They say that the eyes are the windows to the soul. But when you’re conducting business online, the eyes and every other fragment of identity is concealed. The “hidden” nature of the online environment makes it a breeding ground for fraud.
Fraud in all its forms is so pervasive in the subprime lending industry that lenders are tasked with trying to verify each applicant’s identity, their credit history, their ability to repay and the most difficult, their intent to repay. The underwriting burden alone can become crippling.
The Subprime Underwriting Struggle
Subprime lenders realize that their best chance of recovering their money at the end of a loan is by employing strong underwriting at the beginning of a transaction. First-payment default is especially troubling because lenders realize that if a consumer doesn’t pay the first payment, they’re unlikely to receive any payments at all. In January of this year alone, lenders lost more than $12 million in missed payments, according to Clarity data.
The installment market, in particular, is vulnerable to default. The longer the term of the loan, the more risk the lender assumes. First payment default is still a concern, but so too is default in the early stages of a loan. Some customers begin making payments as agreed, but during the longer terms afforded by installment loans, they can experience “payment fatigue,” in which they simply lose the motivation to continue making payments.
Another liability of longer loan terms is that the ability of subprime consumers to repay can be compromised. These consumers, in particular, are more prone to experience disruptive financial events more frequently like unexpected car repairs or medical bills that affect their stability and ability to pay.
Intention Is Everything in Fraud
The intent-to-not-pay consumer is a fraudster and can be engaged in either first- or third-party fraud. First-party fraud is when a person fills out a credit application truthfully but has no intention of repaying the debt. In other cases, a person with no intent to pay may apply for multiple loans simultaneously to see how much money they can secure across industries. Fortunately, lenders can limit their risks and determine intent by analyzing the frequency and number of inquiries, along with a consumer’s financial stability and other proven measurements. Third-party fraud is more commonly known as identity fraud, in which a person fills out credit applications with a stolen identity. In any of these cases, the lender won’t see a cent of their money back.
Fighting Fraud in Cyberspace
Clarity Services developed a fraud solution specifically designed for online lenders. Clear Fraud™ for Online Installment addresses the concerns of the consumer-not-present environment, taking into account the longer terms, larger loan amounts and additional scheduled payments that are typical of installment loans.
Our exclusive fraud score ranks an applicant’s risk of default based on updated, primarily online loan transaction data that includes stability attributes, fraud signatures and more. Early data tests have proven it to be highly predictive of first-payment default and identifying the intent-to-not-pay consumer in the online market. Fraud attempts will continue to increase in complexity and sophistication. A lender’s partner in the battle against fraud will determine their success. Enter the battle armed with Clear Fraud™ for Online Installment.
