With dealer fraud reaching “higher than normal” levels for Pelican Auto Finance LLC, the subprime lender has been looking to develop a lender network to share dealer fraud insights, said Troy Cavallaro, the company’s chief executive. However, the company has been “unable to move the needle” on the project due to lack of lender participation and resources.
“[Dealer fraud] is more rampant than ever, but it’s really tough to assemble a group of lenders together to form a coalition to share the information,” Cavallaro told Auto Finance News, primarily because “no one wants to put the resources behind it.” Lenders perceive there to be a couple points of risk, he explained, such as “sharing information with your competitors, and potential privacy-type issues with dealers, and their customers for that matter, if you are sharing actual documents and fake paystubs.”
It would be “difficult” to form a lender network, because “many lenders may be uncomfortable with sharing how internal policies and procedures operate or how they manage certain potential fraud situations,” added Jeff Haymore, executive vice president of sales and dealer services at Flagship Credit Acceptance.
As of October, Pelican has seen fraudulent dealer activity on 18% of contracts this year, up from 12% last year, Cavallaro said. The primary reason for the increase is that lenders are beginning to tighten or pull back from the deep-subprime space, leaving independent or smaller dealers with fewer opportunities, he explained. “When dealers have less opportunity, they get a little more ‘creative,’ because they are looking to get more deals done and sell more cars,” he added.
Ramping Up Defenses
Whatever the reason for the financing pullback, the remaining lenders are feeling that high level of dealer fraud, and yet “I don’t think a lot of lenders take this seriously,” Cavallaro said, pointing to another reason why creating a forum to share insights is so difficult to achieve. “I think all of them know that it [dealer fraud] exists, but I don’t think any of them really view it as such a risk, like we do and a handful of others.”
In recognizing the problem, Pelican has “ramped up its defenses” in the past 18 months, he said. Specifically, Pelican boosted its verifications, validations, and internal controls, “to make sure that we are talking to the customer that we are purchasing the contract for, and that the income and what’s stated on the credit application is 100% factual. So it’s been a two-fold effort.”
While dealer fraud is not common for Flagship Credit Acceptance, the lender still takes “an active and offensive position,” Haymore said. Flagship prevents dealers from “pushing the envelope” by focusing on “building the dealer relationship, requiring internal associate technical training, and by relying on multiple electronic and manual verifications.” Some lenders tend to get “lax” in their verification or validation process because they often “rely too much on technology, simply for the sake of speed,” Haymore added.
If lenders don’t have a good defense, and a lot of fraud is getting through their system, they may not realize it’s an issue, Cavallaro added. “They would think, ‘Well, we don’t even have that problem, so why do I need to participate in a lender network?’ They probably do have a problem, they just don’t realize it.”
Pelican has endeavored to develop a network, Cavallaro said. However, “until there is more interest, it’s not going to become a reality,” he explained. “With a handful of lenders it’s just not going to work,” he said, but unless everyone participates, “lenders who didn’t participate would get adversely selected,” Cavallaro explained, and those that do will have higher barriers of defense.
“The reality is, like anything, it’s hard to form a coalition,” he said. “But I think that’s ultimately what we need in order to fully combat dealer fraud, because it’s not going away anytime soon.”