Auto finance fraud: Catching up to fraudsters’ speed

Vehicle or auto finance fraud is a big business in the world and the U.S. in particular with $7 billion in losses in 2018, according to an estimate by solution vendor Point Predictive. That may pale in comparison percentage wise to the larger trillion dollar auto loan industry in the U.S. but its no drop in the bucket. In fact, auto finance fraud is fast growing fraud vertical having spiked from just $2.5 billion in 2010.

Auto finance fraud are growing mainly because low interest rates have incentivized lenders to accept more buyers with subprime credit, just like with the housing crisis in 2008. Other contributing factors are that manufacturers are pushing to sell more vehicles and cars in the U.S. market have become more expensive, thus requiring more credit to purchase, according to McKenna.

“In the old days, you could steal a vehicle with a screwdriver,” says Sergeant Darren Schlosser, a Houston police officer who covers financial crimes and now specializes in the auto finance fraud beat. “Nowadays, it’s extremely difficult to steal vehicles since they are chipped, key fobbed, etc.”

As a result, criminals have adapted methods for obtaining vehicle to auto finance fraud. Once vehicles are obtained there are many ways in which they can be used. Some criminals use their illegally appropriate vehicles for their own private use. Other times the vehicle is re-sold onward for a high profit, since the true cost of obtaining the vehicle is just a fraction of the sale price.

When organized crime is involved it’s very possible that fraudulently purchased vehicles end up in other criminal activity such as drug running and human trafficking from different countries. Part of the fraud network may also also ship specific vehicles to countries where U.S. models aren’t sold and the markup can be double or tripled the U.S. price.

When it comes to methods, there are three basic fraud tactics a criminal can use to get a hold of a vehicle for which they cannot or will not pay.

Different auto finance fraud tactics

1. Document Fraud
Sometimes the fraud is simply individuals falsifying their income or residency documentation to get more credit than they would otherwise. This means they have to inflate their income or the stability of their residence in the know your customer (KYC) documentation they submit to the dealer.

2. Identity Theft
This is the level where organized crime really enters the picture. Individuals use stole identity documents to claim to be another person with better credit and take out a loan in their name. This requires the coordination of the identity theft, someone to use the identity at a dealership and often more people to unload the vehicle and turn it into cash.

3. Synthetic Identity
Synthetic identities use Social Security Numbers (SSN) that are either fake or belong to children to open new credit histories that can be used to defraud banks and merchants. These fake SSNs are marketed to people with poor credit as “credit privacy numbers” (CPN). Usually, CPN users build up their new fake credit profile using prepaid or low-limit credit cards where they always pay the bills on time to build up good credit. Once a high credit score is built up, they bust out with a car loan they will default on. To read more on synthetic identities go to this article.

Rogue Dealerships and Chargebacks

Sometimes the dealership or dealership employees are in on the fraud.

“Here in the US, we think that 3% of total dealerships might be engaged in suspicious activity that looks kind of organized,” says McKenna. “What they’re doing is manipulating the loan application of the customer so that they can qualify for the loan, including inflating the applicant’s income, making up employment, forging the pay stub documents, fixing the value of the car beyond what the car is really worth to get more money from the lenders.”

This type of dealer-assisted fraud is more common among independent dealerships that source loans from independent lenders than manufacturer affiliated dealers and lenders, says McKenna.

However, independent lenders have found ways to reduce car dealerships’ incentives to help the applicant evade lending controls. Like card not present credit card payments, auto finance fraud also has a chargeback mechanism – with most lenders having a clawback mechanism in place at the expense of dealerships when a sale is lost to fraud. This is commonly referred to as “unwinding a deal,” says Schlosser.

Organized crime in auto finance fraud

The organized crime involved in auto finance fraud is not the type people are used to from the “The Godfather” and “Goodfellas” or other crime groups organized along ethnic affinity groups. Typically, they are small groups of people who coordinate at least partly online.

“You are talking about two or three people not hundreds of people working together, but little groups of people that work together,” says McKenna.

McKenna and Schlosser agree that low-level organized crime is responsible for the overwhelming majority of auto loan fraud using stolen or synthetic identities. Unfortunately, there are no clear, available statistics on this topic.

Enforcing the law and its limits

Part of the problem in fighting auto loan fraud is that the FBI has and other national law enforcement agencies have a threshold under which they won’t typically investigation. For auto loan fraud that figure is roughly between $1.5 and $2 million in the Houston region, according to Schlosser. Other highly populated regions will have similar thresholds for their field offices. The only exceptions are when the crime is connected to another case that is already being pursued federally.

“With my cases, I have not had one with vehicle finance fraud that has gone federal,” says Schlosser,.

Another problem is the lack of local police department officers trained in fighting financial crime who can link together instances of fraudulent vehicle purchases across a region. Much of the fraud that is going on that is either reported to a different law enforcement agency than the one investigating an organized crime group or sometimes its not reported as a fraud at all, according to Schlosser.
“Vehicle finance fraud… is much higher that what we actually see. Being able to link it all together has been a very serious challenge for the industry,” says Schlosser.[/vc_column_text][/vc_column][/vc_row]