Fraud is higher than ever and it’s occurring more often, according to the 2021 Auto Lending Fraud Sentiment Survey from Point Predictive.
“We track fraud year over year, and there’s been $1.78 billion in fraud this year, “says Frank McKenna, chief strategist for Point Predictive. “That’s a huge number, and it’s never been higher.”
He bases his sentiment on years of data. The San Diego-based machine learning company built an auto lending fraud consortium in 2017 to share best practices in fraud prevention. Today, the firm tracks auto lending fraud 24 hours a day, seven days a week. The data they receive from dealerships and lenders helps the company gauge industry fraud and identify red flags for fraudulent activity.
And its annual survey, now in its fourth year, examines fraud sentiments among lenders and dealers. The survey measures consumer loan fraud exposure and asks risk management executives for their perspective. The survey asks consortium lenders, based on anonymity, to identify the schemes, attacks and loss exposure they currently face and the ones they predict for the future.
McKenna shares what the survey identified as fraud trends, including income forgery and employment misrepresentation, and dealer-perpetuated fraud.
Point Predictive asked respondents how the pandemic affected risk and got some surprising results.
Though the pandemic took a toll on many markets and industries, most prime auto lenders didn’t perceive any change in fraud risk from the pandemic. Further, just 58% of subprime lenders reported a significant uptick in risk from the pandemic.
Still, the pandemic had some affects. For instance, fraudsters took advantage of wearing masks. “They found they could go into dealerships and remain anonymous,” McKenna says. “With their masks on, you could not identify them in security footage. I think that’s why theft increased. Fraudsters felt more emboldened.”
Dealers that couldn’t open during shutdowns also began delivering cars for test drives, widening fraud risks. Fraudsters asked to have a vehicle delivered to their apartments. They would stand outside, share their driver’s license, and sign paperwork. “Then they drove off and were gone forever because they didn’t really live there and had a fraudulent driver’s license,” McKenna says.
Point Predictive also relates in its report that “many affects from the pandemic for lenders lie ahead but have not yet been felt.”
Why Fraud Increased
Why did fraud increase last year?
The survey identified the top reason as misrepresentation of income and employment. Of the lenders who responded, over 70% of them believed that at least 5% or more of the paystubs they reviewed misrepresented income. These misrepresentations increased lender exposure to fraud, reports McKenna.
He explains fraudsters go to websites to create fake pay stubs and print them off. “You can make it look like you work anywhere and make any income you want, and it looks like a real ADP pay stub,” he says. “We saw fake pay stub fraud double last year.”
The reasons, he says, include increased unemployment in 2020 as people got laid off, furloughed or quit. “But many still wanted cars,” he says. “So, they had to fake their incomes.”
Synthetic borrowers also increased. Borrowers once stole identities to purchase cars fraudulently. Now they create fake identities using information from many people. They establish a credit history for their fake identity over time until they can trick lenders into giving them a loan.
“People use synthetic identities to get fake driver’s licenses. When they build up enough credit, they buy a car from a dealership and are never seen again,” he says. “This costs dealers and lenders about $1.2 billion a year.”
The third growing problem involves credit repair companies. McKenna explains these firms help consumers wipe out their poor credit. “They obliterate their negative credit history and leave them with pristine credit,” he says. “Then they give the borrower a pay stub from a fake employer so they can go out and buy a car.”
Point Predictive operates a fraud team to spot these activities. So far, the firm has identified around 5,000 fake employers tied to fraud rings and hundreds of millions of dollars in fraud.
How Big a Threat?
The survey identified that most lenders view fraud as a moderate to serious problem for their organizations. Yet it also found 39% of lenders and dealers do not track the full impact of fraud and misrepresentation.
“A lot of dealers think this fraud will not happen to them,” says McKenna. “But if you do the math, conservatively one out of every 200 applications may have fraud on it. So, one out of every 200 cars they sell may involve fraud. And our analysis suggests they will have to sell 10 more cars to make up for that loss.”
McKenna says lenders and dealers often do not look for or ignore fraud. “If you bury your head in the sand, it still occurs. It’s just not classified as fraud,” he says. A buyer may use a synthetic identity to buy a car, then never make a payment, but the lender classifies it as a loan default. They try to repossess the car and cannot find it, so they write off the loan.
Of the firms that track fraud, many do so haphazardly. Someone takes a call from an individual who says there’s a loan on my credit report that I never applied for. But the person taking the call never shares the information. “It’s not that they don’t track it, but they’re not recording it in a central location,” McKenna says. “So, no one else knows about it.”
He adds, “Every lender has some fraud so they should track it.”
How to Respond
“We are trying to raise awareness that fraud is increasing, and you may get hit with it in 2022,” he says. “We need dealers to know that fraud exists, so they train their staff and their finance managers what to look for.”
McKenna then offers suggestions to help dealerships reduce fraud.
“Trust your gut instinct,” he says. “If someone walks into your dealership and doesn’t look like the normal type of consumer, pay attention.”
Red flags may include a consumer who wants to buy a vehicle very quickly. They know the exact make and model they want, but do not haggle price and want to complete a sale within the hour. McKenna recommends, “Slow the transaction down. If it is too good to be true, it probably is.”
He recommends asking additional questions. This often sends would-be fraudsters out the door. “A true consumer, motivated to buy a car, will take time to answer all questions,” he says.
Check and double check driver’s licenses, he adds. Too often dealerships accept a driver’s license on face value, never thinking to check if it’s fraudulent. They just photocopy the license and put it in the loan file.
McKenna recommends purchasing an ID checking guide. These guides contain pictures of state driver’s licenses and share how to determine validity. Many drivers’ licenses have UV security. Dealers can purchase a UV flashlight to check IDs. Finally, McKenna recommends asking for a Social Security card and double checking whether insurance paperwork is legitimate.
He also warns to watch for straw borrowers. These borrowers are car buying mules who purchase cars for theft rings. “Fraudsters recruit vulnerable people to buy cars for them,” he says. “Then that person turns over the car to them for a few thousand dollars. Fraudsters put the car into a shipping container and sell it in another country. And the victim is on the hook to pay for the car.”
McKenna reports these victims often come in with someone who coaches them through the transaction. “That’s a big red flag,” he says.
Finally, he advises not to take pay stubs on face value. Validate the pay stub. Make sure the employer exists and that the person in question works for them.
And when fraud occurs, notify the police immediately. Law enforcement will open an auto theft case, help recover the car, and prosecute the case. “It will not be 100% effective because a lot of cars end up overseas, but it can help,” he says. “However, you’re better off preventing fraud in the first place.”
Ronnie Wendt is owner of In Good Company Communications and an editor at F&I and Showroom.