Four Wheelin’: Fighting Auto Finance Application Fraud

Did you know that a pickup truck can easily cost $72,000? That’s as much as many Mercedes-Benz models! But for criminals, working individually or in fraud rings, these vehicles (or any vehicle, for that matter), present an attractive opportunity: finance the vehicle, sell it illicitly, and pocket the cash. An estimated 10% to 15% of auto finance companies’ bad debt book actually classifiable as first-party fraud.

I spoke with Andy Pollock, fraud specialist for the automotive sector, about this high-impact fraud type, and how to take a strong, “four-wheel drive” approach to fighting application fraud. With over 20 years of fraud-fighting experience working for large banks and insurers, Andy offers FICO’s automotive clients deep domain expertise. Here are the highlights of our recent conversation. 

Q: Why do fraudsters find auto finance fraud so attractive?

When a luxury car or high-end truck is fraudulently financed, the perpetrator can quickly secure a high-value asset for little or no down payment, and drive off the lot with a vehicle that can be immediately sold up to $100,000, or even more. A fraudster needs only a few of these high-end transactions to approach $1,000,000. 

Q: How do fraudsters turn ill-gotten vehicles into cash?

The vehicle can be driven to a port, put into a container and shipped to another country. Or driven across the border to Mexico. Or sold to an unsuspecting victim. Whichever way, the vehicle is nearly impossible to recover. Even if it were recoverable, it could be just a shell a car if it’s stripped for parts or in otherwise bad condition from criminal use. So, while a vehicle is financed with what is technically a collateralized loan, in the case of auto finance fraud, it really isn’t.

Q: How is auto finance fraud perpetrated?

The biggest trend now in the United States is first-party fraud – fraud perpetrated by an individual using their own identity information or a synthetic identity. If using their own, genuine identity information, the fraudster can either not care about the downstream credit score impact of the loan default, and would rather sell the car and pocket the money. Or, if they don’t have the know-how to sell the car directly to a buyer, an otherwise not-hardened criminal may take out the auto loan based on a fraudster’s offer to pay this desperate seller a portion of the vehicle’s value – a quick, easy, still-large amount of money. 

Another approach is the use of fraud ‘mules,’ people who can be enticed or coerced by fraudsters into taking out auto loans. These people who are supplied with a fake license that is good enough to complete the financing process at the dealership, or are forced to use their own. Mules are almost always very vulnerable people. Sadly, the elderly are often prey for this type of vehicle fraud, sometimes perpetrated by a family member.

Crime syndicates and gangs operate at a larger and more sophisticated level. They will apply for multiple loans across multiple lenders, and usually there are one or more common elements, such as a phone number, that links all of these applications together. Organized vehicle fraud is always the most dangerous; you are dealing with hardened criminals moving a high volume of cars, almost always top-of-the-line models.

Q: So synthetic identities are common – what about stolen identities?

Yes, synthetic identities, even those based on young children’s identity information, are widely used to fraudulently finance vehicles. But stolen identities, not so much. Identity theft victims typically become aware of and report this crime quickly, due to highly available credit-watch apps such as myFICO. This defeats one of the fraudster’s main goals: to keep the loan appearing normal, so when it falls into default it is classified as bad debt instead of fraud.

Finally, in some instances, dealers themselves can be involved in auto loan fraud. They sometimes working in collusion with fraudsters, “turning a blind eye” to identification checks or falsifying information at the application stage.

Q: What is FICO’s “four-wheel drive” approach to fighting auto finance fraud?

We have found that while banks and card providers have well-defined fraud teams, processes and detection platforms, the auto finance industry’s approach is more decentralized. There may be fraud-check mechanisms at the dealer or other point of sale, checks in underwriting and checks in collections, but not any way to put all of these pieces together.

At FICO, our goal is to help the auto finance process to be a safe, frictionless customer experience, with risk-managed, fraud-free finance decisions made in seconds. We do this in four ways:

1. Find and classify the fraud on the books: The first and most important step is to size the auto lender’s fraud exposure by determining exactly how much revenue is being lost to fraud. If different groups have their own fraud management, it’s impossible for the auto lender to have an overall picture. The FICO automotive solutions team can, for example, find the connections between fraudulent loans and analyze receivables to determine how much of the lender’s bad debt is actually fraud. We present best-case and worst-case scenarios, and introduce fraud reduction options.
2. Establish teams and processes: Many auto lenders’ fraud functions are rooted in underwriting. We help them evolve to a more effective approach, a centralized fraud function operated by a dedicated fraud team. With advice from FICO on best practices, the lender’s team develops the fraud detection processes needed at various touchpoints in the customer journey.
3. Provide tools: Based on the auto finance company’s requirements, FICO can provide an integrated suite of solutions for multiple types of fraud detection, organized crime link analysis, collections analysis and other necessary functions.
4. Prevent fraud: Our ultimate goal is to provide frictionless fraud detection capabilities that seamlessly integrate into the customer journey, to stop fraudulent activity before it starts – the moment a fraudster even attempts to drive an ill-gotten car or truck off the dealer’s lot.

Led by industry experts like Andy Pollock, FICO is serious about helping auto lenders to improve their financial results and protect paying customers. For more information, visit FICO’s resource page for the automotive finance industry.

Follow me on Twitter @LizFightsFraud.