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What is Loan Fraud? & How to Prevent It

What is loan fraud and how to prevent it

Financial frauds and scams are everywhere these days. While these things have always been around, the widespread use of digital and mobile banking has opened up new opportunities for scammers to take advantage of honest people.

Here at Leaders Credit Union, we’re dedicated to protecting our members by keeping them informed of common scams to avoid. Our members sometimes ask us, "what is loan fraud?" To help you with protecting your finances, here’s what you need to know about the various types of loan fraud and how to avoid them.

What is Loan Fraud?

Loan fraud is a type of financial crime that targets people who are applying for (or who might be persuaded to apply for) a loan or loan refinancing. Some types of loan fraud include mortgage loan fraud, loan application fraud, student debt relief scams, and scams for PPP loans.

If you’re a borrower, you should be aware of the various types of lending fraud and how to identify and avoid them. Loan fraud may be a first step on the road to being a victim of identity theft because, if you get tricked into applying for a fraudulent loan, you’ll provide the scammer with information they can use to steal your identity, including your Social Security Number.

What Are Different Types of Loan Frauds To Be Aware Of?

Here are some of the most common types of loan fraud with explanations of how each works and some tips on how to spot them.

Mortgage Fraud

Mortgage fraud is a type of loan fraud that targets both home buyers and homeowners. Here are some of the various forms it can take:

  • Bait and switch. Bait and switch is a type of predatory lending that lures prospective buyers with the promise of low-interest rates and advantageous mortgage terms. Once the buyers get to the closing, the lender reveals that the rates are no longer available and pressures the buyer to sign a loan agreement at a higher rate.
  • Foreclosure relief scams. This type of scam focuses on homeowners who may be at risk of foreclosure. Scammers make the homeowner believe they can avoid foreclosure by putting their home in the name of a third party, who then sells the house and robs the owners of their equity and profits.
  • Mortgage refinancing scams. Refinancing scams typically start with an unsolicited phone call or email about refinancing options. Most often, the scammer wants the homeowner to pay them a fee upfront. No legitimate lender will do this.
  • Mortgage payment scams. Sometimes, an unscrupulous lender will try to talk a home buyer into a loan that would necessitate a payment of more than 28% of the borrower’s gross monthly income. Having such a high payment puts the buyer at a higher risk of default and foreclosure.
  • Appraisal fraud. If an appraiser offers to deflate or inflate the value of your home to help you qualify for a loan or get more money, it’s a sign that you’ve been targeted in a suspected mortgage fraud.

These are all types of mortgage loan fraud from the lender’s side, and some may involve predatory lending. The best way to avoid these scams is to take a skeptical approach toward borrowing. If someone offers an interest rate that sounds too good to be true, it probably is. A lender should never surprise you at a closing with a higher rate, and as painful as it might be to walk away, that’s the best thing to do.

Personal Loan Scams

There are a few other loan and lending scams you should know about that don’t involve mortgages.

Auto Loan Refinancing Scams

Auto loan refinancing scams have a lot in common with mortgage refinancing scams. If you receive an unsolicited phone call, email, or text with promises about refinancing your auto loan with a lower interest rate in return for a fee, do not click on it. Instead, report it as spam and report it to the Federal Trade Commission, since this practice is illegal.

No trustworthy lender will reach out to you in this manner. The fee these scammers charge is typically several hundred dollars and, of course, the scam is that your loan won’t be refinanced and you’ll never see the money you paid them again.

Phishing Scams

We’ve already alluded to phishing scams, which involve sending an unsuspecting person an email that’s spoofed to look like it comes from a legitimate lender. These emails typically include a link that leads to a spoofed website, where you’ll be prompted to enter personal information.

The best way to avoid a phishing scam is not to click any unknown link. If you’re on a computer, you can hover your cursor over the link to see the full URL. You can double check the URL by Googling the name of the company and looking at their real website.

Debt Relief Scams

People who are carrying a significant amount of debt, whether it’s credit card debt or student loan debt, may be susceptible to debt relief scams, where the scammer promises to reduce and/or settle the person’s debts in return for an up-front fee.

As you might expect, the scam’s purpose is to collect a hefty fee and vanish, having done nothing to help the target get out of debt.

fraud prevention kit

Are There Any Red Flags or Warning Signs to Look Out For When Applying for a Loan?

Now that you know some of the most common types of loan fraud, here are our best pointers on how to identify loan fraud and avoid being scammed:

  • Unsolicited offers. Legitimate lenders may send out a pre-qualified or pre-approved offer. They also may advertise or promote their loans on social media. It could be a scam if someone calls you to offer you a loan over the phone. Under FTC rules, it’s illegal for a lender to ask you to pay upfront for a loan. Always be cautious when receiving unsolicited loan offers that you are not expecting. 
  • Unreasonable promises. One of the biggest red flags is when a lender or a related party makes promises that aren’t reasonable. For example, they might say you can keep your home by selling it to them and then renting it with the option of buying it back at a later date. Too many unsolicited promises should be your signal to take a closer look at the lender and what they’re offering.
  • Too-low interest rates. Interest rates fluctuate and may be influenced by factors such as your credit history and income. That said, an interest rate that’s far below average is something that should be viewed with skepticism. The lowest interest rates from legitimate lenders go to people with excellent credit, so if that’s not you, you should be suspicious.
  • No credit check. There are some short-term loans that may not require a credit check, but these are usually payday loans that are disadvantageous in a variety of ways. In most cases, a credit check is a requirement for lending.
  • Guaranteed approval. No legitimate lender can promise you an approval before your application has been completed and you’ve gone through the underwriting process. They might send out a pre-approved or pre-qualified offer, but that is not a guarantee. It’s not responsible to guarantee a loan and it may be a sign that you’re being targeted for loan fraud.
  • Encouraging lies or omissions. What happens if you’re sitting down with a lender and they encourage you to leave part of your application blank or inflate your income? Both things are an indication of loan fraud and the best thing to do is to walk away. You shouldn’t sign anything that’s a misrepresentation of your finances.
  • Discrepancies in paperwork. We told you about bait and switch loan scams already. If a lender presents you with a loan document that doesn’t match their verbal promises, or if they disregard the Loan Disclosure, they may be scamming you and you should not sign anything.
  • Refusal to answer questions. Responsible lenders are eager to answer questions that help borrowers understand their obligations under a loan agreement. If you’re asking questions and the lender is dodging them, you should be skeptical of their intentions and find a better lender.
  • Pressure tactics.  If a lender is pressuring you to make a quick decision about a loan, it’s usually a sign that they’re either a scammer or involved in predatory lending practices. We’re not talking about asking you to schedule a closing within a reasonable time frame. If someone’s using strong-arm tactics to get you to accept their offer, though, that’s a red flag.
  • An unsecured website. Google now penalizes websites that don’t have an installed security certificate, which you can identify by looking for a symbol that looks like a padlock in the search bar next to the lender’s URL. If there’s no lock, the site is not secure and it’s not safe to enter your personal information.

If you’re unsure about an offer, trust your gut instinct and avoid it. You’ll always be better off walking away than you will if you ignore your instincts and get taken in by a scam. If you have been a victim of loan fraud, make sure to report fraud to your lending institution, the local police, and other authorities.

Get Advantageous Loan Rates with Leaders Credit Union

Loan scammers may be out there, but the information we’ve provided here will help you learn how to spot scams and frauds and avoid them. Remember, the best approach to any unsolicited or “too good to be true” offer is skepticism. A little research and common sense will help you avoid being taken in by loan fraud.

Leaders Credit Union is a lender that cares about your financial security. That’s why we’ve created the Ultimate Fraud Prevention Help Kit. Download our guide so you can stay one step ahead of scammers and safeguard your finances. 

Report Scams to the FTC

If you were scammed or think you saw a scam, report it to the Federal Trade Commission.