No one wants to admit they’ve been taken.

We’re in a catch-22: Get called to carpet by investors, capital providers, and other stakeholders by admitting how prevalent fraud really is, or own it as an industry so we can start the hard work to figure out the fix?

Let’s just say the quiet part out loud— the reality that this issue is now discussed at nearly every industry event, in every publication, and with some of the biggest names in our business calling for action, is a sign of just how widespread borrower fraud is in today’s lending ecosystem.

But we are still missing the mark. “Everyone” may be talking about fraud, but “no one” can pin a dollar figure estimate to losses, how many of their funded loans they’ve discovered to have elements of misrepresentation, or any number of other tangible indicators that would quantify prevalence and pinpoint what types of borrower fraud are truly our industry’s biggest troublemakers.

Is it because we don’t know? Or because we’re afraid to say?

There are no easy answers, but like shrinkage in retail, perhaps it’s time to view—and quantify— fraud as a cost of doing business.

When it comes another operational line item, it’s easier to discuss frankly, practically, and without a cloud of shame for being “taken.”

That isn’t to say we just shrug and move on now that we’ve allocated fraud “expenses” to the budget. We’re all about minimizing unnecessary operating costs.

Beyond the semantics of how we view fraud within the lending community, having a better understanding of the funds going toward this line item will also serve businesses well in being able to plan for it. Retail shops measure how much of their inventory goes to shrinkage, and price their stock to account for this loss. If private lenders do the same, fraud loses its bogeyman quality, and businesses are better equipped to limit impacts to their own and stakeholder profits.

Finally, it is only when we know what the real costs are and from where, how, and who they originate, that we can then also measure the effectiveness of any potential solution.

To Solve a Problem, You Have to Own It

Where is all this coming from, and why are we so opinionated? During a hallmark panel on market projections at Geraci’s Innovate conference, leaders discussed a growing need to combat rampant borrower fraud, highlighting this fraud class as one of their largest concerns for the industry. Panelists and attendees called for action from the American Association of Private Lenders, citing our standing in the industry as their preference to spearhead and organize next steps.

In response, we formed a Borrower Fraud Steering Committee to better understand the scope of this pressing challenge and to strategize a path forward for our members, the industry, and AAPL.

At the time of this writing, the member-led committee is scheduled to hold its inaugural meeting in October. Ahead of that, industry discussions of “We all know this is a massive issue …” have continued but left unsaid is, “… for our business, personally.”

Without quantifiers, fraud becomes a black box of a problem to solve. We inspire confidence in our various stakeholders by owning challenges with strength, candidness, and lack of stigma. And to beat a near-dead horse: To own it, we need to know how much of it we own.

A Quick Note on “But Not Me!”

Everyone is touched by fraud. There is no stigma in something that affects all of us to some degree. If you’re reading this and think you’re the exception: ignorance may be bliss, but it doesn’t serve your business. (And, also: a bit odd that you’re still reading.)

Part of a Solution

A steering committee is just that—they help guide the process, but the buck doesn’t stop there. We only succeed with the buy-in of our larger community. To that end, while we heard the call to action to assist in fighting fraud, we have one in return: arm us with information and insight.

If you already track fraud losses, be willing to share, along with any solutions you’ve found to help mitigate. If you don’t track but could—allocate time and capital in your 2025 budget to start. If you don’t track and have no idea how to start, be candid about that too.

We need to know where lenders are at individually and at scale to set priorities and formulate realistic, actionable guidance that lenders of all sizes, experience levels, and capabilities can implement. Provide feedback via our public comment portal at www.aaplonline.com/comments/ or stay tuned to our newsletter for open comment periods where we gather insight on specific topics and needs as identified by the Borrower Fraud Steering Committee.

Finally, because borrower fraud occurs at the transaction level, it is with processes at the transaction level that it will be subverted. Just as fraud itself has a cost, its solution will also involve time, effort, and budget. The difference is, it’s on your terms and with the advantage of funding more deals with good-faith borrowers who seek to grow with you, not at your expense.

As individual businesses and a community, we must be willing to allocate resources toward fraud mitigation. We’ve taken a first step, but we cannot do it alone. We need you.

About the American Association of Private Lenders

The American Association of Private Lenders is the oldest and largest national organization safeguarding the continued viability and growth of the private real estate lending profession. Formed in 2009, the association identified needs for standardized best practices, ongoing support resources, and self-governance that perseveres today. AAPL’s membership includes private money lenders, mortgage fund managers, brokers, and service providers from across the United States.

The Borrower Fraud Steering Committee is not AAPL’s first foray into industry fraud defense. Fraud—both what it looks like and how to combat it—is a frequent topic on AAPL webinars; in its trade magazine, Private Lender, and online article archive; and at its Annual Conference. Additionally, in 2023 the association launched the industry’s first business identity theft and credentialing scam prevention initiative to protect AAPL brand assets from usage by bad actors and to monitor for cloning of member websites.