What is loan stacking? Loan stacking is when a borrower has multiple loans outstanding at the same time. People use this term most often when borrowers apply for and receive approval on several short-term business loans in short succession, each having similar interest rates and repayment terms. Loan applications are often sent to multiple lenders simultaneously.
Loan stacking generally happens online and can be done by either individuals or businesses. It is not illegal to “stack” loans, but financial institutions lose billions of dollars every year to the process because many loan stackers commit application fraud – intentionally default on the loans they take out. Since telecom companies have ventured into offering financial services, they are now prone to this loan stacking fraud too.
Is it lawful to take more than one loan? One can most certainly take out a second personal loan but there are a few conditions that need to be met before it becomes reality. You still need to qualify for the second personal loan before a lender will disburse it into your bank account. All the same eligibility criteria still apply.
All types of loans can be stacked. For instance, credit card stacking is the strategy of applying for multiple smaller lines of credit cards in a specific order to access a larger unsecured line of credit than any one business credit card could offer. Loan stacking can easily occur for unsecured loans but secured loans may be exploited too. That is why seeking the advice of experts like Infotesters Limited is of paramount importance to mitigate such risks.
Loan stacking can help address a legitimate need for quick funding, or to perpetrate a scam that brings quick funding with no intent of complete repayment. Online lenders that focus on quick decisioning with limited verification of applicant identity or financial credentials for short-term loans face increased risk of loan stacking.
Why are stacked loans prone to fraud? False identity is the key to successful fraud. Stolen personal or account information and synthetic identities provide endless variations of false identities that appear to be legitimate without more detailed analysis or verification. Fraud rings have sophisticated means of creating false identities, using a different one for each application simultaneously submitted to unsuspecting lenders. When a stacked loan defaults, false identities make it difficult to track down the perpetrator.
Fraudsters also know that at times it can take up to 30 or more days for credit inquiries and new accounts to appear on some credit reports. This makes it difficult for lenders to recognize loan stacking and easy for a fraudster to obtain two or more loans with similar interest rates and payment terms. Even when the lender is able to track down the person whose stacked loan has defaulted, the legal proceedings for equitable recovery among multiple lenders can be time-consuming, with no guarantee of satisfactory closure.
Many lenders have explicit policies against illegal loan stacking. Not all stacked loans are fraudulent. When properly undertaken, they can be a financial lifeline for the borrower. After receiving funding for an initial loan, a second loan (with a higher, risk-adjusted interest rate) from a different lender aware of the initial loan can provide the funds to bridge the borrower’s financial gap. Disclosure is key to the legitimacy of the loan.
How do we mitigate illegal loan stacking when there is simultaneous loan submission? Fraud analytics, identity verification, and accurate assessment of an applicant’s financial strength are three capabilities that can help lenders reduce the risk of loan stacking. There’s no single solution to prevent the risk of financial loss resulting from loan stacking, but smart lenders know they need the right combination of technologies that give them a decided advantage over loan stacking borrowers who have no intent to repay.
Cautious lenders enhance their underwriting processes with lending technology to help determine whether applicants are legitimate and can pay off what they’ve borrowed. Liens on loans should be promptly recorded such that another lender can see that a particular loan has been booked.
Information from the meetings of selected heads of Fraud departments from the different financial institutions also comes in handy in this respect. Fraud analysis can identify subtle or overt irregularities in the information provided in the application by comparing identities, IP addresses, or known locations used by known fraud rings to a database of borrower data to alert lenders to applications highly suspect of fraudulent applications.
Internet and cloud-based identity analysis and verification services are used to flag applications that have a high probability of using false information to perpetrate fraud. These services identify synthetic identities and misrepresented addresses, income, or employment used to present a persona whose attributes belie the actual individual and financial position.
In addition to checking credit scores, alternative credit data sources (utility payment history, rental records, address history, etc.) can provide a more detailed and accurate assessment of an individual’s financial position to help lenders better assess risk and price deals accordingly. Discrepancies between alternative data and information provided on the loan application alert lenders to the need for in-depth vetting of the applicant’s credentials.
For information and services that will help your team and organization against fraudulent loan stacking, please do not hesitate to contact us by email: info@infotesters.com.
