Private lending is not as burdened with the abundance of federal regulations that apply to bank lenders. However, that being said, there are still critical regulatory requirements with which lenders must comply, namely Anti-Money Laundering (AML) verification. Just like bank lenders, private lenders are also susceptible to loan application fraud, of particular concern is identity theft.
While banks must follow specific AML procedures to avoid fraud, private lenders must rely on internal and external security mechanisms, along with onboarding examination strategies to spot and prevent loan application fraud.
AML regulatory compliance requires financial services companies to perform specific tasks in identifying and verifying the business or individual they are working with. These tasks are generally known as the Know Your Customer (KYC) process. Besides identifying fraud, the KYC process allows lenders to investigate and determine the financial behavior of prospective customers.
Using KYC procedures correctly, lenders can better identify fraud, particularly identity theft, and protect their business and investors from serious loss.
Here are some common KYC security tests that can help better validate a loan applicant’s identity:
- Identity Document Verification Confirming a person’s identity is no longer as easy as looking over a driver’s license, passport, or other ID cards. Fraudsters have gotten better at producing fake identifying documents. Verification can now be done with software, using either a PC, tablet, or smartphone camera. The software scans and verifies the identification card’s several security features, such as barcode and watermarks. Some online lenders now require the applicant to scan their ID and upload it to their file directly.
- Identity Data Validation This is the process of comparing the application information against the identity documents. It can be accomplished by verifying information such as name, address, date of birth, Social Security Number against public and private databases. The information gathered should be compared against the submitted documents, and any discrepancies addressed personally with the applicant.
- Verify Accounts Verifying the bank accounts the borrower presented during the onboarding process can be accomplished by having the borrower give you the name and number for the bank officer at their home branch. Some lenders also verify the account status by having the applicant make a micro-deposit from the account.
- Out-of-Wallet Questions Out-of-wallet questions are personal questions that can only be answered by the individual who applied. This information is presented in multiple choice format and may include questions such as mother’s maiden name, a previous address associated with their credit report, or the color of a car they previously purchased.
- Out-of-Band Phone Verification This type of verification allows you to check whether the phone number provided is assigned to the phone in possession of the applicant. In some areas, you can also check whether the phone number and subscriber data match.
- Social Media Review An examination of the applicant’s social media accounts may provide evidence of a false identity or raise red flags as to the truthfulness of the applicant.
- Preventing All Fraud Loan application fraud, especially where identity theft is involved, is of particular concern to online lenders. While you may employ robust identity verification strategies, occurrences of fraud do happen. It’s about applying policies with a combination of KYC and investigative techniques during the application process. This combined solution should provide you with diverse protection against both identity theft and application fraud. The more varied your fraud detection strategy, the better your chances of protecting your company and your investors against loan application fraud.
Written by Kevin S. Kim, ESQ from Geraci Law Firm
For questions about this article, email Kevin Kim: K.Kim@geracillp.com
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