As more individuals and businesses turn to online lenders for instant approval and quick turnaround/funding, the issue of loan stacking continues to make headlines. How can a consumer receive multiple loans of the same type on the same day … with no intention of paying and without raising flags? When it comes to loan stacking, timing matters. The key is the speed of the transactions, which sometimes occur simultaneously or within a few minutes of each other, coupled with the length of the reporting gap to credit bureaus.
Loan stacking is an ongoing concern with serious consequences for marketplace lenders. Like all fraud, it greatly increases risks for defaults and erodes profits. The issue has lenders scrambling to shield themselves while continuing to satisfy customer expectations.
Loan Stacking: What Is It?
Though definitions can vary slightly, most financial experts agree that loan stacking occurs when a consumer secures multiple loans of the same type from different financial institutions by exploiting weaknesses and time lags in reporting to credit bureaus. This intentionally deceitful behavior constitutes fraud, as opposed to a consumer simply shopping for multiple options.
Not Your Grandfather’s Loan Stacking
Sometimes called “credit stacking,” the practice dates back to the 1800s. But it became a much bigger issue in the early 2000s, when online small-dollar lenders began dealing with its modern version. The fraud proliferated as automation decreased the time necessary to secure a loan and receive proceeds. In subsequent years, loan stacking has been compounded by lead generators propagating consumer applications to multiple lenders electronically.
Lenders have tried to solve the problem in multiple ways. Some have simply implemented more aggressive underwriting, seeking consumers who appear responsible with their use of credit. The challenge is that lenders are working from a false assumption that consumers with higher credit scores won’t stack multiple loans.
In evaluating available credit reports, lenders often search for dates and frequency of hard post inquiries. However, this approach has limited success because the lead generation environment causes multiple inquiries that may not be an accurate reflection. Even “real-time” reporting, which reduces the window of invisibility from days to hours, is an incomplete remedy because it allows a brief blind spot to exist.
Finally, a Solution That Closes the Reporting Gap
Clarity Services offers Temporary Account Record, an innovative solution that further closes the gap from hours to minutes, greatly reducing risk for underwriting unsecured loans to consumers throughout the country.
It’s similar to the process that occurs with credit cards, where the final transaction on a purchase isn’t posted for several days. At the time the purchase is approved, a temporary hold is placed on the credit card for the amount of money that covers the transaction – thereby reducing the available credit balance. A Temporary Account Record, which is typically triggered by a consumer’s e-signature, works the same way.
For example, if a loan is approved at 10 a.m. the lender submits a temporary tradeline, which is available for other lenders to view in the Clarity system until it is replaced with a permanent tradeline record.
Lenders can see other tradelines, which exclude lender names, and make a determination of whether the consumer can handle the stacked loan. Both lenders win; the lender who submits the temporary tradeline reduces the likelihood that someone else will stack a loan and overextend a consumer after they’ve made a loan. The other lender has visibility into a possible stacking that can indicate a consumer may have difficulty with repayment.
Benefits of Temporary Account Record:
- Closes the reporting “window of invisibility”
- Makes it much more difficult to stack loans
- Is necessary if proposed CFPB small-dollar rules become law
- Lowers default rates
So, what type of information appears in a Temporary Account Record? Structurally, it is identical to a traditional account record, including data such as loan amounts and payment terms. What’s different is a flag that notes it’s a temporary record and not a funded tradeline record.
Add Clarity and Reduce Risk to Subprime Lending
The value of Clarity’s subprime consumer credit data cannot be overstated, particularly when you consider that 51 percent of U.S. households fall into the nonprime category, as well as consumers with no credit file or thin files that don’t generate a traditional credit score. In the U.S. today, there are roughly 53 million people without a reliable FICO® score, either because their credit history is insufficient or nonexistent.1 Clarity maintains a dedicated, full-time Fraud Prevention Team to provide lenders with maximum protection against loan stacking and other threats.
Safeguard your profits! Call Clarity’s fraud experts today at 727-400-6754 to schedule a brief consultation.
1 FICO. (2015). Insights White Paper No. 90, Can Alternative Data Expand Credit Access. Retrieved from http://www.fico.com/en/latest-thinking?asset_type=106&solutions=8.
Tim Ranney is president and CEO of Clarity Services, Inc., a real-time credit bureau providing credit-related data on subprime consumers. Prior to founding Clarity in 2008, Ranney spent 20 years as a leader in internet security and risk management, serving as COO of an industry leader and senior executive for both Network Solutions and VeriSign.