Common fraud schemes every dealer should know
Auto loan fraud is a growing problem in the US. Current estimates from PointPredictive, Inc. are that auto lending fraud loss will reach $6 billion in 2017, up from $3 billion in 2015. Lenders are actively looking for ways to reduce fraud and are turning to dealers as their first line of defense. This is logical as dealers have the borrower right in front of them and are in the best position to identify and stop fraud. Here are four ways auto dealers can identify auto loan fraud:
1. Check beyond ID.
Only about 15% of auto loan fraud is due to identity theft. If your only fraud control is checking a buyer’s driver license and social security card, then you are only addressing a small portion of the risk. There are many types of risk beyond identity theft that dealers need to be aware of, including:
- Income fraud – borrowers misrepresent their income.
- Employment fraud – borrowers misrepresent where they work, length of employment and/or job title.
- Straw borrower fraud – borrowers or finance managers bring in a person to qualify for the loan who is not the real buyer.
- Finance manager fraud – finance managers who systematically commit fraud or collude with fraud rings to get loans for luxury cars.
- Document fraud – borrowers falsify their paystubs to substantiate income or employment misrepresentations.
- Collateral fraud – finance managers or sales people load the car with non-existent add-ons to boost the vehicle’s value to justify a higher loan amount.
2. Check if the income makes sense for the borrower.
Income fraud is the most common type of auto fraud – to qualify for a car the buyer cannot really afford, or to get a better interest rate. Look for these common red flags:
- Borrower’s job does not match income (e.g. they work at a fast-food restaurant yet claim $20,000 monthly income).
- Borrower’s income does not match age and experience (e.g. the borrower is 19 years old and makes $25,000 per month). Possible, but very unlikely.
- Borrower’s trade-in, car purchase, and credit bureau don’t match income (e.g. they are trading in a junker, buying a top-of-the-line Mercedes, they have only one tradeline on their credit bureau, and they claim $30,000 per month). Again, it could be, but the facts do not match those of a typical high net-worth individual.
3. Check employment discrepancies
Fake paystubs and borrowers that lie about employment are significant issues for auto lenders. There are several ways to identify fake paystubs and employment:
- Do simple math on the deductions. Most fake paystubs will be inconsistent or have anomalies with the deductions.
- Confirm with tax records. If you’re suspicious of the borrower’s income, get them to sign a 4506-T and go right to the IRS to verify the income reported last year. This is far more accurate than a paystub.
- Request bank statements and cross reference paystubs against deposits to look for inconsistencies.
4. Beware of Straw Borrowers
A straw borrower is an individual whose name, social security number and credit history are used to hide the identity of the organizers of a for-profit auto fraud loan scheme. There are several red flags that indicate potential straw borrower fraud:
- The borrower profile does not match the purchase.
Look at the profile of the borrower compared to the purchase and the application. For example, an 80-year-old person buying a turbocharged Mustang with racing wheels and an upgraded stereo might be a straw borrower.
- Income and employment are inflated.
Since straw borrower scams are fabricated deals, other indicators on the application will not make sense. The income and employment details of straw borrowers are usually fabricated to make the deal go through.
- Inflated collateral value.
The most common element of straw borrower schemes is the inflation of the collateral itself. Cars are often inflated so the dealer can make a huge profit to pay kickbacks to everyone that is part of the scheme.
- Monitor your finance managers.
If a finance manager’s performance is too good to be true, or they can work miracles to get the most down-and-out borrower a good quality loan, they might be doing something “extra.” Monitor each finance manager’s book-of-business weekly to identify unusual trends, spikes in volume, or a rash of atypical borrowers getting loans on vehicles in a short period.
These are all surefire signs that something might be amiss.
Author: Frank McKenna
Frank McKenna is Chief Fraud Strategist at PointPredictive, Inc. Frank is an advocate for fighting fraud and has worked with more than 100 banks, lenders and companies throughout the world, designing strategies, solutions and operational practices that help them reduce costs and increase efficiencies. Connect with Frank on Twitter @frankonfraud.