6 Tips on How to Avoid Lending Fraud

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Online lending fraud is constantly on the rise; statistics show that small and midsize business loan fraud has increased by 6.9% since 2022.

Lending fraud puts financial organizations at risk, from revenue losses to negative brand reputation, ultimately impeding an organization’s growth.

Therefore, it’s critical to know the red flags to look out for and the mistakes to avoid in order to prevent loan fraud in your financial institution.

This article discusses six tips for loan fraud prevention as a lending company.

Let’s get started.

6 Mistakes to Avoid to Prevent Loan Fraud

Making a payment with cash.

Avoiding these six common mistakes will help prevent loan fraud in your financial organization. Let’s examine them below:

1. Irregular fraud assessment

You may have many activities lined up as a financial institution, distracting you from conducting regular fraud assessments. However, you put your institution at risk of loan fraud without frequent check-ups on fraudulent activities.

So, you must conduct regular audits to save your company from impending loan fraud transactions.

By performing a thorough, regular assessment of your financial transactions, you can find weak areas and loopholes fraudsters can use.

Conducting a consistent regular audit involves examining precautionary methods, protocols, and strategies to combat loan fraud in the organization.

When you do this, you may notice faulty systems, lack of backups, or wrong identification cards and fix them before they hamper the company’s financial history.

While regular financial audits may require effort, time and resources, it’s a worth while investment to prevent loan fraud.

So, do not neglect frequent assessments of current and past financial activities, records and procedures to ensure the preventive fraud loan precautions are constantly taken.

2. Inadequate cyber security

Laptop screen signing into a VPN

Cyber security is an effective strategy to prevent lending fraud cases in financial institutions. People may use the cloud to access your company as a digital loan lending company, putting its data at risk. If hackers have access to the company’s vital information, they can leverage it to forge their identity and boycott your policies.

Therefore, one of the most critical mistakes to avoid is providing inadequate cyber security for the company’s operations. You must ensure the system is safeguarded against hackers and that those assessing the loans have legitimate identities. To do this, combine practical data security tools and lending fraud solutions for sufficient data security.

Monitor transactions daily and set security alerts to report any suspicious activity. Additionally, train employees on loan fraud, the signs to look out for, and how to ensure proper protection. By preventing weak cyber security measures and adopting protective practices, you can control loan fraud efficiently.

3. Rushing through the process

Running a lending company can be hectic. So, skipping protocols might be a convenient way to get a job done faster. However, rushing through the activities makes the company susceptible to fraudsters.

Hackers can get away unnoticed without proper checks and cross-examinations, therefore your company should avoid rushing through processes. Take time to go through the documents, verify identities and cross-examine files before signing the papers and handing over the loan.

Patient scrutiny and strict adherence to the protocols will help you identify errors that can reveal a fraudulent loan request. Therefore, ensure workers conduct thorough and strict adherence to the processes to avoid loan frauds.

4. Not conducting a credit check

A credit check gives insight into the financial habits of an individual. So, by conducting a credit check, you can know how fast they repay loans, helping you understand the type of individual you are working with. On the other hand, a lack of credit checks may prevent you from identifying negative habits that could reveal a fraudster’s true identity.

So, it’s crucial to examine their credit score and understand their spending and loan payment habits. This way, you can decide if the borrower will repay, and how quickly, allowing you to mitigate any impending fraud.

5. Unclear terms and conditions

Creating detailed and clear terms and conditions is vital to avoiding loan fraud. Fraudsters can leverage errors in the terms and conditions to justify their actions. So, it’s essential to not create vague terms and conditions that build confusion.

Ensure the terms and conditions are clear, straightforward, and easy to understand. Don’t leave out essential details, including the length of the loan, monthly payment amount, and fees.

Additionally, ensure the requirements you state verbally correspond with the terms and conditions. It’s also best to have witnesses and a record of the entire process.

Afterward, ensure the borrowing party understands, agrees, and signs the terms and conditions before offering the loan. Doing this will prevent the fraudster from holding on to any discrepancies and allow you to execute appropriate sanctions when fraudulent loan transactions occur.

6. Not conducting an OFAC check

In the US, OFAC (The Office of Foreign Assets Control) checks are necessary to confirm a company and individual’s validity. Therefore, you might increase your company’s exposure to loan fraud by neglecting this critical step.

Scan your clients’ database against OFAC’s sanction list regularly to identify and restrict any suspicious account.

Additionally, a regular OFAC check identifies inactive or deactivated accounts in case fraudsters want to use these accounts to make unauthorized loans. You can also update your customer database for effective monitoring.

However, regular OFAC checks on customers are not enough. You must also ensure the company complies with the OFAC regulations to prevent violating its laws. This also benefits your institution by providing you take the right approach to loan fraud.

Types of Loan Fraud to Avoid

Various payment cards

Below are the popular types of loan fraud to avoid as a lending institution:

1. First-party fraud

First-party fraud (also called personal fraud) is when a fraudster deliberately provides a false identity or information to acquire a loan.

For instance, they can exaggerate their income, employment, or financial status to obtain a loan. Fraudsters employ different techniques to perform a first-party fraud, including:

  • Fronting: This involves taking a loan with another person’s name to save cost.

  • Address front: This is when a fraudster uses a fake address or an address that’s not theirs to save money.

  • De-shopping: This involves purchasing items such as clothes to use before returning them.

2. Second-party loan fraud

Second-party fraud occurs when a person intentionally gives their information or identity to someone else to commit fraud.

Among the most popular types of second-party loans, fraud is money muling. This involves allowing another person to use their bank account to receive and send fraudulent money at a fee.

Second-party loan frauds are challenging to detect because the party whose identity was used consented to the action. Therefore, the chances of them reporting such cases are low. It often takes identifying financial transaction discrepancies to know if a second party loan fraud is about to occur.

So, to reduce second party loan fraud, develop predictive models, and regulations to identify and curb fraudulent practices before they happen.

3. Third-party fraud

Third-party fraud, popularly known as identity theft, involves using a person’s identity and personal information without their consent.

This also includes creating a new identity using stolen information.

Third-party fraud is easier to identify because the owner of the stolen identity is not in support. To spot a third-party scam, conduct thorough checks using background check tools (like this one) and install security software to identify and notify you about false identities.

4. Loan stacking

Loan stacking is when an individual applies for several loans within a short term without repayments. Since new profiles and credit inquiries may need up to thirty days to show in a credit account, most lending companies may not be able to detect who applies for multiple loans, enabling fraudsters to use this to their advantage. Therefore, an effective way to prevent this is to adopt detective software to report suspicious loan applications appropriately.

How to Prevent Loan Fraud

Adopting highly effective practices is crucial to providing a lasting solution to loan fraud. Let’s check them out.

1. Use fraud detection tools

Fraud detection software helps to identify suspicious financial transactions in real-time. They detect fraudulent practices before they occur, restrict suspicious accounts, and allow you to take other necessary action to prevent loan fraud in your organization.

Excellent fraud detection tools help automate tracking activities, so you can focus on other responsibilities while monitoring every transaction.

So, if you want to streamline fraud detection practices and identify fraudulent loan activities proactively, use fraud detection software.

2. Conduct multiple identity verification and facial verification

Request two or more forms of identification and conduct facial verification multiple times to confirm the identity of an individual. For online loan applications, use automated ID verification software and facial recognition tools to ascertain that the ID and image match. You can also interview individuals to ask a few questions and confirm their identity.

3. Conduct knowledge-based verification

Check the applicants’ credit reports to examine their payment history and ask questions to see if the answers they provide match the details in their credit reports. For example, you can ask questions about their previous addresses, or house or vehicle purchases, etc.


Every lending institution is at risk of loan fraud. So, it’s crucial to avoid these mistakes that could expose the company to risk. This article identified six critical ways to prevent loan fraud. Avoid making these mistakes to eliminate fraudulent loan practices in your organization.

Lydia Iseh

About the Author

Lydia Iseh is a writer with years of experience in writing SEO content that provides value to the reader.