Deals on Wheels Break Down

COVID created lingering poor physical health effects for some and poor financial health for others.

So says fraud expert Frank McKenna, noting the pandemic revealed skilled fraudsters who boosted auto loan fraud at dealerships.

“During COVID, a lot of people learned how to commit fraud by getting unemployment benefits" using falsified paperwork and other means, McKenna, chief fraud strategist at Point Predictive, tells Wards. "These were sophisticated frauds (and) cars are the next best place to target.”

Auto loan fraud in 2022 rose by more than $400 million compared to 2021 to over $8.1 billion, Point Predictive, a fraud-detection and -prevention software developer, says in its recent Auto Lending Fraud Trends Report.

The report analyzes data from 50 lenders and over 130 million loan applications from 2016 through 2022.

Such fraudulent lending leaves dealerships exposed, says McKenna, “because oftentimes the lender will push these loans back to the dealership and the dealership will be on the hook” for the loan fraud, meaning they will have to recover the purchase price from the consumer. If the dealership was involved in the fraud, they may face civil or criminal charges.

Of the more than $8 billion in auto loan fraud, the largest segment was income and employment-status fraud at $3 billion, followed by synthetic or credit repair fraud at $2.0 billion and identity theft at $1.7 billion. Straw borrowers and dealer/powerbooking fraud accounted for the rest. Powerbooking is when a dealership inflates the value of a vehicle on paper and submits loan applications for more than it is worth.

While it wasn’t the largest in dollar amount, synthetic identity fraud borrowing — using stolen or manufactured identity and identifiers such as a social security number — increased “dramatically” in 2022 and accounted for nearly 25% of fraud, says the Report.

Synthetic identity fraud is “totally avoidable,” says McKenna. “There is no reason you would ever have to book one of these loans.”

To prevent it, dealerships need to look for common synthetic identity red flags, he says.

Those include:

Income Misrepresentation Ties Back to Dealers

Though it fell by $1.6 billion to $3 billion in 2022, income and employment misrepresentation is still the most common type of auto loan fraud, says the Report. And it is a top concern for auto lenders, 43% of whom cited it as their single largest threat for 2023, says the Report.

Moreover, lenders told Point Predictive that about 50% of their income representation can be tied back to the dealer. That creates a “level of scrutiny” by lenders, many of whom track dealership income misrepresentation frequency, says McKenna.

“We have seen lenders terminate relationships with dealers they think are systematically falsifying employment records,” he says.

It is usually not the dealership owner who is behind the fraudulent behavior, he adds. Rather, it is often done by a salesperson hungry to close a deal.

“Dealership owners are frustrated,” says McKenna. “A lot of owners or finance managers are making it mandatory to do certain steps" in the lending process to stop income misrepresentation.

“We are definitely seeing an escalation in fraud,” Mike Pereira, vice president for lending operations at MidAtlantic Finance, tells Wards.

MidAtlantic Finance is a deep subprime auto lender whose clients include both franchised and independent dealers.

Income and employment misrepresentation accounts for the bulk of fraud MidAtlantic sees, says Pereira, but such fraud occurs at a fairly consistent rate and isn’t growing significantly.

However, MidAtlantic has seen synthetic identity fraud “really grow significantly" over the past year, he says. "Creating a falsified (identity) file allows you to create fraud on a number of levels.”

Dealer fraud is not one of the major issues MidAtlantic deals with, says Pereira. And while there were instances where MidAtlantic needed to separate from a dealer due to systemic misrepresentation, “it is not the norm,” he says.

Pereira advocates education as the most effective fraud prevention measure. MidAtlantic consistently coaches and trains its employees on how to spot fraud in a loan application, says Pereira.

Such education is given to employees at every level. “You have to look at every person in your company that is a consumer touchpoint,” he says.

The education must be ongoing because fraud is something “that continues to grow,” Pereira says. “You always have to be one step ahead.”

Fraud will continue to rise as vehicles become less affordable, says McKenna.

Point Predictive’s “Affordability Risk Index” peaked at 152% in November 2022 due to tightened inventory and rising inflation, but vehicles have been becoming less affordable since 2017, according to Point Predictive’s analysis.

The Index analyzes the interrelationship between average car prices, loan amounts and borrower risk factors such as income, credit scores, car payments, and average loan terms to understand macro affordability across the industry.

Rising prices in general stress incomes, making fraud more tempting, says McKenna.

And while some fraud may decrease as inflation subsides, detecting it is like playing Whack-a-Mole.

“The thing about fraud,” says McKenna, “is inflation dropping might result in less income fraud, but there is always some scheme that is replacing it. Fraud is becoming more and more prolific.”