HOW THE BEST LENDERS SPOT STRAW BUYER RED FLAGS

Most lenders encounter straw buyers at some point but only realize it once a loan defaults without a single payment. Thanks to the Internet, lenders are guaranteed to experience more straw buyers. With ongoing data breaches that expose sensitive personal information to global fraud rings and these fraudsters’ technical skills, straw buyers will continue to be a problem for lenders.

A straw buyer is someone who purchases property for another person in order to conceal the identity of the true purchaser.

Straw Buyer Red Flags

Although not the leading source of fraud (only 3.1 percent of fraudulent mortgages), straw buyers can cause severe losses to a lender. Even with plenty of time to review a loan application, an unsuspecting underwriter often won’t find the red flags indicative of a straw buyer. The table below details some straw buyer red flags to look for.

Straw Buyer Red Flags
Red Flag	Description
Profiles Don’t Match 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. Certain combinations are so improbable that they must be flagged.
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 healthcare 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 fraudster with a full range of fabricated employment histories, including references that make the straw buyer appear on the fast track to a C-level executive position.
High Collateral Valuation	Collateral inflation is one of the easiest straw buyer schemes. With a simple number change by the dealer, everyone—except the lender—is ensured a huge profit from the scam.

Professional straw buyer fraud is perpetrated by fraud rings and unscrupulous dealers who want to unload slow-moving vehicles. Dealers use straw buyers to purchase cars with grossly inflated valuations. These straw buyers usually get a kickback and occasionally keep the overpriced vehicle. The dealer makes a quick and often hefty profit with this scheme.

So, how can a lender efficiently and accurately detect and decline fraudulent applications? The best lenders use automation and analytics.

Tools to Detect Straw Buyer Red Flags

No lender has the resources to evaluate every loan application to detect straw buyers manually. However, the latest advances in automation and analytics can address this problem. Three of the best methods to prevent straw buyers are:

1. Fraud analytics that use sophisticated pattern recognition algorithms to recognize loan application discrepancies or inaccuracies. These include purchase profiles, social security numbers, incomes, employment histories, and residences that correlate with fraud.
2. Verification services that confirm or refute suspected misinformation about income, employment, and used vehicle valuation. 
3. Loan portfolio analytics that identify regions or dealers where deals have been generated that then quickly default. Straw buyer schemes often exhibit certain patterns and have characteristics in common. When lenders discover them, they can then modify their credit policies accordingly.

Fraud analytics and verification services are easily integrated into the workflow of modern loan origination processes. Calls are made automatically so lenders can efficiently and effectively combat straw buyer fraud. Analytics provides an additional level of defense by identifying straw buyer characteristics to prevent future fraud proactively.

Protecting Your Portfolio From Straw Buyers With defi

Straw buyer fraud schemes represent a considerable risk for auto lenders unprepared to combat the threat. Loans that default without a single payment made are typical of fraud involving a dealer. Fraud rings can be even more damaging when they target a specific region. The best lenders recognize the extent of the threat and use all the tools in their tool chest—especially automation and analytics—to spot straw buyer red flags.

If you are looking for a platform that harnesses the power of analytics and automation to effectively protect your portfolio from fraud, defi SOLUTIONS can help. Our loan origination platforms are equipped with the latest technology for detecting fraud and integrations with third-party services that offer alternative data sources, verification services, and fraud analytics.