Fraud alert: What to watch for in online business lending

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The online lender Fundation can’t have a fraud specialist review every document of every loan application, so to monitor for fraud it asks employee to look for inconsistencies, no matter how small. The company rewards employees who catch fraud, calling them out for special recognition and nominating them for a quarterly cash bonus.

In one case, an employee in the loan processing department noticed that a loan guarantor’s last name differed from the one on the credit report by just one letter. Further investigation revealed the applicant had also sent in fraudulent tax documentation.

“It was just one little thing that one person caught. You pull a single thread and the whole quilt just unravels. It literally saved us $100,000,” said Jim Ryan, Fundation’s head of originations operations.

Fundation’s bonus program is one example of how lenders are fighting fraud in online small-business lending.

While hardly widespread, fraud is becoming a growing concern among both fintechs, such as Fundation, and banks, which are increasingly building digital-lending platforms to meet small and medium-sized businesses’ demand for speedier loans.

Lenders say that fraud is easier to pull off on digital platforms than in physical locations, where loan officers are looking borrowers in the eye while examining identifying documents. The most skilled fraudsters have also spent the last few years hoarding personal information leaked in data breaches and stitching together fake identities that they then use to try to obtain loans.

David O’Connell, a senior analyst at Aite Group, said lenders are building online-lending platforms to “reduce friction,” but in doing so they have created more opportunities for fraudsters.

“When there is too much friction reduction in a process that involves putting capital at risk, there will be fraud,” he said.

In a recent survey conducted by Aite Group and the Small Business Financial Exchange, lenders said that they are seeing fraudsters employ a wide range of tactics to obtain loans, from pretending to be top decision-makers at nonexistent firms to tweaking financial statements.

The biggest area of concern, they said, is with so-called synthetic identity fraud, a scheme in which thieves use bits of stolen information to create fake identities. Forty-four percent of lenders surveyed said that they have seen a rise in attempted synthetic identity fraud in the last year.

Jack Murphy, the head of business banking for Citizens Financial Group in Providence, R.I., named synthetic identity fraud and first-party fraud, in which a business owner or employee commits the fraud, as the two that concern him the most.

One upside of rising fraud is that even when criminals get away with it, they still leave behind clues, which lenders can then use to inform their fraud prevention practices, O’Connell said. Indeed, 92% of respondents that have loan workout departments said those departments are sharing information about fraudsters’ tactics with lending departments.

All online lenders used sophisticated verification tools to try to confirm borrowers’ identity, but Dan O’Malley, the CEO of Numerated Growth Technologies, an online lending software startup, said more than 80% of the banks using Numerated’s platform still have an actual banker involved at some point before funding a loan.

In addition to verification tools it runs on each digital application, Citizens Financial Group sends a banker to physically verify every small business that applies, Murphy said. It may slow down the process a little bit, he said, but the bank still manages to close most of these loans within two to three days.

“We just feel it’s prudent to make sure we have eyes on the customer, eyes on the location, and if we give money to somebody we want to make sure they’re legitimate,” he said.

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