lenders should implement a multi-faceted approach: 

  • Educate and empower frontline fraud fighters: Train underwriters to recognize these red flags and promote a culture of vigilance across the organization. Encourage open communication among underwriting teams to share insights and concerns about potentially fraudulent applications.
  • Utilize advanced analytics solutions: Leverage data analytics and artificial intelligence to detect patterns and anomalies that could signify fraudulent behavior.
  • Establish clear documentation requirements: Clearly communicate to applicants the specific documents and information they need to provide as part of their loan application. Having comprehensive documentation requirements sets expectations and helps ensure that you receive accurate and complete information.
  • Look for patterns and anomalies: Pay attention to patterns and anomalies within documents and across multiple applications. Unusual formatting, missing information, or repeated use of the same document across different applications could indicate fraudulent activity. Artificial intelligence and machine learning solutions can help you do this at scale. 
  • Securely retain borrower documentation: Maintain organized and secure records of all applicant documents, communication, and decision-making processes. These records can serve as valuable evidence in case of audits or investigations.

In the battle against loan application fraud, vigilance is key. By remaining attentive to these common red flags and adopting a proactive approach to fraud prevention, lenders can protect themselves, their customers, and the integrity of the lending industry as a whole.

Inscribe helps business and consuming lending companies reduce fraud and credit losses by detecting application fraud in bank statements, utility bills, tax documents, and others — while also helping you assess borrower creditworthiness. Want to learn more about how you can prevent application fraud with the help of AI? Check out an interactive tour of Inscribe, or reach out to speak with a member of our team

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