Loan Stacking - Retail & Online Banking

There are a wide range of credit and financial tools that can help consumers and even businesses reach their financial goals. Unfortunately, almost every one of these tools can be exploited fraudulently, at a cost of several billions of dollars per year to the public. One such fraudulent practice is called loan stacking.

Between 2010 and 2014 marketplace lending grew over 700 percent, with online lenders issuing $15.91 billion in U.S. loans in 2014. Retail banking loan stacking is sometimes committed by individuals who are overextended somewhere else, or it can be committed fraudulently in someone else's name. Here is an overview of retail banking loan stacking: what it is, how it is committed, who it hurts and how to prevent it.

What is Loan Stacking?

Loan stacking is the act of applying for and taking out several different loans all at the same time. Loan stacking is, in and of itself a fraudulent practice because the more loans an individual takes out, the less likely it becomes that they will be able to pay them all back. Loan stacking generally occurs for a few reasons.

One reason is that something happens in an individual's life that leads them to believe they won't need to pay the loans back. For instance, if an individual just discovered they only had a few months to live, they may take out several loans because they know they won't be around long enough to have to pay them back. Sometimes an individual may know they are reaching financial rock bottom and so they simply throw caution to the wind and take out several loans as a last hoorah before they reach financial ruin.

In other cases, however, loan stacking occurs as a result of identity theft. If a person that has good credit gets their identity stolen, the thief may take out several loans and be long gone before the victim discovers the theft. Since many loans can be applied for online and the funds transferred electronically, an identity thief can potentially make off with tens of thousands of dollars in fraudulent loan monies.

Why is Loan Stacking Considered Fraud?

Banks and other financial institutions use the money deposited with them to offer loans to individuals and businesses. This means banks and other financial institutions have a fiduciary responsibility to both their board members as well as all of the depositors entrusting their finances to the bank. Banks use credit scores to determine the risk of certain loans. Credit scores are based on a compilation of different factors that help them assess the risk of lending to a certain individual.

They may issue a higher risk loan, but will also charge a much higher interest rate. Since the interest is the first thing that gets taken out of a loan payment, a higher interest rate means they stand a better chance of recouping at least their initial investment even if the individual defaults somewhere down the line. Individuals with a high credit score indicate a lower risk to lenders. Therefore, they qualify for lower interest loans because the bank is more confident they will recoup their initial investment with a small amount of interest.

Credit scores are based on a number of different factors, but one of those factors is how many times an individual has applied for credit cards or loans recently.

When an individual applies for a loan, it often takes time for the loan to show up on a credit report. Before loans are issued, however, lenders will request a copy of the borrower's credit report. This request will show up on the credit report almost immediately, even though the loan or line of credit may not. Since it takes time for a new loan to show up on a credit report, lenders will look at how many times a credit report has been requested recently. If there are a number of requests, lenders become more hesitant to issue credit because they don't know how many other lenders may have already issued credit. The more loans or credit an individual applies for in a short period of time, the more it lowers their credit score.

The reason lenders are hesitant to loan money to an individual that has applied for several loans is that each loan extends the individual further and further financially, which makes them a higher risk with each loan. People who stack loans are not unaware that they are likely not in a position to pay that many loans back, so more often than not, just taking the loans out in the first place is an attempt to commit fraud.

In some cases, however, the individual is not acting fraudulently. There are always going to be some instances where consumers may have just led a very frugal life and reach a point where they decide to have some fun. They may take out several loans or apply for several lines of credit that they can easily afford, just because they want to. The difficulty then becomes separating out responsible borrowers that just want to live a little and genuine fraudsters.

Loan Stacking Fraud Detection and Prevention

While there is little that can be done about borrowers that take out loans in their own name and use their own credit, there is much that can be done about loans or lines of credit that are applied for fraudulently. Many banks and lending institutions are instituting multi-factor authentication protocols to verify a borrower's identity even online. Multi-factor identification usually includes at least two of three types of authentication:

  • Something the user has (like a cell phone)
  • Something the user knows (security questions)
  • Something about the user (biometric identification)

So, for instance, when a borrower applies for a loan, they may have to authenticate their identity by entering a code they receive on their cell phone or at a previously registered email address. Since lenders have access to an individual's credit report, they may be asked questions based on information contained in the credit report that only they would know. This might include things like the name of another lender they have a relationship with or the name of a street they lived on previously.

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