A Year of Lending Dangerously – How 2020 and the Pandemic Shot Auto Lending Fraud to New Heights – and What Can Be Done About It
The pandemic of 2020-21 created a perfect storm for fraud to flourish. Heightened fear, anxiety and economic hardship resulting from the pandemic led some consumers to perpetrate fraud in varying degrees in pursuit of financing, and in turn, to place greater risk for losses on credit unions among other lending organizations. The ensuing economic turmoil caused an immediate and dramatic rise in unemployment, increasing some people’s willingness to misrepresent their current incomes – even with the best intention of paying back the loan once approved.
2020 set a new record for fraud losses -- $7.3 billion in exposure for the U.S. auto lenders – yet income misrepresentation was just one of many forms of fraud to affect auto lenders, with other forms representing an increasingly complex range of sophistication. Fraudsters are experts at finding vulnerabilities in processes and exploiting them for gain. They take advantage of technology and adopt strategies that go far beyond employment and income misrepresentation.
Historically speaking, credit unions could afford to concentrate fraud management efforts away from identity-related fraud, such as identity theft and synthetic identities. This advantage stemmed from a “membership shield” that insulated credit unions from fraud perpetrated against the general public. In 2020, identity-related fraud represented only 20 percent of US fraud exposure – with the balance attributed to first-party fraud schemes. So in reality, many credit unions, especially those growing aggressively and with looser membership criteria, are likely facing a very similar range of first party fraud, just like smaller banks and monoline automotive finance organizations. Only the most selective credit unions are immune to income fraud, employment fraud, straw borrower fraud, and collateral fraud.
Image 1: 2020 U.S. Auto Finance Fraud Incidents – Income & Employment Misrepresentation
Source: 2020 Annual Auto Loan Fraud Report (Point Predictive, 2021).
Last year, there was marked uptick in income and employment misrepresentation (see Image 1). As the lockdowns began, lenders were suddenly slammed by a 100-percent year-over-year increase of falsified income and employment claims on auto loan applications, a level of risk which remains elevated to this day. Data science teams have detected thousands of bogus employers which continue to be used to falsify employment on auto loan applications each month. Far too many of these loans are funded nonetheless perhaps because of a lack of detection.
Trends That are Driving Loan Fraud Exposure Higher
Online commerce presents risk to lenders. Online auto lending channels generate higher rates of synthetic identity, identity theft, and straw borrower attempts since the lack of face-to-face interaction with the lender and dealer directly increases risk. It is reasonable to assume that the rate of fraudulent online loan applications is several hundreds of basis points higher than the fraud rate over the dealer channel since fraudsters can submit many applications with different information in rapid succession. Lenders should be on the alert for higher fraud rates on all their digital and online channels.
Credit washing is the systematic dispute of anything derogatory on the credit report regardless of the accuracy of the record, and there is a thriving industry for these services. In 2020, such credit washing incidents spiked by 12 percent. The line between legality (credit repair and resolving identity theft) and fraud (credit washing) is not always clear to a lender and essentially boils down to ascertaining borrower intentions. Is credit repair part of an effort to turn over a new creditworthiness stone? Or is credit repair merely to engage in more deception? The truth is very difficult to determine. Advanced modeling technology, however, can now detect this fraud risk by identifying borrowers whose credit scores have rapidly increased, while simultaneously identifying a rapid reduction in the number of tradelines appearing on subsequent credit bureau inquiries.
Verifying employment in a “gig” economy, is a challenge for lenders. It is challenging enough to verify employment of a borrower who works in Corporate America. Some of these corporate employers report employee information to screening services. But since roughly only 30% of employment is reported, this traditional approach simply doesn’t cover the majority of workers. A self-employed applicant is even more difficult to verify than a wage-earning applicant. Furthermore, their reported incomes may widely and legitimately vary over time, whether they are small business....-->
The pandemic of 2020-21 created a perfect storm for fraud to flourish. Heightened fear, anxiety and economic hardship resulting from the pandemic led some consumers to perpetrate fraud in varying degrees in pursuit of financing, and in turn, to place greater risk for losses on credit unions among other lending organizations. The ensuing economic turmoil cau...