DES MOINES, Iowa (9/30/11)--Bust-out fraud, a form of first-party fraud also known as "sleeper fraud," is breaking out in a major way, and card-issuing credit unions and other financial institutions must pay closer attention to the risk, according to a white paper from The Members Group (TMG). Bust-out fraud occurs when a card applicant with criminal intent applies for credit using a false, partially false or even legitimate identity, said Karen Postma, senior cards risk manager for TMG and author of "Are Your Cardholders About to Bust Out?" Once approved, the cardholder behaves normally, flying under the radar for as long as a year. During that time, the cardholder receives credit line increases and makes normal transactions and over-the-minimum payments each month. Then suddenly, the bust-out artist defaults, Postma said. The bust-out artist doesn't work alone but may be part of a ring of as many as 20 people, systematically targeting credit unions and community banks. "They know exactly how long it will take and the kind of behavior they will need to exhibit in order to get their credit up to the highest limit possible before striking," she wrote. The typical financial institution (FI) relegates accounts like this to a collection team, which is unsuccessful in recovering the balance due. As a result, the loss is never classified as a fraud, and the con artist moves on to the next financial institution victim. "Community-based FIs are particularly vulnerable to bust-out fraud," wrote Postma. "That's because losses stemming from this and other forms of first-party fraud are typically as much as 40% higher than losses from third-party fraud." She noted that first-party fraud accounts for at least 25% of total U.S. consumer credit charge-offs. Postma examines red-flag warnings and prevention methods, including education, cohesion among departments at the institution on application procedures, and frequent refreshing of credit scores. TMG, a wholly owned subsidiary of the Affiliates Management Co., which is owned by Iowa credit unions and their members, provides card processing and payment solutions to credit unions and financial institutions. To access the entire report, use the link.