What is Loan Fraud and Red Flags to Spot Fraudulent Borrowers

September 2, 2024

Loan fraud is a deceptive practice where individuals or businesses misrepresent or omit information to obtain a loan they wouldn’t qualify for otherwise. It can involve various tactics, from falsifying income to identity theft.

According to the Financial Institutions Training Centre (FITC) report, fraudulent loans accounted for a 38 percent loss, with a value of N468.42 million in Q1 2024.

This data underscores the escalating challenge of fraud in Nigeria’s banking sector. While fraudulent loans continue to be a concern, the growing involvement of insiders raises questions about internal controls and the need for enhanced integrity checks.

Red Flags to Spot Fraudulent Borrowers

Identifying potential loan fraudsters requires a keen eye for discrepancies and anomalies. Here are some common red flags:

Application Red Flag

These are red flags you should spot during a loan application stage.

During the application process, some fraudsters intentionally put gaps in employment history, discrepancies in income, or missing documentation. They may also claim unusually high income without supporting documents. Some go to the length of listing assets that seem out of place for the borrower’s income level.

Another way to spot red flags is the unusual speed in completing a loan application process.

Behavioural Red Flags

While this is self-explanatory, Loan companies should be careful of fraud applicants if they observe a reluctance to submit required information and difficulties answering queries regarding financial history or work. It is pertinent to notice these behavioural patterns when a customer applies for a loan.

Also, some customers don’t have adequate knowledge of the loan process or company profile, and they skip important required information because they think they can.

Document Red Flags:

Some loan applicants submit altered or counterfeit pay stubs, tax returns, or bank statements. Lenders should be able to notice inconsistent information between different documents or missing required information. Unprofessional or poorly typed or handwritten documents with errors are also red flags because some may be intentional by the applicant.

Here are some red flags to spot fraudulent borrowers and preventive measures against falling victim to these devices. Below are some other preventive measures: