Most early payment default cases, in which the borrower stops paying within the first six months, include fraudulent information on the loan application, making it crucial for lenders to identify misrepresentation prior to funding a loan.
There are several ways for auto lenders to preemptively identify loans that would likely default in the first six months, risk management platform Point Predictive Chief Fraud Analyst Frank McKenna told Auto Finance News.
Loans with more than 17 potential indicators of false information on the application during the scoring process, for example, are eight times more likely to result in early payment default (EPD), McKenna said.
If a borrower was tied to another EPD case within the past two years, the risk of defaulting early again is eight times higher, he said. A different work phone number listed on multiple applications from the same primary borrower also is a strong indicator of likely EPD.
“There are a lot of alerts that lenders can pay attention to in order to avoid [EPD] from booking,” McKenna said, adding that when EPD occurs it is likely that red flag checks were not in place or that fraudsters were taking advantage of loopholes or “weak targets.”
EPD red flag alerts
Red Flag Alert description Over 17 Different Red Flags Appeared on The Application When Scoring
Borrower Social Security Number has been associated with at least one other early payment default in the last 24 months
Primary borrower has used a different work phone number on another application in the last 120 days.
Borrower has used a different employer name and address on another application in last 120 days.
Borrower home phone number has been associated with at least one defaulted loan in the consortium in the last 24 months
Primary Borrower has used a different address on another application in the last 120 days.
Primary Borrower has been associated with 6 or more declined applications in the last 90 days.
Borrower has been seen in more than 5 applications across lenders in the last 6 months
Borrower home phone number has appeared on multiple applications with high average fraud score and high fraud risk alerts.
Employer name and phone number has been associated with a default in the last couple of years.
Primary Borrower has used 3 or more employer phone numbers in the last 30 days.
Possible straw borrower or identity theft based on profiles of the borrower and the vehicle being purchased.
Primary borrower income is at least 15% larger than income stated by same borrower on an application to a different lender within the last 120 days.
Primary borrower email address has been associated with a default in the last couple of years.
Primary borrower reported income is at least 50% larger than income stated by same borrower on an application within the last 365 days.
Source: Point Predictive
Editor’s note: This story is a supplement to our series providing an in-depth look at trends in auto finance fraud in 2022.
The Big Wheels Auto Finance Data 2023 report, the only tabulation of the top 200 auto lenders by outstandings, is available now.