Instances of fraud have been on the rise lately and regulatory agencies at both the state and federal level have been keeping a watchful eye on the automotive lending industry. Research in 2017 showed that fraud cost the auto industry between $4- to – $6 billion – in one year! Data from PointPredictive shows the dramatic jump between 2015 to 2017. While the research has not been updated for 2019, it’s likely a similar picture.
This correlates closely with the implementation of microchips to credit and debit cards. Starting in 2015, the use of microchips rose, making credit cards more difficult to counterfeit, and forcing criminals to focus on other types of fraud like new account fraud.
According to the 2017 Javelin Strategy and Research study:
- Account takeovers tripled in 2017 from 2016, with losses totaling $5.1 billion.
- In 2017, there were 16.7 million victims of identity fraud.
- The total amount stolen hit $16.8 billion in 2017.
- For the first time, more Social Security numbers were exposed than credit card numbers.
Top Five Types of Identity Theft Fraud, 2018
Source: Federal Trade Commission Consumer Sentiment Network
|Number of reports||Percent of total top five|
|Credit card fraud – new accounts||130,928||40.%%|
|Miscellaneous identity theft (2)||87,765||27.1%|
|Mobile telephone – new accounts||33,466||10.3%|
|Credit card fraud – existing accounts||32,329||10%|
|Total, top five||323,455||100%|
Line of Defense
What steps can a lender take to protect its auto lending assets from fraud? First, let’s consider the “known” and the “unknown” types of fraud.
Known fraud is identified either before an auto loan is originated or shortly afterward when a borrower notifies the lender afterward of identity theft, or a lender discovers the fraud in their collections process. Known fraud is more common than you might expect and is present on approximately 0.30% of originated application volume.
In the case of the identity theft against the borrower, the lender is at the mercy of the recovery process. The other instances possibly could have been caught using the OFAC List and FACTA Red Flags Rule requirements. According to credit agency Experian, these two steps are excellent defenses against fraud risks.
Unknown fraud is never identified – at least not during the application process, and possibly not even after a loan has been funded. In most cases, this fraud results in early or first payment default where the customer never makes a payment on their loan after they walk out of the dealership. Data and investigative analysis of early payment default loans indicate that between 40% and 70% of those loans have significant misrepresentation on the original loan application which led to the financial loss.
Again, the use of the OFAC List and Red Flags Rule requirements at the dealership level is essential. The good news is most dealers have made this a standard practice.
However, criminals are creative, and they are always innovating new ways to steal information or defraud businesses. Even when applying the strictest checklists, things can fall through the cracks.
Help your dealers stay educated on the latest types of fraud and how to prevent them – For example, synthetic fraud is on the rise. Synthetic fraud occurs when an individual uses potentially valid social security numbers with false personally identifiable information. For example, the credit application may include a real home address and the SSN may appear valid, but the name and birthdate information do not match with any one person. Unfortunately, automated fraud detection systems don’t always catch synthetic fraud because of a new randomization system implemented by the Social Security Administration in 2011. Educate your dealer partners on what they can do to prevent this. For example, they should apply more scrutiny to all applicants and not rely on a single tool or database to validate a person’s identity. If proper attention is paid during the credit application process, this type of fraud can be stopped in its tracks.
Remind your dealer partners to check for any discrepancies in employment, housing, pay stubs, etc. – Fraud can happen in relation to income, employment, documents provided, and many other ways. Pay attention to any bulletins issued by local, state, and federal government entities and share that information with your dealer partners. You may even want to require pay stub verification even for prime and super-prime consumers. Given the heightened concern over identity fraud, most consumers should recognize the steps taken are to protect their money, as well as the dealer and lender.
Always check the VIN – While powerbooking has gone down in recent years, there are still some bad actors out there filling out credit applications with false or misleading information on the equipment installed on a given vehicle to inflate the total amount funded. Remind your team to always run the VIN in a VIN decoder to see exactly what is installed on a given vehicle and compare it to the credit application. If there are discrepancies, ask the dealer to provide additional documentation showing after-market installations on a vehicle.
The fact of the matter is – fraud is not going away. But helping dealers keep their guard up against fraud risk will do a lot to protect your lending institution from getting caught with a loss.