Protecting Against Consumer Fraud in the Digital Age

Prakash Santhana, Partner at Davies

By Prakash Santhana, Partner at Davies.

An economic downturn is typically coupled with an increase in fraud, and the advent of online banking has been a catalyst for a new and highly sophisticated era of digital conmen praying on the vulnerable.

Consumers in the United States lost a record $10bn to fraud in 2023, representing a 14% increase from the previous year’s reported losses. This data from the Federal Trade Commission suggests a troubling uptick in consumer fraud, but while stringent measures to protect those in need are necessary, there exists a secondary challenge to the very systems designed to safeguard consumers: that of fake complaints.

For those who have been the victim of financial crime, being able to report that crime and preserve their credit history is a valuable resource. However, research conducted by Consulting at Davies suggests that there is a provable trend of this resource being abused.

These fraudulent reports are a major issue for the Consumer Financial Protection Bureau (CFPB), which is the principal outlet for such complaints.

This article will delve into the impact of fraudulent complaints on both consumers and financial companies, exploring the methods used to identify them and proposing solutions to maintain the integrity of consumer protection mechanisms.

What is the CFPB?

The Consumer Financial Protection Bureau is a pillar of safety for American consumers in the complex world of financial services. Established in 2011 as part of the Dodd-Frank Wall Street Reform and the Consumer Protection Act, the CFPB’s mission is to ensure that consumers are treated fairly by banks, lenders, and other financial institutions.

At the heart of the CFPB’s operations is its complaint submission process. Consumers can file complaints about a wide range of financial products and services, from credit cards to mortgages. These complaints are then forwarded to the companies in question, with the expectation of a timely response and resolution.

The goal of this system is to arm consumers with a voice and protect them from the worst ramifications of financial crime. It also provides companies with valuable feedback that allows them to improve their services and assist in the safeguarding of consumers.

The Specter of Fake Complaints

However, this well-intentioned system has become vulnerable to abuse. Consulting at Davies’ recent investigation uncovered a disturbing trend: a significant number of fake complaints infiltrating the CFPB database. This discovery raises serious concerns about the reliability of the complaint system and its impact on both consumers and financial institutions.

To detect fraudulent complaints, analysts examined a subset of data focused on credit bureau complaints that included consumer narratives and unique ZIP codes. They found over 100 complaints with identical wording but different ZIP codes, suggesting system abuse by one individual or entity.

For example, consider this fictitious complaint narrative:

“I applied for a credit card and was denied without explanation. I have excellent credit and have never missed a payment. This is unfair and discriminatory.”

When this exact text appears verbatim across multiple complaints lodged with different ZIP codes, it raises red flags. Legitimate complaints typically contain unique details and personal experiences, making such repetition highly suspicious.

Assuming that submitting the same narrative for over 100 complaints with unique ZIP codes indicates fraud, it is estimated that at least 2% of all credit bureau-related complaints to the CFPB are fraudulent.

The High Cost of Deception

Fake complaints do more than damage the legitimacy of the CFPB and the wider credit reporting system: they undermine the effectiveness of legitimate complaints from vulnerable consumers.

Credit bureaus, often the target of these fraudulent submissions, incur significant costs in investigating and responding to each complaint. These expenses can run into millions of dollars annually, resources that could otherwise be directed towards improving services or reducing costs for consumers.

The fact that bad actors can have a significant impact on the CFPB’s complaints system could bring the reputation of financial institutions into disrepute, challenging their authority and undermining consumer trust in them, their processes, and the entire complaint process.

What can be done?

The research conducted by Consulting at Davies’ was extensive, but only covers exact matches. More advanced techniques using Natural Language Processing (NLP) technology would be more effective at recognizing suspicious patterns with the help of advanced techniques such as semantic analysis and clustering.

While this would likely increase the estimate of fraudulent complaints within the CFPB database, this same technology could be leveraged to recognize and flag fraudulent complaints automatically. It would also maintain the integrity of the complaints system while significantly reducing the costs of response and prevention.

Tackling the issue of fake complaints does more than just preserve the reputation of the CFPB: it also safeguards the interests of consumers and makes life more difficult for fraudsters. The CFPB has a duty to explore every opportunity to crack down on financial crime and maintain the integrity of their systems for the good of everyone.

Spot the Fake: Tackling Fraudulent Complaints in the CFPB Database

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