Bankers: Beware of These Warning Signs Associated with Deceptive Borrowers

Bankers have a number of tools at their disposal to assess a prospective borrower’s loan application, but nothing can take the place of a face-to-face meeting. Of course, most borrowers respond honestly when they meet with bankers about their financial condition. But those with less than stellar financial records may be tempted to downplay their true economic situation. How can a banker determine if a loan applicant is telling the whole truth — or not? To help you vet loan applications, here are some interview tips that forensic accountants use to unearth exaggerations, misstatements and outright fraud when managers are suspected of dishonest behavior.

What’s normal?

Telling lies creates stress that the body typically attempts to relieve in several ways. Being aware of how a borrower’s demeanor changes over the course of an interview can provide a window into his or her state of mind. 

The first step is to establish a “baseline” measure of the prospective borrower’s normal behavior. Put the prospective borrower at ease by explaining the process and purpose of the interview. This should help the borrower relax and act normally. During this introduction phase, make a mental note of the behaviors that the borrower exhibits when under minimal stress. For example, you might find that fast-paced speech, which often indicates stress, is normal for the prospective borrower.

What does the borrower say and do?

A borrower’s tone of voice, pitch, volume and rate of speech often vary according to the level of stress they’re undergoing. For example, when experiencing stress, an individual’s voice may become higher and less audible. Or a person’s voice may actually sound “shaky.” The anxiety triggered by an important financial meeting coupled with the perceived need to lie can cause some people to have trouble swallowing, while others may lose their voice entirely.

People under stress often experience an increase in heart rates, breathing and perspiration. They also might exhibit exaggerated physical movements, such as hand waving or leg shaking. Anxious loan applicants might bite their lips or cheeks, tightly close their mouths, place their hands over their mouths or frequently rub their eyes, temples or necks. Nervousness also can impel people to frequently shift in their seats or cross and uncross their arms — especially when asked to elaborate on statements that are, in fact, lies or omissions of important details.

What should you ask?

Throughout the meeting, ask open-ended questions that allow the borrower to share information about the application in a free-flowing manner. When possible, ask probing follow-up questions and encourage the applicant to provide specifics. Jot down key facts critical to assessing the borrower’s suitability, such as the number of current customers or planned investments in capital assets.

If you’re concerned about a particular fact, restate that information incorrectly in a follow-up question. For example, if the applicant states that its company’s largest customer represents 22% of its revenue, increase or decrease that number significantly in a subsequent question. Ask the prospective borrower to share additional facts about that customer, such as the customer’s location, payment terms or operating history.

Are facts being hidden?

When asked to elaborate on the loan’s purpose and the application’s details, a deceptive borrower may hide material information or try to paint it in a less damaging light. For example, when asked about the company’s financial performance in the current year, the borrower may choose to talk about the previous year.

The borrower also may attempt to buy time to formulate answers to probing questions by repeating the question or answering with another question. Sometimes a deceptive borrower might request clarification on a particular question and attempt to move the focus from an area he or she doesn’t want the banker to scrutinize.

Look at the total picture

Meeting with a bank as part of the loan approval process is inherently stressful. It’s important to understand that a loan applicant showing stress isn’t always telling lies. But, by considering the totality of borrowers’ applications, including their behavior while being interviewed, bankers increase their chances of uncovering deceit.

8 questions to ask a prospective borrower

In addition to establishing routine facts, such as how the borrower will use the proceeds and repay the loan, the following eight questions can help uncover inconsistencies:

1. How accurate are your company’s financial statements?
2. How did you calculate the amount of money you need to borrow?
3. How confident are you that we’ll approve your loan application?
4. What will happen to your business if we don’t approve the loan?
5. What will happen to your company if we approve a smaller loan than you’ve requested?
6. Since completing the loan application, has anything changed within your business? If so, what?
7. Are you concerned about any questions on the loan application or that I’ve asked you today? If so, why?
8. Are there any additional questions that you think I should have asked you today?

Uncovering deception is inherently difficult — especially when the prospective borrower appears qualified. Paying close attention to details and being willing to ask difficult questions increases the probability that, if deception exists, the banker will uncover it.