Countless auto loan applications are processed monthly. With today’s technology, some lending decisions are near-instantaneous, either automatically approving or declining. These decisions are aided by lending software that automates decision rules and workflows. Outside these automated decisions are those that require the expertise of an underwriter to review the application, assess risk, and structure the deal. Yet, of all these loans that are approved, how many misrepresent information to obtain a more favorable loan structure or terms? This unseen risk can come back to haunt lenders.
The auto lending market has become far more competitive, with auto sales peaking in 2017. As a result, many lenders loosened credit policies to maintain these historically high portfolio levels. Unfortunately, this loosening of credit policies may prove to be a bad policy for many lenders. Additionally, there are numerous online services that make it easy for applicants to misrepresent information on their auto loan applications. Dealers anxious to move cars off the lot and lenders eager to lend to auto purchasers rarely catch misinformation on applications. An estimated 30% of applicants misrepresent their incomes when seeking auto loans, which is one of the most common methods of auto loan application fraud.
Application Fraud: Create Fake Pay Stubs in Minutes
All a loan applicant needs to do to boost their reported income is do an online search for “fake pay stubs.” To appear legitimate, some sites even provide rationale and guidance for creating fake pay stubs with verbiage, like:
- Useful when you need to submit documentation that your employer doesn’t provide.
- Ensure the information on your pay stub is factual.
- Create pay stubs regularly even if you don’t currently have a specific need.
- Have pay stubs available to save time when you have an emergency and need to apply for a loan right away.
These sites direct you to “Click Here to Create Your Paystub in a Few Minutes.” It’s easy, and the use of fake pay stub services has even caught the attention of CarsDirect. Their webpage Can I Fake Proof of Income for an Auto Loan? calls out the deceptive scheme and strongly admonishes borrowers from taking part in it. As a further warning, the web page also explains the techniques lenders use to identify application fraud.
- An experienced underwriter will realize that an income of $120,000 doesn’t synch with a job title of forklift operator.
- A lender could place a stipulation that requires the applicant to sign a 4506-T copy of their tax returns, though getting that slip will also delay any lending decision.
- Bank statements can help confirm income, but it’s as easy to generate bank statements as it is for income statements.
- Income could also be verified by calling the applicant’s employer, but employment fraud is just as prevalent as income fraud.
The above methods are manual attempts to catch an applicant misrepresenting their income. Each of the steps above requires additional underwriting time that slows the overall efficiency of the loan origination process.
Detect Application Fraud Efficiently
With the volume of auto loan applications and pressure to offer loans, detecting fraudulent applications is a challenge for lenders. Just as technology makes it easier for individuals to commit fraud, it also enables lenders to stay a step ahead of fraudsters through the use of machine-learning algorithms.
This technology allows lenders to analyze immense amounts of digital information concerning an applicant’s occupation, employment classification, cost of living variations, job title, income ranges, regional differences, and other personal data. There are additionally private services and government databases that make ensuring accurate information easier, including IRS income data and US Census data.
Machine learning evaluates these data sources to create profiles for occupations and incomes while also accounting for regional cost-of-living variations. Lenders can even use fraud detection services that employ machine learning. These services plug directly into modern loan origination systems to review an applicant’s attributes automatically and to assess whether income has been misrepresented.
Benefits of Automated Application Fraud Detection
Incorporating automated fraud detection services into your loan origination process is a cost-effective way to defend against income misrepresentation and its negative fiscal results. The immediate benefits to lenders include:
- Taking this time-consuming process away from underwriters who would otherwise review applications to detect income misrepresentation.
- Automatically reviewing applicant credentials and calculating the probability that income is inflated on an application.
- Eliminating the cost of income verification for multiple applications.
The long-term benefits are more significant. Detecting income misrepresentation at the doorstep helps lenders reduce the risk of lending to applicants with a higher probability that they’ll default or their accounts become delinquent. In a competitive auto lending market, risk avoidance is a critical factor in maintaining a profitable lending business.
defi SOLUTIONS offers a total solution for a lender’s complete loan or lease lifecycle. Partnering with captives, banks, credit unions, and finance companies, defi’s market-leading solution helps lenders exceed borrower expectations. From digital engagement through the complete lending process, defi sets new standards for flexibility, configurability, and scalability in originations, servicing, and managed servicing. defi SOLUTIONS has the backing of Warburg Pincus, Bain Capital Ventures, and Fiserv. For more information on loan application fraud and how defi can help, please visit www.defisolutions.com.