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Synthetic Fraud Myths: Are All Identities Created to Charge-off?

Chad Gluff
Blog Post09/25/2018
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Fraudsters are evolving and adapting to new identity verification and fraud prevention methods. Often, lenders think all synthetic fraudsters follow the same pattern: Create an identity, gain easy access to credit, ramp up loan balances and then bust out.

In my last blog, we dispelled the myth that synthetic fraudsters follow the same pattern to build their identities. What about their behavior after they are approved for loans? Do all synthetic fraudsters create identities intending to charge-off – also known as bust out – on their loans?

Between 2012 and 2014, fraudsters built synthetic identities with longer times to charge-off, reaching 10% charge-off at 13 months. By 2016, 10% of the identities tied to synthetic fraud charged off in less than 8 months.

But the average charge-off rate across all credit products is below 30% for likely synthetic identities. More than 70% of synthetic identities potentially remained in lenders’ portfolios, carrying risk of default and, more importantly, reputational risk.

Misconceptions about synthetic fraud

It’s a common misconception that malicious fraudsters and professional criminals create all synthetic identities. There can be several reasons for building synthetic identities, including:

  • Disreputable credit repair business offering to help individuals with derogatory or limited credit histories, often recommending inappropriate techniques that have the effect of creating synthetic identities
  • Individuals who create a false identity to hide a history of bankruptcy, tax liens, criminal records or other derogatory information
  • Consumers who want to get access to the credit and financial system but lack a genuine Social Security Number, so they patch together pieces of PII from real identities to build a fictitious identity and apply for loans

In one recent case analyzed by TransUnion, an individual was discovered using multiple Social Security Numbers to manufacture good credit histories, hiding a past of bankruptcy and liens. A lender approved the consumer’s synthetic identity for a credit card, which he paid for several months before charging off over $2,000.

However, in another case, evidence suggests that a self-described credit repair firm helped an individual use a synthetic identity to hide a history of mortgage delinquency. Using this new credit identity, the consumer was able to obtain an auto loan, which they continue to pay.

Lenders should address all types of synthetic fraud

Lenders are more likely to address the first case due to early or later stage defaults, which cost their organization money. But many individuals in this second case will continue to pay their loans over time after they receive credit using a synthetic identity. Even if the consumer in the second case potentially intended to repay the loan, underwriters extended credit based on a false credit history and what amounts to a manufactured credit score. If a consumer appears to have a positive credit history, lenders may not expect their sudden delinquency or charge-off. They won’t be prepared to do proper account management and may incur larger losses. 

In drastic cases, synthetic identities were used for money laundering and other crimes, taking lenders for losses of hundreds of thousands or millions. Just as importantly, these situations present significant reputational risk for financial institutions involved in transactions with these customers they do not really know. Synthetic identities need to be identified before accessing credit, regardless of ultimate lending performance.

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