An estimated 5% of franchise dealerships up-charge vehicles sold to subprime consumers more than $1,000 on average above the online advertised price, making it more likely that borrowers will default on their loans, Josh Wortman, an analyst with General Forensics, told AFN.
Since 2017, Wortman’s data also shows that 26% of independent dealerships inflate prices to consumers. “Repeat offenders of price inflation are only a minority of total dealerships, but when added up can account for more than a few bad apples,” Wortman said, warning that dealership-based fraud is a growing trend.
Two weeks ago, a Pennsylvania-based dealership, Hallman Chevrolet, was slapped with a $2 million fine for getting caught in this exact fraud scheme. A month prior, Ford Motor Credit Co. sued Texas-based Reagor-Dykes Auto Group for $41 million, claiming it defaulted on financing agreements by delaying payments on sold cars, falsifying records to obtain additional loans, and partaking in a fraudulent scheme related to inventory flooring.
The impact of dealer fraud can hit a lender for millions in losses in a matter of months if lenders do not have proactive ways of detecting fraud before loans start to default, Wortman said. He recommends that lenders monitor the websites of their dealer base to check that they are advertising the right price and that inventory is refreshed each month.
What dealers don’t realize is they are on the hook if loans default without making payments. “Many dealers do not understand that the loans can push back,” Frank McKenna, chief fraud strategist at PointPredictive, told AFN. “For every loan that gets pushed back for fraud, a dealer has to sell 10 good cars just to make up for that one fraud.”
The chart below represents the percentage of loans at independent and franchise dealers priced higher or lower than advertised online, with the right half showing inflated pricing and the left side showing discounted sales.