Types of Fraud in the Small-Dollar Credit Industry

TYPES OF FRAUD SMALL-DOLLAR CREDIT INDUSTRY IN THE These agencies claim they are not trying to Since August 9, 2013, there has been a significant amount of activity by the Federal Deposit Insurance Corporation (FDIC) and the Department of Justice (DOJ) in the online small-dollar credit industry. deny accesS to ACH processing or bank services to online lenders, but instead are simply Working to eliminate financial fraud in the system. FDIC DOJ Both the FDIC and DOJ are attempting to make the payments processing networks and banks unavailable to the ONLINE LEND NG INDOSTRY online lending industry. Jan.- June 2013 =18 million report requests The Clarity Credit Bureau Database has information related to the subject of fraud in the online small-dollar credit space. E1million report requests Source: Clarity Services Inc. survey 2012/2013 There are many types of fraud, and it's not clear which type the regulators are concerned about. Identity fraud or Identity Theft. • In traffic screened by Clarity, 8.57% of the applications exhibited issues that could classify them as stolen, synthetic, or fraud-ring identities. • Of that population, 1,800 of the applicants managed to clear the lenders' automated underwriting. • Those 1,800 applications in a population of 18 million translates to a fraud rate of 1/100th of 1%. The online small-dollar credit industry sees a higher percentage of potentially fraudulent application attempts than prime credit cards and banks, but does a better job of screening and avoiding these fraudulent applications. 8.57% OF APPLICANTS COULD BE CLASSIFIED AS FRAUD 1/100TH 1,800 (1/10OTH OF 1%) CLEARED LENDERS' UNDERWRITING AND COMMITTED FRAUD Source: Clarity Services Inc. survey 2012/2013 OF 1% The possibility that a lender would fraudulently debit consumers' accounts for loan payments. This company was not a lender and did not represent In early September 2013, a story in the media reported a Florida-based company that was supposedly offering loans and fraudulently debiting the consumers' itself as a lender. It claimed to be offering a service that could help the consumer bank accounts. secure a loan for a fee. cases of fraudulent debit transactions by legitimate lenders This is not a case of small-dollar lending fraud. Source: Clarity Services Inc survey 2012/2013 3. Intent to not pay is by far the most common type of fraud in the online space. A consumer uses their own identity to apply for credit and receives the proceeds from the funding transaction. The consumer planned from the beginning to never repay the loan. In this scenario, the lender is the victim. Regulators attempting to eliminate financial fraud in the system may be concerned about the number of consumers who commit this type of fraud. HOWEVER, Clarity's data shows that in a sample of about two million online lending ACH transactions, less than 1%, or about 18,000 of the transactions were disputed by the consumer as "not authorized." Within these same 18,000 transactions, only 19 times did the consumer say that >0.001% they were given money they didn't ask for, and the lender should take it back. The other 17,981 consumers who received loan proceeds disputed as "non-authorized" were legitimate and the consumers who challenged them should be categorized as Intent to Not Pay fraud. 2 MILLION ONLINE LENDING ACH TRANSACTIONS 18,000 (>1%) DISPUTED AS FRAUD 19 (>0.001%) TRUE FRAUD Source: Clarity Services Inc. survey 2012/2013 Comparision of Fees: Small-Dollar Loans & Banks As a percentage of total applications processed or a percentage of transactions that might be fraudulent, Clarity believes the transaction rates in the $25 $15 online small-dollar credit space are significantly lower than in the prime credit card industry or in the mainstream banking industry. SMALL-DOLLAR LOAN FEE BANK NSF FEE" "Source http://consumerist.com/2013/04/26/the-average-payday-loan-borrower-spends-more-than-half-the-year-in-debt-to-lender/ "Source: http:/www.intelli-colleCE.com/cblog/archives/225-NSF-Bank-Fees-Credit-Card-Processing-Merchants-Beware.html Small-Dollar Loan Customer Satisfaction In 2012, consumers used more $10 billion worth than of online small dollar loans. 99% of consumers had no complaints about their small-dollar loan payments. % of consumers who complained about their small-dollar loan payment Source Clarity Services Inc survey 2012/2013 Denying online lenders access to the ACH payments system is to deny access to credit to those consumers who need it. For more information about nonprimel01.com, email [email protected] or call 727-489-7266. ©2013 Clarity Services Inc. NPI01-IGW.1.0.10.14.13