By Ray Birch
PHILADELPHIA—Data show credit unions encounter consumer loan fraud at a much greater rate than other lenders, one expert is pointing out.
Credit unions had 15,432 consumer loans listed in suspicious activity reports (SAR) in 2023, a 418.9% increase over the last decade, according to the Financial Crimes Enforcement Network. While consumer loan SARs rose across all lenders over the decade, the overall growth rate was much lower compared with credit unions, according to FinCEN.
SARs rose 12.2% over the past decade across all lender types. The year-over-year figures tell a similar story. Credit union SARs rose 12.7% YoY, while SARs fell 3% YoY for all other lenders, according to FinCEN.
Tim Yalich, head of motor vehicle strategy for Wolters Kluwer, spoke with CUToday.info about the data, stating what may be leading to the growing credit union issue is not automating the entire lending process and using AI to spot fraud, as too many CUs simply adhere to old rules-based lending.
Yalich emphasized that crooks are getting far too sophisticated to hang onto processes from the past, and that doing so makes CUs a bigger fraud target.
Fundamental Issue
“The fundamental issue is lack of technology. The fraudsters are super advanced and are using technology to find every little niche, corner and crack,” said Yalich. “Whenever you are low tech, you're vulnerable in so many ways. I think that's really the fundamental element of why we are seeing this data with credit unions.”
Yalich called the data “alarming.”
“Some of the information and stats are chilling…just to see how many attempts of fraud there have been, how advanced the attacks are, and to the levels the crooks are going,” he said. “They're looking like actual business entities when they apply for loans, for example. It's just crazy how far it's gone.”
Yalich said his experience with Wolters Kluwer clients support the data. He said his organization divides customers by size—large banks, regional banks, community banks and credit unions.
“Credit unions seem to be the place where the least amount of adoption occurs among all of our lending technology products and solutions,” he said.
Tim Yalich
Yalich addressed the kinds of tech solutions today, which Wolters Kluwer offers, that help FIs protect and encrypt data and detect fraud in the lending process. Tools that can spot phony paycheck stubs, incorrect income statements and more.
“There's so much you can do with technology, and that's really where I think credit unions lag behind, having too many manual workflows,” he said. “They're comparing and still doing manual reviews of information to make sure everything's factual, accurate and correct.”
Yalich said credit unions don’t have to make rapid shifts away from any manual lending processes, but should do so gradually.
Nibble Away
“You can start nibbling away at where you want to apply technology,” he said. “For example, we had a lender that was very paper based and they were starting to experience higher application volume and wanted to invest in more technology. But they had limited resources. They wanted to know where they could get the biggest bang for the buck. They ended up automating on the back end. They took all that paper they were generating on the front side of the business and all the different sources that were giving them loans and fed them into an automated engine that would read the information and feed into their loan origination system. They automated a lot of the manual workflows and processes.”
Yalich said that accomplished many things for the lender.
“It sped up their process tremendously, which avoided all kinds of data entry errors, because humans don’t type perfectly every time,” he said. “But more important, the automated engine could read the information to make sure it was accurate and make sure it was not fraudulent, and then feed the documents straight to their funding workstream. Where we see the most amount of advancement in our industry is in back-end automation.”
Yalich reiterated there is a great deal of fraudulent information being passed on to lenders that's hard to detect.
“For example, a fraudulent business that's applying for credit. It can be hard to spot. However, technology can go deep into information and find things that don't look quite right and bring those to the surface,” he said. “Then, a human can verify it all.”
Recognizing how crooks are getting extremely sophisticated with their efforts, such as using deepfake technology, Yalich agreed criminals are just getting better at fooling people.
“Credit unions are the stepchild now, using less technology in the lending process. That makes them more vulnerable, and the fraudsters know this, and they often go for the easiest targets,” Yalich said. “You have to get away from the old rules based anti-fraud systems. That's what I would call the antiquated model. Rules that tell your systems to look for this and look for that. You really have to implement AI and machine learning so you can find all the new, sophisticated fraud.”