You’ve likely encountered straw buyers in your lending operations, but only realized the problem when the loan defaulted without a single payment. You’re virtually guaranteed to encounter more straw buyers, thanks to the internet, ongoing data breaches that expose personally identifiable information, and the technical skills of global fraud rings.
Although they’re not the leading source of fraud, straw buyers can cause serious losses. The straw buyer is typically a front for a fraud ring focused on high-profit auto resales (often sold off-shore). The straw buyer provides a real social security number, a verifiable address, and other information that masks their true intent. An unsuspecting underwriter who had time to review the loan application might not find any straw buyer red flags.
Professional straw buyer fraud is perpetrated not only by fraud rings, but also by unscrupulous dealers wanting to unload slow-moving vehicles. Dealers use straw buyers to purchase cars with grossly-inflated valuations. The straw buyer usually gets a kickback and occasionally keeps the overpriced vehicle. The dealer makes a fast, hefty profit with this scheme.
Straw Buyer Red Flags
What are the straw buyer red flags that lenders can use to identify fraud and prevent it from hurting portfolio performance? Any one or more of these characteristics are often the most obvious indicators of straw buyer fraud.
- Profiles that don’t match the purchase. It’s plausible that a grandmother would purchase a two-year-old Toyota Camry, but she’s not likely to be parking the latest ‘Vette in her garage. Equally unlikely is a 21-year-old working at McDonald’s attempting to purchase a Tesla Model S. There are certain combinations that are simply outliers.
- Unrealistic income. Often income statements, which are very easy to falsify, don’t match the straw buyer’s age or supposed profession. Six-figure incomes are realistic for young high-tech, finance, and health-care professionals, but not for someone who’s getting an hourly wage, or someone under 25 with only a high school diploma.
- Spotless employment history. Like income statements, the internet can provide a full range of fabricated employment history, including references to make the straw buyer appear to be on the fast track to the executive suite.
- High collateral valuation. Collateral inflation is one of the easiest straw buyer schemes. A simple change of a number by the dealer can deliver a huge profit to ensure that everyone profits from the scam except the lender.
These are some of the more obvious straw buyer red flags. So how do lenders efficiently and accurately detect and decline fraudulent applications? The best lenders use automation and analytics.
Want to find out more about our software and services? Contact our team today.
Detect Straw Buyer Red Flags
No lender has the resources to manually evaluate volumes of loan applications and detect straw buyers. However, they do have access to the latest advances in automation and analytics that address the problem. Three of the best methods to prevent straw buyers:
- Fraud analytics that uses sophisticated pattern recognition algorithms to recognize loan application discrepancies or inaccuracies—purchase profiles, social security, income, employment, residence—that correlate with fraud.
- Verification services to confirm or refute suspected misinformation about income, employment, and use vehicle valuation.
- Loan portfolio analytics to identify regions or dealers that have generated deals that have quickly defaulted. Straw buyer schemes often exhibit patterns and common characteristics. When you discover them, you can modify your credit policies accordingly.
Fraud analytics and verification services are easily integrated into the workflow of modern loan origination processes. Calls are made automatically, so that lenders can efficiently and effectively combat straw buyer fraud. Analytics provides an additional level of defense by identifying straw buyer characteristics to proactively prevent future fraud.
Straw buyer fraud schemes represent a huge risk for auto lenders unprepared to combat the threat. Loans defaulting without a single payment made are typical of dealer-involved fraud. Fraud rings can be even more damaging when they target a specific region. The best lenders recognize the extent of the threat and use automation and analytics to spot straw buyer red flags.
defi SOLUTIONS’ lending technology and analytics experts welcome the opportunity to discuss how automation and analytics can fight loan fraud. Take the first step toward spotting straw buyer red flags and reducing risk by contacting our team today or registering for a demo of defi LOS.
Get in touch with us today and get a demo!