Small business loan fraud is a big deal


Quick and easy is invariably better than tedious and time consuming, so of course businesses prefer submitting loan applications electronically rather than sitting down with a lender to sign and verify stacks of documents. And from a lender’s perspective, underwriting automation makes small loan applications more profitable.

But speed comes with risks: the process opens up new opportunities for fraud.

“When there is very little human interaction, ‘synthetic identity’ fraud is at the fore,” says Brad Day, Chief Compliance Officer for Live Oak Bank, a Wilmington, North Carolina bank with $ 8 billion in assets.

One of these scams involves a synthetic individual identity – in which criminals carefully keep snippets of real data, like one person’s Social Security and another’s mailing address – and tie that fake identity to a business. legitimate. Another involves a synthetic corporate identity, constructed using fake banking and financial documents, possibly layered on top of a fake website or even legitimate statutes to add credibility.

Another iteration of fraud that thrives in cyberspace is “loan stacking,” whereby multiple fraudulent loan applications are submitted in rapid succession across multiple platforms.

“First party” fraud: A genuine business borrower is usually so desperate for an injection of funds that they inflate their finances and other documents, sometimes also with the intention of not repaying the loan that existed long before the arrival of the loan. digital lending platforms. the scene – is also a concern in today’s electronic lending environment.

Measuring fraud is an inexact science

In 2019, David O’Connell from the consulting firm Aite Group surveyed lenders of all types, some entirely electronic, and found that 33 percent of SME lenders believed that one percent of their loans were fraudulent. “But I think that’s a conservative estimate,” says O’Connell.

In many banks, small business loans are not fully electronic, with loan officers or other bank staff entering information specific to the borrowing company and taking other manual actions.

But ever more sophisticated crooks can find their way even into electronic lending systems with some human oversight, says Shaun murphy, EVP and COO at Liberty bank, a $ 750 million bank in Fairfax, Va. that focuses on business operations.

Banking practices developed from expertise in AML and BSA, risk and compliance, credit risk, technology and business lending teams maximize expertise in fraud prevention, Murphy says. He pointed to the recent coordination of Freedom’s technology and operations experts to work with the bank’s loan origination system vendor to develop an API for their CRM. By seeing where all requests are in the approval process, suspicious activity can be more easily identified bank-wide.

Cultivate a questioning mentality

Banks are increasingly investing in anti-fraud technology and taking advantage of innovations such as AI, which can scan a scanned beneficial owner document for suspicious language, notes Neil Katkov, who oversees risk and compliance for the consulting firm Celent.

Live Oak Bank, which began in 2008 strictly serving veterinary practices, has now expanded to around 30 other areas of business, such as agriculture and insurance. Loan officers who question any aspect of a particular borrower’s documentation turn to experts in that industry’s field, Day Actions.

Automated processes don’t change the age-old task of paying attention to the fundamental discipline of credit, says Murphy. Simply pulling a Dun & Bradstreet credit report can reveal that there is no such business at a specific address, he explains.

A physical verification of an address, which can reveal that a supposedly successful business is in fact an abandoned building, may not be time-efficient, Katkov says, adding that a close examination of a Google Maps view may give the same overview.

The culture of an institution is essential for cultivating individual inquiry initiative, says Murphy. “You don’t want a ‘gotcha’ attitude, where the blame is attached to cases of fraud. “Everyone has their role and there should be a healthy respect for the people who fill those roles.”

Marilyn Kennedy Melia is a Chicago-area financial writer.

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