Are You Alert to Loan Fraud Clues? John S. Burnett, Associate Editor
A recent Small Business Administration alert to lenders warned of fraudulent loan schemes. The agency had learned from one of its participating banks that it had detected a large number of fraudulent loan applications forwarded to them by a loan-packager.
All of the purported applications were for SBAExpress loans, which are typically "low documentation" loans that can be closed on a lender's own forms, with incentives from the agency to make smaller (under $50,000) loans to small businesses. We can only speculate on the reasons for the loan-packer's fraud -- perhaps there was a belief that an SBA guaranty and the smaller loan amounts would lull the lender into a false sense of security.
The loan package exhibited some unusual characteristics that proved to be the weak spot in the scammer's plans. How many of these clues would your loan underwriters detect? Ironically, the fact that these applications arrived as a group may have helped to wave these red flags --
Multiple applications in the same handwriting
If your institution receives a package of applications to be underwritten, would your staff be aware if many of the applications were in the same handwriting? There might be instances where the loan-packager assists an applicant by filling out an application, but what are the odds there would be several of these in the same package?
Duplicate business addresses
How many small businesses can operate at the same business address? If you use an automated underwriting system, can it alert you when it detects an application address it's "seen" before? If the system can't detect the duplication, can the individual keying data from the applications catch it? If you rely on people to complete your underwriting, an alert employee should catch a familiar address, and start waving the red flag. At the very least, a common address on several applications might reflect the use of a commercial mailbox facility, almost always a high risk item in a business loan application.
Business profile
Imagine reviewing a loan application that claims the operation has existed for 15 years, but "tripping over" the fact that its organizational documents were filed only three months ago. Consider your reaction if you completed an online search of corporate filings and couldn't find a filing for the corporation listed on another application, on which the applicant claims to have been organized three years ago. What documents could you require to back up the now questionable claims of these businesses? Do you know whom to contact at the state filing office to verify the authenticity of any documents you are provided?
The all-important site visit
The pressure to "fast track" loan applications comes from two directions: the applicant and management. The reason for the former is obvious. For the latter, there is the ever-present push to "book 'em and move on." It might be understandable -- particularly for smaller credits -- that a lender would be tempted to skip a site visit. Yet many cases of commercial loan application fraud would be eliminated by something as uncomplicated as a site visit. What better way to confirm that a business operates at the address on its application? A site visit can confirm the size of the business's payroll, help provide a sense of inventory and sales activity, give an idea of the condition of the business's operations, and generally provide reassurance of an applicant's legitimacy.
There's nothing like homework
Competition in the business loan market drives all lenders toward faster, more efficient, loan underwriting and application turnaround. The basics of lending, however, continue to demand verification of a business's statements on an application. The internet and web-accessible official filing data have proven invaluable in the quest to document a business's existence and status. But to control the risk of loan fraud, it often takes old-fashioned techniques and detective work. The lender that fails to do its homework on commercial applications will pay in form of increased fraud losses.
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