AUTO DEALER LOAN FRAUD PREVENTION STARTS WITH AN LOS UPDATE

Fraud has many faces. Auto dealer loan fraud isn’t as frequent as income, employment, or identity fraud by individuals and fraud cartels. Still, an application from a less-than-honest dealer can show up in the underwriting queue anytime. A few examples of auto dealer loan fraud show how varied these schemes can be.

• Erie, PA Chevrolet dealership is fined $2 million for falsifying subprime loan documents by inflating collateral prices.
• West Texas Ford dealership chain charged with “double flooring”—obtaining financing for a vehicle at one dealership, then transferring the vehicle to another dealership to get additional financing.
• Complex fraudulent auto loan scheme created fake dealerships and targeted 15 credit unions to obtain $1 million in loans.

With criminal creativity, there’s no limit to the types of fraud that dealers might perpetrate to boost their profits. Successful fraud schemes leave lenders with the financial burden. The challenge is to recognize auto dealer loan fraud right when it enters the application queue, and to prevent it from inflicting financial damage. For the majority of lenders, that’s a big challenge—especially if they’re running legacy loan origination software.

The Limitations of Legacy Loan Origination Software

It’s more difficult for lenders using legacy (i.e. not cloud-based) loan origination software to detect auto dealer loan fraud. Legacy loan origination software, built with outdated software tools and running on local servers, lack the latest fraud-identifying fintech.

Auto Dealer Loan Fraud Defense: Integrated Analytics

Machine learning can help analyze millions of loan applications and identify characteristics which are highly indicative of loan application fraud. The insight gained from machine learning is then applied to evaluate individual loan applications, detect and classify potential fraud, and calculate a fraud score, all to help lenders determine the next steps in the loan origination process.

Fraud analytic services operate with a consortium model, screening millions of loan applications from across the country and continually improving the ability to recognize fraud. The consortium tracks individuals and dealerships. With these capabilities, fraud analytics can help prevent auto dealer loan fraud in the following ways:

• Identify applications likely to contain fraudulent information intended to increase the applicant’s chances of obtaining a loan or receiving more favorable terms;
• Recognize applications that come from dealers or dealership chains known to perpetrate loan fraud; and
• Provide details on the types of suspected fraud—income or employment misrepresentation, identity, collateral valuation, straw buyer—to help the lender determine the appropriate next steps.

Regardless of the volume of loan applications, fraud analytics provides a consistent and efficient way to review applications. Lenders may quickly decline those that are blatantly fraudulent, and further evaluate those that are borderline. A legacy LOS without access to fraud analytic services must rely on experienced underwriters to recognize auto dealer loan fraud.  

Vehicle Valuation Services

Inflated used vehicle valuations are another tactic disreputable dealers use to boost profits. It’s easy to set a lower-than-market value of trade-in collateral, or to boost the value of a used vehicle being sold to a subprime borrower. Valuation errors can be difficult to detect when you’re processing hundreds of applications.

Lenders can use vehicle valuation services that accurately calculate values using VIN decoding, vehicle inspection data, and sales data from major auctions. An automated call to the valuation services can determine in seconds if a dealer’s valuation is justified.

Cloud-Based Integration Delivers Services That Fight Fraud

Modern, cloud-based loan origination solutions let you take advantage of fraud analytics and vehicle valuation services. Pre-integration allows lenders to quickly configure automated calls to the cloud services as part of their loan origination process.

When fraud analytics suspects misrepresented information in an application, it indicates the type of fraud and assigns a predictive fraud score. Lenders may use the score to prioritize review of the riskiest applications, or to streamline underwriting for those with low-risk scores.

When vehicle valuations are suspect, a call to valuation services can confirm the fact, or provide guidance that allows the lender to structure the deal based on an adjusted vehicle valuation.

Is It Time to Update Your LOS?

Fraud analytics and vehicle valuation services are only two of the many capabilities accessible to cloud-based loan origination solutions. Lenders with a legacy LOS face an uphill battle in integrating these modern cloud-based services with legacy software. A better use of time and budget may be updating to a modern cloud-based loan origination solution. You’ll get the most effective and efficient means of fighting auto dealer loan fraud. You’ll also have a loan origination solution that will improve every aspect of your origination processes. It’s an investment that brings greater underwriting efficiency, lower processing costs, and well-reasoned lending decisions.