Online lenders’ advantage in speed has exposed them to a growing problem: a type of fraud called loan stacking.

People are taking advantage of the quick loan approval times online lenders offer to game the system by applying for multiple online loans in a short time before credit files update to reflect the increased debt load. By doing so, they are able to get more money than they would typically qualify for in any one loan.

Some use fake identities to get loans and some use completely stolen identity information. Others use their own true identity but take out one or more loans with no intention of ever repaying. And there are people who have hit hard times and need more cash than any one lender will give them.

Investigators at companies like TransUnion, ID Analytics and Clarity Services are starting to see the clues that indicate a loan applicant is up to no good and they have learned some of the characteristics of loan stackers.

One surprise in investigators’ early findings is that online lending fraudsters tend to hit phone companies first.

“They’ll do the rounds and they’ll apply for as much as is humanly possible; they tend to start off in telco,” said Pat Phelan, senior vice president at TransUnion, whose Fraud Prevention Exchange monitors applications for telephone and card companies as well as online lenders. “They’ll open a mobile account, get a billing address on that mobile account, then they’ll head towards traditional nonfintech borrowing, then they’ll head towards card and fintech.”

What makes the telephone providers appealing? They have a lightweight customer-onboarding process; they don’t have the same Know Your Customer compliance procedures lenders have. Their main goal is to sell a phone.

“You’re going in probably with someone else’s ID or a fake ID. The person examining it is probably very young and is looking at a piece of paper that has an identity,” Phelan said. “They’re probably not as attentive.”

Another interesting finding is that online loan scammers who steal identities know to go after victims with high FICO scores. A superprime borrower is far more likely to be approved, and for a higher loan amount.

“There’s no real benefit in stealing someone’s credit records or identity who’s a 475,” Phelan said. “If I were to steal someone’s identity, it would be someone around 790-825.”

According to TransUnion data, stacked loans in the superprime segment are 10.5% more likely to default than loans without stacking, whereas stacked prime loans are only 3.2% more likely than non-stacked loans to go bust.

The types of loan stackers

Loan stackers aren’t necessarily hardened criminals.

“Everybody wants to hang this on their traditional view of a sinister type, some hacker in their basement who’s got 100,000 identities they purchased off the dark web and is methodically applying for credit,” said Tim Ranney, president and CEO of Clarity Services. “The fact is, your neighbor next door could just as likely be a loan stacker. And loan stacking is not a crime, it is a too-easy opportunity for a consumer to get overextended without a way for a lender to spot the consumer is doing that.”

Indeed, ID Analytics’ analysis of its data, which includes a database of 2.4 million past fraudulent incidents, has turned up no clues that distinguish loan stackers from people shopping around for the best loan deal.

“There's clearly no smoking gun in terms of the credit profiles of these consumers,” said Patrick Reemts, vice president of credit risk solutions for ID Analytics. They have the same average age and live in the same types of homes as people shopping for loans normally, he said.

“To us, that means they're particularly new at this game, whether fraudulent or just bad credit managers of their own finances,” Reemts said. “This doesn’t appear to be a hardened set of criminals.”

ID Analytics buckets loan stackers in three categories: fraudsters, shoppers, and the over-leveraged. Fraudsters deliberately apply for loans they have no intention of repaying. Loan shoppers are financially savvy consumers who apply for several loans because they're smart enough to know they can shop around and get the best rate. The third category is consumers with financial problems who need more than one loan to make ends meet.

The one signal that does strongly indicate fraudulent intent in loan stacking is velocity.

“If we saw two requests for a loan application in the last 90 days, there was some element of risk,” Reemts said. “If we saw two within the last hour, there was a three-time elevation of risk. We're seeing evidence that time does matter.”


The fast and the fishy

Profile of the online loan fraudster

Intentional and nefarious loan stackers, obviously, are the ones online lenders and their service providers are trying to catch and block.

“They have no intention of paying these loans, they knew the weaknesses in the system and were exploiting them,” Reemts said.

The anonymity of the internet removes the stigma of defaulting on a loan and emboldens people to do things societal conventions would typically stop them from doing.

Even if the stacker shares their true identity, because of the physical distance between the lender and the borrower, it’s extremely hard for the online lender to get its money back.

When a loan is large, the lender can afford to hire a collections agency and an attorney to chase the customer around for the money. But if a lender in Portland, Ore. lends $1,000 to a borrower in New York who doesn’t repay, “what sort of an effort can you cost-effectively make to get that $1,000 back?” Ranney said.

Defaulting would make the borrower’s FICO score plummet, but that may not be a major concern to them.

“The consumer that plans to not pay a loan back has already thought about the repercussions and they don’t care,” Ranney said.

Some stackers use stolen identities to avoid ever getting caught. “Over the last 12 months, there have been so many breaches, I can just apply in your name,” Phelan said. “If they have your username and password and they have your email, the rest of the stuff is pretty easy to put together.”

These scammers will use a stolen identity to open a new bank account (using perhaps a mobile bill and fake ID card as proof of identity) and apply for a loan at an online lender, which pays the funds in the new bank account.

In some cases, fraud rings drive loan stacking. TransUnion recently caught a fraud ring that was sending multiple loan applications from the same IP address but from different devices.

“You’ve got rings that are highly organized,” Phelan said. “These are intelligent fraudsters who aren’t just happening upon someone’s identity and making an application for a loan.”

The ring was caught before any damage was done. “We flagged an IP address and our customer cross-referenced that IP address and we found a large fraud” before the loans were approved. In such cases, TransUnion and the other loan stacking defense providers hand the evidence of fraud over to their client, which decides where to take it from there.

They see no signs of online loan fraud abating. “It’s deliberate, it’s targeted, it’s cross-vertical and it’s not going anywhere,” Phelan said.

Editor at Large Penny Crosman welcomes feedback at penny.crosman@sourcemedia.com.