THE RISE OF FRAUD AND MISREPRESENTATION IN AUTO LOAN ORIGINATION

While fraud has always been a problem with auto loans, technology is making it easier to get a steal of a deal. Today’s auto market creates greater competition, particularly for those lenders focused on subprime tiers. Many have loosened credit policies and failed to properly vet loan applications for misrepresentations or outright fraud. Some dealers focus only on getting a vehicle out the door, ignoring the importance of identity verification. Automotive News, citing proprietary fraud data provided by TransUnion, indicates auto loan balances with suspected fraud activity exceed $620 million.

The motivation for auto loan origination fraud varies. Some applicants want to hide poor credit history to obtain favorable terms and acquire a vehicle. They have every intention to meet their payments. For many others, auto loan origination fraud is the easiest way to convert an expensive vehicle into cash. Before these fraudsters have made a single payment, the vehicle is in a shipping container and on its way to a foreign port.

Types of Auto Loan Origination Fraud

Auto loan origination fraud falls into five primary types. Often, an application may incorporate two or more of these types.

Types of Auto Fraud

Source: PointPredictive

Income

There’s no need to be constrained by income when applying for an auto loan. Dozens of websites make it nearly effortless for an applicant to produce credible-looking documents confirming your income.

Employment

Here, too, you’ll find services that provide employment confirmation by phone or document for thirty days—ample time for a loan to fund the purchase, which a driver then takes off the dealer’s hands, forever. For a few extra dollars, they’ll chip in a fictitious company website and even letters of recommendation from former supervisors.  

Straw Borrower

A fraud cartel substitutes a collaborator’s identity (based on an actual person) for the applicant’s identity. In some instances, this scheme is initiated by the dealer. The collaborator gets a kickback and maybe even the car, depending on the the scope of the fraud.

Identity

Considering the frequency and volume of data breaches, this may be one of the easiest types of fraud perpetrated by professional fraudsters. Social security, credit card, bank account, and drivers’ license numbers are all readily available for fraudsters who want a vehicle.

Collateral

Perhaps the easiest from a dealer’s perspective, though it will eventually be detected by the lender who becomes the victim of this repetitive scheme. The dealer misrepresents the vehicle’s value and pockets the difference.

Lenders can’t rely on outdated legacy loan origination systems to fight fraud. Fraudsters who exploit technology to their advantage need to be countered with fintech advancements.

Detecting Auto Loan Origination Fraud Requires Fintech

Analysis of tens of millions of loan applications—legitimate and fraudulent—using machine learning have let fintech services like PointPredictive help lenders detect hidden fraud. These services analyze application information. When fraud is suspected, they provide:

• A confidence score regarding the probability of misinformation or fraud; and
• A reason (identity, income, employment, straw borrower, or dealer).

Based on the score and reasons, lenders can then use this information to determine the next steps in the loan origination process.

• A high confidence score could automatically initiate an auto-decline workflow that creates the adverse action, cites incomplete or inaccurate information as the reason, and sends the notification electronically. Not a minute of underwriter time is used to handle this situation.
• When identity fraud or straw borrowers are suspect, an automated call to verification services provided by ID:Analtyics can be used to confirm or refute the suspected identify fraud.
• If income or employment are suspect, an automated call to verification services like Equifax WorkNumber can provide confirmation or correction of the data.
• When a dealer is suspect, it may be an early warning of a dealer’s attempts to target you with risky loans. Detecting dealer fraud is possible because the analytic service monitors millions of applications from thousands of dealers. When it detects fraudulent patterns from a specific dealer, every lender using the service benefits from the warning.

Unlike legacy loan origination software that requires substantial time and cost to integrate new functionality, cloud-based loan origination systems make it easy to quickly incorporate fraud analytics and verification services. Without the latest fintech capabilities, lenders will be unable to successfully counter the rise of auto loan origination fraud.