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Synthetic Identity Fraud Cost Lenders $6 Billion in 2016: Auriemma Consulting Group

August 1, 2017

(New York, NY):  A form of identity theft is artificially inflating consumer loan delinquencies and costing lenders billions of dollars annually, according to data from Auriemma Consulting Group (ACG).

Synthetic identity theft, a form of application fraud in which criminals use fake personas to abuse credit, is responsible for 5% of charged-off accounts and up to 20% of credit losses – or $6 billion last year alone – according to the firm’s analysis. The total is higher when store credit cards are considered, along with other products such as auto loans.

Growth in synthetic identities, particularly in the post-EMV era, could explain why key measures of consumer credit are worsening despite a strong employment market and record-high consumer credit scores. Credit card delinquency and loss rates increased 14.8% and 12.3% year-over-year in the first quarter of 2017. While most of these increases can be attributed to accelerated consumer borrowing and a corresponding rise in cardholder defaults, synthetic identity fraud is having an incremental impact.

Synthetic fraudsters rack up debt with no intent to repay, leaving lenders with massive losses and no true customer to chase in their collection and recovery efforts. Because synthetic identities behave like legitimate borrowers – establishing a history of responsible use and prime credit scores before defaulting on their loans – they can be virtually impossible to identify. As a result, the accounts evade detection and the charged-off balances are logged as a credit loss instead of fraud. Those balances are exponentially higher than a typical chargeoff, averaging more than $15,000 per attack.

“Commonalities between customers in financial hardship and synthetic identities make distinguishing between the two loss classifications extremely difficult,” said Ira Goldman, Director of ACG’s Synthetic Identity Fraud Working Group and Credit Operations Roundtable. “But it’s clear that a significant portion of accounts in collections exhibit synthetic characteristics.”

Those include characteristics of so-called “straight rollers,” or accounts that go from current to six payments past due with no payment activity or contact with the lender. To estimate the prevalence of synthetic identity fraud within collections queues, ACG analyzed these behaviors among all accounts that charged off in 2016.

Synthetic identity fraud is a growing problem within lenders’ collections departments, which are investing time and money working debts that will never be repaid. The threat is expected to increase as criminals migrate to application fraud in growing numbers and exploit easy access to sensitive consumer data.

While financial institutions are working to deploy countermeasures, the fight against synthetic identity fraud will require collaboration with a diverse array of external stakeholders. These include authorities investigating fraud rings, third parties developing technology solutions, and the Social Security Administration, which currently bars the industry from cross-checking applicants’ identity information against its records.

“Synthetic fraud will continue to be a key migration point for fraudsters in credit card, auto finance, and other segments of consumer lending,” Goldman said. “Mitigating it will require unprecedented collaboration among risk managers across these different loan types, working in conjunction with vendors, the national credit bureaus, law enforcement, and government agencies.”

About ACG’s Synthetic Identity Fraud Working Group

ACG is leading a consortium of financial institutions working to mitigate synthetic identity fraud through collective action. In addition, the firm’s credit card, debit card, and consumer banking fraud control roundtables help more than 30 leading companies optimize their fraud management strategies. For more information, contact ira.goldman@acg.net.

About Auriemma Consulting Group

ACG is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. Founded in 1984, ACG has grown from a one-man shop to a nearly 50-person firm with offices in New York and London.