Lenders invest in tools to mitigate double-pledging, credit washing

Lenders are investing in tools to mitigate double-pledging of assets and credit washing in light of an uptick in fraud. Auto financiers are eyeing ways to protect against fraudulent activity as fraudsters become more sophisticated , and the industry faces increased scrutiny on the heels of recent allegations of double-pledging of assets on warehouse lines of credit against buy here, pay here retailer Tricolor Auto . “The recent issues with certain players in the private credit market validate the need for solutions,” Jeff Flynn , partner at San Francisco-based Citi Ventures , told Auto Finance News . Citi Ventures and Wells Fargo Strategic Capital participated in a $31 million series B funding round for asset-backed lending fintech Setpoint.io in August 2024, according to Crunchbase. Setpoint launched asset verification software to combat double-pledging of assets in collateral pools on Oct. 29. The launch of PledgeCheck followed the collapse of Tricolor on Sept. 10, which the Department of Justice is investigating for potential fraud. PledgeCheck is a third-party verification system that requires lenders to submit their master loan tapes — a record of the loans they’ve made — and the funding request alongside voluntary information such as bank account data, Setpoint Chief Executive and co-founder Stuart Wall told AFN . The tool checks submissions from the originators against other data uploaded without sharing the information with other users, he said. “Between those three [pieces of information], we can validate that the asset being pledged to that lender in that funding request is unique,” Wall said. “Because some of the issues that have been the catalyst here came from auto, that's where people are starting,” he said. “The most demand seems to be from the auto groups, and that might be where a lender, for example, might be starting with some of their auto counterparties.” About 55 firms have either adopted PledgeCheck or are in active discussions, Wall said. The breakdown includes 17 U.S. banks, 28 global credit managers and 10 originators or issuers. Setpoint has demonstrated PledgeCheck for more than 250 lenders and originators, Wall said. In total, Setpoint serves about 250 institutions, most of which are involved in auto, across all products such as report automation and standardizing asset-level data, according to the company. “Nearly all [lenders] have emphasized the need for better borrower data and support the idea of a trusted third party,” Wall said. "Reception from auto loan originators has been especially positive. Most have indicated a willingness to meet lender requirements to begin implementing PledgeCheck.” Credit washing While double-pledging scrutiny has grown in recent months, lenders are continuing to combat the rise of credit washing, in which consumers' credit scores are inflated by the removal of tradelines. The trend prompted TransUnion on Nov. 13 to release its credit washing solution after more than a year of development, Steve Yin , global head of fraud solutions at TransUnion, told AFN . “We had a very successful pre-launch, with interest across the credit landscape,” he said. TransUnion did not disclose how many lenders use the product. Credit washing occurs when consumers eliminate “either temporarily or permanently legitimate tradelines from [their] credit reports, which has the effect of increasing [their] credit score, either in the very near term or over a period of time,” Yin said, adding that there are legitimate use cases of contesting tradelines. “The mechanism is a legitimate mechanism; it's the abuse of the mechanism that is the problem [and] the problem can manifest in two different ways,” he said. According to Yin, they are: First-party fraud: An individual contests a legitimate tradeline after going delinquent or defaulting with the intent of increasing their credit score; and Systemic issues: Collection agencies market the ability to clean up credit and recommend actions that the consumer should take. “If you dig into some of the details, then it turns into recommending that the consumer takes certain actions that are likely misrepresentative of the actual condition of that account that's in collections and the reasoning behind it,” Yin said. “The numbers are really big in terms of losses associated with credit washing,” he said, noting that while credit washing is estimated to be carried out by 1% to 2% of consumers in the U.S. economy, large losses are because of the size of the economy. TransUnion estimates that $10 billion in debt will be erased from credit reports by yearend 2025.

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