Fraud rates expected to spike in a recession, Equifax warns

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Fraud rates in Canada may have dropped from the levels reached during the COVID-19 pandemic, but Equifax Canada warns that increased financial pressure on Canadians could lead to a spike in fraud.

The credit information agency said in a report released Tuesday that rising financial stress among Canadians, spurred by surging inflation, rapid rate hikes and recession concerns, may lead to increased levels of fraud. Equifax Canada’s head of fraud and identity Carl Davies said first-party fraud in particular (instances where individuals themselves commit a fraudulent acts) are expected to rise in an economic downturn.

“We see that in times of financial stress, there comes the opportunity for increases in fraudulent behaviours, especially first-party fraud,” Davies said in an interview with Yahoo Finance Canada, adding that the vast majority of first-party fraud involves falsifying income or providing conflicting information to lenders.

“When people get stressed because interest rates are going up and the cost of living is through the roof, there is more incentive for them to do that… Generally in times of financial uncertainty we typically expect to see those first-party fraud rates increase.”

An example of first-party fraud that Davies says may rise in an economic downturn is mortgage fraud. According to Equifax Canada, levels of mortgage fraud dropped 13.3 per cent in the second quarter of 2022 compared to the highs seen during the same quarter in 2021, when there was a flurry of sales activity and prices soared in the Canadian housing market. But while the mortgage fraud rate fell, it remains 29.5 per cent higher than what it was before the pandemic hit.

“The mortgage space, coupled with a reduced supply of homes, puts the focus on competition for the few homes that are available which could further incentivize people to take fraudulent steps to try and qualify for a mortgage,” Davies said.

Generally fraud rates have fallen from pandemic levels. Canada’s credit card fraud rate was down 13.5 per cent in the second quarter of this year compared to the same time in 2021, which saw a spike in digital fraud. The auto fraud rate fell 16.6 per cent in the second quarter of 2022 compared to the same time last year, as application volume dropped. Bank and deposit fraud also fell 16.6 per cent year-over-year, despite the fact that application volumes increased by 28.2 per cent, as government pandemic support programs ended.

While fraud rates have yet to increase, Davies said that there has been an increase in credit card usage among consumers, an indication that people may be using credit cards as a way to meet financial obligations. Total consumer debt among Canadians has also climbed, rising to $2.32 trillion in the second quarter of the year, an increase of 8.2 per cent. The average non-mortgage debt per consumer reached more than $21,000.

“When these cracks start showing, that’s a good indication that people are getting into troublesome times,” Davies said.

“As this plays out over the next six to 12 months and we continue to see impacts on consumers’ disposable income, there’s going to be growing incentive for consumers to potentially embellish or inflate things like income, or create additional employment records that don’t exist. Lenders need to be aware and prepared for that, so they don’t introduce incremental risk to their business.”

This article was originally sourced from