Income verification has historically been a long and tedious process. Lenders relied on applicants to submit huge volumes of paperwork. Then lenders had to sift through and determine the veracity of each document. Then, data was manually aggregated and churned through a formula to determine whether or not to grant a loan.
Modern income verification methods make this process much more streamlined. In many cases, they can make a loan determination in just a few clicks. But there are more reasons to verify income besides the fact that it’s more convenient than it used to be. Read on to learn more about how income verification can safeguard against financial fraud.
A robust income verification platform can help lower the risk of identity theft in two ways. First, it confirms with certainty that a borrower or applicant (for a loan, job, apartment, etc.) is who they say they are. This directly prevents bad actors from illegally obtaining access to resources that aren’t rightfully theirs.
For example, people who work with or near the elderly may have access to their identifying documents. They may use these documents to try and qualify for an apartment or take out a mortgage or loan in the elderly person’s name. Stringent income verification platforms eliminate much of this risk, by using advanced technology to diligently confirm identity data.
Second, income verification platforms can help prevent the kinds of mass data breaches that result in large-scale identity theft. For example, cyber criminals sometimes try to steal huge volumes of data from companies. This can include private information like social security numbers or even bank account information. These criminals then use that information to commit all sorts of financial fraud.
Some companies or lenders use older, less secure methods of financial data transmission. This makes it easier for cyber criminals to get that information. Strong income verification software uses encryption and other security tools to make it harder for anyone to access this private data.
Some legacy loan and mortgage application procedures used to rely on something called “stated income.” With these loans, the applicant didn’t have to provide proof of the amount or source of income they declared. Borrowers could apply for loans they had no means or intention of paying off. Some were fraudsters, while others simply didn’t understand well enough how these loans worked.
For these reasons, stated income loans were one of the main causes of the housing bubble of 2008. Lenders kept making it easier and easier for would-be homeowners to take out a mortgage they couldn’t afford. Many people got stuck, unable to sell or refinance their homes. And a great many defaulted, sending the market into crisis.
Income verification eliminates the risk of this particular kind of lending bubble, because it relies on hard data. Modern verification tools and procedures make it much, much harder for borrowers to claim income they don’t have. In conjunction with strict lending laws, like the Dodd-Frank act, income verification mitigates the risk of borrowers defaulting on mortgages.
On the flipside, income verification protects uninformed borrowers from predatory lending practices. Some borrowers might not realize how underqualified they are for a loan or be too optimistic about their financial resources. They might be perfectly honest about their intentions, but need a robust system in place to keep them safe from malicious actors.
Loan stacking refers to the practice where an applicant applies for multiple loans to get more funds. In some cases, a borrower doesn’t disclose to other lenders that they are applying for multiple loans. Like stated income, loan stacking is a practice that can be problematic even in the best-intentioned hands.
In the best case scenario, the borrower is an innocent person just trying to get more cash for their business. In other cases, criminals use loan stacking to launder funds or accumulate lots of money they’ll never pay back. Because loan stacking applicants often don’t have the resources to pay off one loan, debts can really add up.
Loan stacking thus increases the odds that a borrower will default on a loan. These loan recipients often use funds from one loan to pay off another. Even when loan stacking is legal, it can still create big problems.
But a good third-party income verification platform can stop potential loan stacking in various ways. For one, identity verification procedures make it harder for individuals to use false identities to apply for funds. And tracking the source of income may prevent them from using loaned funds to pay off other loans.
Loan stacking isn’t the only way criminals take advantage of weak loan application systems. There are also other ways they can take advantage of lenders to commit illegal activity. Some fraudsters use unverified lending systems to get access to more and more funds. Others use it as a cover to hide the funds they may already have.
For example, in a practice called “loan flipping,” a criminal will apply for a legitimate loan they intend to repay. But the money they use to pay back the loan will have been obtained through illegal means. The process is repeated, with the fraudster borrowing and repaying multiple lenders. Eventually, it becomes nearly impossible for law enforcement to track where the funds came from.
In another fraudulent practice, a criminal creates something called a “shell company.” This is either a fake company, or a pre-existing real (but corrupt) company used as a front to apply for funds. The company may or may not conduct legitimate, legal business in addition to acting as a front. Either way, it’s used as a cover-up for funds that have been obtained through illegal activity.
Thorough income verification prevents both of these types of fraud as well as many others. By tracing multiple income and identity sources, it accurately confirms identities, past and current employment, and sources of funds. Modern income verification imposes many more hurdles on would-be fraudsters, discouraging these types of transactions.
Income verification isn’t just an excellent means of protecting yourself and your clients or applicants against fraud. It’s also a great way to establish your company as a trustworthy and secure place to do business. Knowing your business does its due diligence can be a huge selling point with potential clients. Carefully verifying income shows your prospects you’re serious about what you do.