The most painful way to learn about auto loan straw buyers is to become their fraud victim. According to PointPredictive, straw buyers are one of the top three fraud auto loan fraud schemes, though not all straw buyers have criminal intent.
By definition, a straw buyer is one who makes a purchase on behalf of someone else. For an auto purchase, it often involves a cosigner. With the best of intentions, a parent could cosign for a child who’s trying to establish a credit history. In those situations, when cosigners are present at the dealership, the relationship between cosigners is clear.
However, other straw buyer variations are rife with risk. Let’s look at two examples that frequently result in defaults: 1) A borrower with a ruined credit history; and 2) Dishonest dealers who juggle paperwork to make an unsuspecting cosigner solely responsible for the loan.
Auto Loan Straw Buyers
A Friend in Need
In this scenario, a buyer with bad credit convinces a friend with good credit to pose as the one buying the car. A friend’s good credit gets a better deal than the fraudster could obtain—a lower down payment, lower interest, and better terms all around. The fraudster promises to make the payments but given their credit history, that’s highly unlikely. When the default becomes delinquent the (former) friend’s credit rating is damaged, the lender takes a loss and initiates recovery. In the worst case (the friend is a master of identity theft), this is outright theft and the vehicle has been traded for cash or shipped offshore.
In this scenario, an unscrupulous dealer schemes with a straw buyer to submit a loan application. Vehicle value is typically inflated. It’s not unusual for the straw buyer to get a kickback. Motivated to boost sales, the dealer may be systematically distributing these fraudulent applications to unsuspecting lenders. The dealer gets a sale, the straw buyer gains financially, and lenders take a loss.
An alternative version of the scheme is based on the familial cosigning relationship described above. In this case, the dealer tricks the relative into signing and submitting the loan as the primary borrower. From a legal perspective, it appears there’s no cosigner involved. A short time later the relative is notified and surprised by the payment schedule. It’s near impossible to rectify the paperwork. The relative assumes financial responsibility and is highly motivated to ensure the payments. The deal may work out in the end, but it’s not the kind of risk that lenders want to undertake.
Auto Loan Straw Buyers are Difficult to Detect
Auto loan fraud via straw buyers is driven by a few key factors:
- The relative ease of identity theft;
- Vehicle value arbitrage—a high-end vehicle can be worth two to three times its US value when stolen and sold in a foreign country; and
- An individual’s need to purchase a car, despite a poor credit history.
When fraudulent auto loan applications become defaults it’s the lenders who suffer the greatest economic damage.
Several factors make detection of auto loan straw buyers difficult:
- The sophistication and variations in straw buyer schemes that cleverly disguise fraud;
- Loan application volume—Processing hundreds to thousands of loan applications, underwriters don’t have time to carefully review every application for potential fraud; and
- A softening auto market—Dealers and lenders work hard to achieve and maintain sales and bookings goals. Failure to overlook fraud at the dealership and loosened credit policies increase the likelihood of defaults.
Despite the growth in auto loan application fraud, the fight against fraud is not as daunting as it may seem. Recent fintech advances are making it easier for lenders to detect auto loan straw buyers.
Auto Loan Straw Buyers Can Be Detected
Modern cloud-based loan origination solutions, combined with recent fintech advancements help detect fraud perpetrated by straw buyers. Machine learning techniques analyze tens of millions of auto loan applications—legitimate and fraudulent—to identify anomalies, often very subtle, indicative of potential or outright fraud. Through cloud-based integration between the LOS and fraud detection services, lenders can efficiently evaluate loan applications. A few examples show how auto loan straw buyers can be detected.
- Discrepancy Between Borrower Profile and Vehicle Purchase
Yes, there’s a chance that great-grandma is having a very late life crisis and thinks a new ‘vette would be good for her health and image, but it’s unlikely.
- Inflated Values—Income, Employment, and Vehicle
Income that seems high in comparison to average wages for specific job titles in industries or regions, employment with a fictitious company, or inflated vehicle valuations individually or collectively may be evidence of a straw buyer.
- Emerging Dealer Patterns
Fraud detection services can monitor thousands of auto applications submitted by dealers across the United States. This consortium strategy can provide early warning of emerging fraud patterns, such as a dealer systematically perpetrating a straw buyer scheme across the US.
The added advantage of the consortium strategy it the ability for machine learning to continually improve and refine its pattern recognition models to detect anomalies and give lenders ever-greater ability to fight fraud.
Use Fintech Advancements to Your Advantage
Internet technology and the digitization of commerce have enabled identity theft, false income and employment statements, and straw buyers. Fortunately, more sophisticated fintech applications such as fraud detection let lenders reduce these threats. In a very competitive market, lenders need to use fintech to combat auto loan straw buyers and other fraudsters.
defi SOLUTIONS is exclusively focused on the lending industry. We develop, deliver, and support configurable, cloud-based loan origination solutions (LOS) that integrate with fraud detection services. Take the first step in reducing auto loan straw buyer risk by contacting our team today or registering for a demo of defi LOS.
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