First-party fraud may feature multiple forms of deception which vary in sophistication, but it often begins with a basic premise – with applicants who simply present themselves as the borrower. They use their own identity, or parts of their identity, with the intent to defraud for financial gain. In some cases, a first-party fraudster will use bits of information identifying their next of kin when applying for credit.

Also known as intent to not pay fraud, first-party fraud differs from third-party fraud by listing at least some personal details.

Often, these fraudsters will apply for many loans across various industries within the same day in an attempt to get more money, known as loan stacking. This type of fraud costs lenders more than $340 million in losses annually throughout the financial services industry alone.[1]

A Long History of Fraud

Naturally, when professionals in the lending industry think about any type of fraud, most will consider the latest technical schemes that may be compromising business right now. To get a good grasp of what lenders are up against, however, it’s helpful to understand history and, to an extent, human nature.

For as long as there have been credit services, there has been first-party fraud. While credit cards and digital services are unique to the modern era, lending practices date back to 3500 B.C., back to the first agricultural civilizations in Mesopotamia, which is today southern Iraq.

Since then, as civilizational developments are tracked in history, some form of lending has existed. It is a fundamental feature of any economy. Unfortunately, so is fraud.

The Tale of a First-Party Fraudster: Linda

Linda has a need to secure a loan within the alternative financial services industry. She fills out an application online, but is she a good candidate? And, is this the only one?

She has lived in New Jersey for six months, but uses a Georgia license. As an isolated fact, this observation could be benign, except it’s been reported to Clarity that she has been employed at the same company for 29 months. But that’s not the only indicator to arouse suspicion.

Reason codes also show inconsistencies. They include things like a low level of authentication, too many recent changes in income and other factors indicating intent to not pay. So far, many factors are showing that Linda is a high-risk applicant, including the fact that the address she’s currently listing doesn’t match the one previously reported to Clarity.

Additionally, Linda’s work phone number has experienced three changes within the last hour. Finally, Clarity is able to see five unique email addresses that are associated with Linda’s social security number on a pending application.

Any of the above inconsistencies could indicate fraud. However, when it’s all added up, Linda has a high likelihood of being a first-party fraudster. Lenders who have access to only data from their portfolio probably wouldn’t have noticed these various fraud indicators. This data is reported in real-time from the multiple applications she is trying to secure for a loan.

The Digital Challenges of Fraud

Today, first-party fraud applicants are able to skew personal details to look more appealing. While fraudsters pose as themselves, they are using fabricated information to misrepresent actual risk.

Due to the enormous amount of information available today, criminals can steal enough plausible details online to augment their own negative credit or employment history. There are websites and programs to create false but believable documents and files for forgeries including pay stubs.

Since it’s the consumer who commits first-party fraud – and the victim is the lender – the loss is managed by collections departments, which considers these loans as bad debt. Synthetic identity fraud that utilizes fabricated information is estimated to account for 85 percent of all identity fraud in the United States, according to the Federal Trade Commission (FTC).[2]

Automation: An Ideal Cover

Decades ago, personal bankers determined creditworthiness and most loans were established through face-to-face relationships. Today, however, lending products and loans are often solicited digitally or through direct mail, allowing for perpetrators to operate with much more anonymity.

Fraudsters have found ways to, with relative ease, manipulate an automated score through banking activity. It can be as easy as churning transactions through an account to make a newly fabricated account look more legitimate. A fraudster can do this several times in one day and later ask a teller if they’ve achieved a score high enough to merit a loan that they do not intend to pay.

Don’t Let Fraudsters Fabricate Subprime Gaps

By now, lenders in the credit industry have accepted the value of engaging consumers in the subprime market. Millions of applicants are simply underbanked and underserved. But when more lenders are seeing opportunity, so too are fraudsters.

First-party fraudsters often use gaps in credit history as wiggle room for falsified information. With limited information to authenticate applications, misrepresenting an identity or fabricating a synthetic identity becomes much easier.

Moving Forward: The Right Tools for Fighting Fraud

Given the anonymity of online lending and the evolving schemes fraudsters pull off with regularity, reliable protection is a must for businesses who want to expand their lending universe.

That’s why more creditors are utilizing alternative credit data to dig deeper and gain an industry-wide perspective with Clarity’s fraud solutions, backed by the market’s largest database that’s sourced from the spectrum of alternative finance providers.

Don’t nullify your gains from the nonprime market by exposing vulnerabilities to a widespread crime. Profit more with Clarity protection, the strongest fraud-fighting tools available to lenders.

[1] Javelin Strategy & Research. Al Pascual, Kyle Marchini, Sarah Miller. 2018 Identity Fraud: Fraud Enters a New Era of Complesity.
[2] Federal Trade Commission.