First Party Fraud

What is First Party Fraud

First party fraud, also known as credit muling, typically occurs when an individual obtains a loan with no intention of repayment. This can also occur by defaulting a depository account without repayment.

Loans are often obtained by the applicant misrepresenting their own information in order to get approval. This differs from third-party fraud because they are not impersonating someone else to get approved for the loan.

In this type of fraud, the business or institution is the victim and the customer is the perpetrator.

First party fraud is becoming one of the most common types of fraud due to advancing technology. Financial institutions are the hardest hit by these schemes. According to Javelin Strategy & Research, lenders have reported $340 million in annual losses.

Types of First Party Fraud

This type of fraud can be represented in a variety of ways. Experian has defined 5 types of first-party fraud.

  1. Synthetic Identity – The combining of true and fictitious pieces of one’s identity in order to open an account with the intent to default payment. This type of theft can sometimes include a stolen social security number.
  2. Bust Out – When a fraudster strategically builds positive credit in order to open several accounts with no intent to pay. Sometimes the fraudster is rebuilding credit to replace or restore their poor credit history.
  3. Default Payment – The intentional default on one or many credit lines. Oftentimes, a fraudster will apply for several accounts at the same time across different institutions.
  4. Straight-Roller – A new account opened for immediate use followed by immediate default.
  5. Never Pay - A new loan account opened that becomes delinquent within the first few months.

First Party Fraud Detection

Oftentimes, businesses cannot detect first-party fraud until it’s too late and the account has become a charge off or credit loss to the institution. This is because screening for the “mules” of first party fraud is not as easy as one would hope.

Unlike third party fraudsters, consumers who plan to steal from a lender or business may not show the same red flags. They look like normal customers. Their identities may be true but their intent is criminal.

These criminals are very efficient too. They don’t wait around to act. Most first party fraud thefts happen shortly after the accounts are established, however, the losses may not become evident to the institution for a few weeks.

First Party Fraud Protection

Have a post-application process in place. Train staff to follow the process. Misrepresentation can be prevented by following up on verification of fact processes, such as calling the phone number provided and verifying the address.

Share information across departments. Sometimes the lines of business within the institutions don’t communicate as often as they should. Details can be missed that can expose the potential fraudster before the loss occurs.

Simply checking a credit score is not sufficient to detect this first party fraud on its own. Institutions may need to expand their risk management techniques. The use of alternative credit data analytics can help by taking a look at the consumer's behavior. Adding application behavior data can give institutions a more precise indication of risk at the time of application.

In our world of advanced technology, fraudsters will also look to be one step ahead. However, technology can also provide us tools to compile data and form analytics that proves helpful in the prevention of fraud losses.

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