The rise in digital lending during the COVID economic crisis has prompted an increase in synthetic fraud and credit washing, a trend that can lead to higher loan losses for auto lenders.
Synthetic fraud and credit washing impact every business that relies on an accurate credit report, Mike Carr, senior director of fraud at Ally Financial, said during a recent Sentilink webinar, noting that when a consumer falsely claims to be a victim of identity theft and the trade line disappears, it affects the next lender’s ability to accurately underwrite that customer.
Synthetic fraud is when false identities are used to obtain credit using a consumer’s real name and date of birth tied to a separate Social Security number, in most cases. Credit washing is a process in which fraudsters open loans, then claim to be victims of identity fraud in order to remove claims from their credit report and raise their credit score. Legitimate consumers in financial trouble may also falsely claim identity theft in order to remove a loan they cannot pay back, either on their own or at the behest of debt-settlement companies.
Credit washing can undermine auto lenders’ underwriting practices, said Jon Barhorst, chief risk officer at point-of-sale fintech LendingUSA. “Our losses go up because we’re making decisions with the wrong data,” he noted.
The COVID-19 pandemic contributed to a rise in credit washing, especially in auto finance, said Zahid Kassem, a longtime risk management executive and former fraud and dealer management leader at Santander Consumer USA. “This behavior was a result of economic pressures, given the economic challenges the industry was facing,” he said, noting that the problem is compounded by synthetic identities.
Auto lenders can combat credit washing by checking if the police report a customer provides has actually been filed with a police department, and by checking if multiple tradelines are included in a single dispute, Kassem said. The theft attempt may also be fraudulent if the customer’s identity at the time of dispute matches the identity used when the loan was acquired, he added.
During the pandemic, credit disputes increased so much that the Consumer Financial Protection Bureau in April 2020 passed a guidance allowing credit bureaus and financial institutions to exceed the 30-day investigation limit outlined in the Fair Credit Reporting Act, according to the Bureau. The Federal Trade Commission received more than 1 million consumer identity theft complaints last year, Ally’s Carr said, noting that auto lenders are seeing a rise in online fraud.
In December 2020, an analysis of 1,600 false identifies found that one in seven had an auto loan or held an account with a credit union, according to data from SentiLink, a fintech that identifies and blocks fake identities created to obtain credit.
In 2019, fraud associated with auto loan originations topped $7 billion.
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