The new face of auto finance fraud has reared its head as changes within the industry have transformed the way predators exploit it.
In 2020, fraud losses reached new heights, amounting to $7.3 billion, an increase from $7.0 billion in 2019, according to risk management company PointPredictive’s 2020 Annual Auto Loan Fraud Report. This increase was largely due to fraudsters’ ability to exploit the newly remote nature of auto transactions and deteriorating consumer financial health induced by the pandemic, according to PointPredictive Chief Strategist Frank McKenna.
“If anything, maybe fraud changed more here in the U.S. than almost anywhere in the world,” McKenna said. “If I look at 2020, not just in auto but period, it was really a perfect storm for fraud and scams.”
With the unemployment rate spiking at 14.8% in April 2020, the U.S. government funneled $2.6 trillion into the economy through the end of 2020 to help prop up businesses and aid consumers. Auto financiers supplemented government stimulus through their own loan modification programs, which largely kept losses at bay, but the stage was set for fraud to balloon.
Fraud traditionally rises during recessionary cycles and economic crises. Borrowers become desperate, businesses feel pressure to stay afloat, and —most importantly — active fraud rings take advantage of the chaos, McKenna said.
However, the pandemic crisis brought new factors into the mix that helped prop up fraud, McKenna said. First, lockdowns and shelter-in-place orders isolated people, who then spent more time online, making them more vulnerable to scams. And, some also ended up participating in fraud, according to PointPredictive.
Auto finance was no different. In fact, fraudulent auto loan applications shot up $2 million per month since the beginning of the coronavirus pandemic in March 2020, despite an overall decline in auto loan applications. As total origination volume declined by 30% during pandemic shutdowns, PointPredictive analysts found that the rate of fraud cases increased by 25% during that period, according to McKenna.
“People are more desperate now than they’ve been in a long time,” McKenna previously told Auto Finance News back in June 2020. “They’re out of a job, dealerships are trying to sell cars because they’ve been locked down. In order to survive, there’s more desperation.”
Income and employment misrepresentation amounted to $2.19 billion each, and the industry saw more borrowers use fabricated identities, McKenna said. Synthetic identity fraud, in which real and fake information are combined to create a new identity, has historically been a major contributor to auto finance fraud.
Now, however, fraud prevention executives are beginning to see new trends in the way fraud is perpetrated through synthetic identities, and they are looking for ways to combat against it.
New threats: Synthetic identity
Capitalizing on the chaos wrought by the pandemic, fraudsters are using synthetic identities and a process of disputing trade lines on credit reports, known as “credit washing,” to execute elaborate schemes. And as consumers also fall victim to fraud due to scams, it is increasingly difficult for lenders to distinguish real instances of fraud from disingenuous claims.
“Synthetic identity” is a term broadly used across the industry, Houston Police Department Sgt. Darren Schlosser told AFN. Schlosser, a 24-year law enforcement agent who supervises the vehicle fraud unit within the auto theft division at the department, said that while the term can be applied to various types of fraud, the common denominator is that at least a portion of an identity is falsified.
Still, a lack of a uniform definition for the fraud poses a problem in guarding against it. Sometimes, traditional identity theft — in which a fraudster takes over a victim’s information and poses as them — is associated with synthetic identity. But that definition isn’t entirely accurate, Schlosser said.
“My personal view on what synthetic identity is, is when there’s a made-up person, so it would be an individual that’s totally created,” Schlosser said. “They would create a credit privacy number, or a number to mimic a Social Security number, to create alias names and alias credit lines, so they can obtain vehicles and other types of commodities,” he added.
Within that world, though, there is also the “hybrid synthetic identity,” in which legitimate personal information — such as name, date of birth or driver’s license — is combined with a fake Social Security number to create a new identity.
No matter which synthetic identity strategy is employed, the end result is a borrower with high credit worthiness — at least on paper.
Credit washing, on the other hand, is the process of disputing trade lines on a credit report by claiming to be the victim of identity theft. This type of fraud has been a growing pain point in the industry for a while, Mike Pereira, vice president of lending operations at Clearwater, Fla.-based MidAtlantic Finance Company said.
Basically, the complainant holds that the credit line was not authorized and claims to be a victim of identity theft, Pereira said, usually through complaints with credit reporting agencies, such as TransUnion, Experian or Equifax. Often, fraudsters employ credit clearing companies to make their requests.
“From our perspective here, we probably at MidAtlantic receive several hundred of those requests on a monthly basis,” Pereira said. “And I will tell you that a majority of those are false accusations — very few of them actually turned out to be identity theft.”
In fact, a single individual could potentially utilize these methods to perpetrate millions of dollars in fraud, Schlosser said.
“We recently had a Hispanic male, an older gentleman in his 60s, that was utilizing Puerto Rico driver’s licenses to obtain credit at the different dealerships,” Schlosser said. “All of the identities had an 800-plus Beacon [Equifax Credit] score, so he qualified for quite a large amount of credit.”
Schlosser’s investigation linked together 19 vehicles amounting to $1.3 million in Texas alone, and another 30 vehicles in Pennsylvania for another $1.3 million.
“I’ve only found one true complainant in the 11 aliases that he used,” Schlosser noted. “It’s quite a large case, and I think it goes to show the synthetic nature of what he was doing — as far as we can tell, some of these individuals were not in existence.”
Protection from the beast
The combination of synthetic identity and credit washing skews lenders’ risk numbers when “credit worthy” borrowers default, Scott Ellefson, fraud specialist at VW Credit Inc., said. “The real conundrum for a lender is: How can we efficiently approve a customer, keep our dealers happy, keep our customers coming back, and yet still filter out these people that are creating these [synthetic identities],” Ellefson said.
“That’s why it’s really important at first to define what is ‘synthetic identity’ to your organization, and start figuring out how are we going to parse these apart and dissect them?”
Fraudsters are very fluent in all things credit, said Matt Beardsley, manager of high-risk consumer underwriting at Pentagon Federal Credit Union, but there are numerous techniques that lenders can employ to help protect against fraud.
First, consumers who are truly victims of identity fraud will reach out to the lending institution directly, rather than use credit clearing agencies or credit reporting agencies.
“They’ll talk to somebody in the fraud department; they’ll go through the fraud protocols; they’ll fill out a fraud affidavit; they might make a police report, whereas the bogus claims are those where the borrower goes directly to the credit reporting agencies to dispute that,” Beardsley said.
Another quick way to help prevent against synthetic identity fraud is to understand the nuances of Social Security cards, Beardsley explained.
“In 2008, the Social Security Administration changed the format of their Social Security cards, meaning that there’s a date in the bottom right-hand corner of the card,” Beardsley said. “If the date is 2008 or later, the name on the card is always going to appear on two lines.
“So a quick way — as it relates to synthetic identities and trying to verify identities upfront when you’re underwriting these applications — is to take a look at that Social Security card.” If the name is on one line, that’s a quick way to identify a fraudulent Social Security card, Beardsley explained.
Lenders can also work with their dealer partners to help mitigate fraudsters taking advantage of the remote nature of transactions by forcing potential borrowers to provide ID verification that includes an image of the borrower’s face, Schlosser said.
“Now you’ve got a face associated with [the ID], and you can compare the image on the driver’s license to the image of the person presenting it. If they don’t look alike, then that’s a problem,” Schlosser said. “Also, it gives us, from a law enforcement perspective, proof that that person was using that ID to commit that crime, instead of having to just rely on a photo array.”
Training is also paramount, VW Credit’s Ellefson noted. “I hammer that all the time — training, training, training. We train our front end [originations] folks what to look for in synthetic fraud. Train your collections folks. Again, early detection — if I can turn every one of my collectors into a baby investigator, that’s outstanding.”
The bottom line, Ellefson said, is that the average person and the average dealer doesn’t understand the intricacies of fraud. “But, if we really start educating … we start seeing dividends.”
At the end of the day, auto lenders can combat fraud by building sound processes, MidAtlantic’s Pereira said. “Making sure we’re timely with the processes on how to spot fraud, how to detect fraud, how to deal with fraud, how to jump on it really quickly, helps us alleviate a potential loss,” he said.