Using a Consortium Approach to Address Fraud and Credit Risk in Online Lending

[Editor’s note: This is a blog post from Patrick Reemts, vice president of credit risk solutions at ID Analytics. ID Analytics is a Silver Sponsor at LendIt USA 2017 which will take place on March 6-7, 2017 in New York City.]

Online lending is in high demand, providing much needed access to financing for millions of consumers and small businesses, while accounting for billions of dollars in loans. In fact, a report issued last year by the California Office of Business Oversight identified that online lenders issued $15.91 billion in U.S. loans in 2014, an increase of 700% from 2010.

This growth in marketplace lending signifies the importance of bringing borrowers and lenders together in a convenient and efficient manner. Unfortunately, this rising demand for online loans is coming from the good, the bad, and the ugly—legitimate, creditworthy customers; those who pose a significant credit risk; and fraudsters exploiting vulnerabilities in the process.

How can lenders be certain they are dealing only with the good? What’s needed is a clear, comprehensive view of borrowers’ application activity and insight to understand their intent.

Do you see what I see? The blind spot to short-term application velocity.

The online lending industry as a whole—including fintech, subprime, and traditional lenders operating online—is struggling with a lack of visibility into short-term application velocity. There’s currently a blind spot that is allowing fraudsters to apply for multiple loans in a brief time period and consumers to borrow beyond their credit capacity.

The most notable and widely discussed vulnerability is loan stacking, where a borrower opens multiple loans in a short period of time by targeting numerous lenders in rapid succession.

Not all loan stacking behavior is equal. There are three distinct categories of high velocity online applicants, all with different intent and levels of risk.

  • Shoppers (the good) are legitimate consumers soliciting pricing at various online lenders to find the best rate and secure financing that meets their needs.
  • Credit stackers (the bad) are applicants rapidly applying online for loans they intend to repay, but likely won’t be able to because they are already overextended.
  • Fraud stackers, or first-party fraudsters (the ugly) are criminals rapidly applying for online loans with no intention to repay.

The challenge for online lenders is distinguishing the good prospects from the bad.  Because of the way online lenders currently report information to credit bureaus, the fraud and credit evaluations they receive in the origination process often can’t see if a consumer has sought out another online loan at a different organization in the very recent past. This allows consumers to “stack” loans—often resulting in loans being given without the full picture of the borrowers’ obligations and ability to pay.

Loan stacking can also seriously impact individuals when criminals use authentic identity information to quickly open dozens of loans in unsuspecting consumers’ names.

Addressing the visibility issue—a consortium approach to understanding intent and risk.

ID Analytics (IDA) believes the visibility issue contributing to loan stacking, is a problem that will most likely be solved by consensus participation. What online lenders need is insight into a consumer’s online loan seeking activity that’s current to the minute, or even to the second.

In response to this need, ID Analytics established the Online Lending Network (OLN) — a new consortium allowing organizations to share information in real-time to enhance responsible lending, help protect consumers and businesses, and address credit and fraud risks.

Through the OLN, lenders report when a consumer requests an offer for a loan product, submits a loan application, or when a loan is funded. In return, the lender receives information on whether that consumer has either requested other loan offers or applied for loans elsewhere in the days, hours, or minutes before. The near real-time nature of the response makes high-velocity fraud, like loan stacking, very difficult. It also has the potential to protect authentic consumers from overextending their credit capacity to facilitate responsible lending.

The OLN decreases the blind spot to short-term loan velocity by providing visibility into applicant velocity behaviors in online lending environments.

The future of the Online Lending Network.

Both from a participation and a solution perspective, the Online Lending Network is a fully functioning consortium with insight into more than two-thirds of U.S. marketplace lending volume. The OLN will continue to grow its membership. The more lenders participating, the better, to expand the coverage and quality of insights into online lending activity for all network members.

In addition to helping the industry, the Online Lending Network will preserve the unique business model that enables consumers’ choice of loan products without affecting their credit. The OLN will also provide access to tools to evaluate credit, including the detection of synthetic identities, and detection of potential identity theft, as online lenders are a target for fraudsters using stolen identities.

While loan stacking is the network’s initial focus it’s ultimately just one of the challenges the OLN will solve for. By establishing comprehensive coverage of consumer online lending behaviors, long-term the OLN will be able to tackle the greater issue of a marketplace that has disparate data, reporting, and inquiries.

The demand for marketplace lending won’t stop and neither will the bad guys. ID Analytics is committed to industry collaboration that supports safe growth for online lenders and protects consumers.

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