The Costs of Financial Fraud Victimization

Abstract

This paper examines the extent of financial fraud victimization, who becomes a victim, and the costs of victimization. Our setting focuses on identity theft, one of the most common types of fraud, comprising over 20% of all reported fraud in the U.S. We find that between 2010 and 2022 credit profiles for over 26 million borrowers included a flag for being an identity theft victim. An average victim reported two fraudulent accounts on which they collectively owed $28,278. Low income, younger borrowers, and those with worse credit histories are more likely to become victims. While an average borrower takes three years to become aware that they have become a victim, over 26% of them find out when they apply for new credit. We find considerable costs associated with victimization as access to credit substantially declines for victims relative to non-victim borrowers following victimization. Victim borrowers are also more likely to file for bankruptcy, be foreclosed upon, and become delinquent post victimization. Not only are low income borrowers more likely to become a victim but conditional on victimization they experience higher costs and decline in access to credit, thereby exacerbating the credit access gap over the income distribution.

Keywords: Financial fraud, fraud, identity theft, victimization, access to credit, financial distress, credit access gap

JEL Classification: G5