Auto fraud is notoriously hard to catch, said Detective Alex Arenas, head of economic crimes at the Fort Lauderdale Police Department. In
fact, less than 2% of fraud schemes are typically uncovered by law
enforcement.
Lenders, to be sure, have long been taking steps to curb fraudulent activity. “We catch around $4 million to $5 million of fraudulent
originations per month,” said Westlake Financial Services Treasury
Director Franka Bicolli. “When we are booking a deal, if we see an alert
from the fraud tools we have, it directly alerts one of our credit
analysts.” Westlake has caught roughly $50 million in fraudulent
applications in the past year, she added.
Industrywide, risk of auto loan origination fraud is forecast to hit $7 billion by year end, a 5% increase year over year, according to data
shared with AFN by PointPredictive’s Chief Fraud Strategist Frank
McKenna. McKenna’s analysis was conducted on more than 70 million
historical auto loan applications.
The potential reach of auto finance fraud demands that lenders stay one step ahead. “Fraud has been around in this space for years,” said
Amy Martin, director of structured finance at S&P Global Ratings.
“I’ve been [in the industry] since 1993, and it’s been a risk in this
space. Auto finance companies have to continue to innovate in new ways
to identify fraud, because the fraud is changing,” she noted.
Of the cases that have gone to judgment — meaning that restitution has been paid or ordered to be paid to victimized lenders — credit
unions have been targeted most often, according to AFN’s analysis.
Specifically, Navy Federal Credit Union and Pentagon Federal Credit
Union suffered the greatest fraud-related losses. In total, 31 credit
unions were victimized by auto loan scams.
Meanwhile, Ally Financial, AmeriCredit, Capital One Auto Finance, PNC Bank, Santander Consumer USA, USAA Bank and captives Ford Motor
Credit, Hyundai Capital America and Nissan Motor Acceptance Corp. were
also nailed by fraud in the past 12 months.
Ford Motor Credit dubbed its case against the Reagor-Dykes Auto Group “one of the largest floorplan financing frauds in the history of
the U.S.,” according to court documents. Ford Credit claimed it was owed
$112 million from the Lubbock, Texas-based dealership chain. The case
has been ongoing for more than a year.
Independent financiers Exeter Finance, Global Lending Services and Skopos Financial were also victims of auto fraud in the past year.
Half of the cases were perpetrated by dealers, establishing dealer fraud as the most common type of fraud found in AFN’s investigation.
Straw-buying fraud — in which the purchase and financing of vehicles are
done using someone else’s credit — was the second-most common type of
fraud, committed 25% of the time.
Yet, across the board, every source AFN spoke with agreed that auto loan fraud involves some aspect of a misrepresented identity. In order
to stop fraud, lenders must first understand the different forms it can
take.Synthetic identity fraud is the process of misrepresenting — in
whole or in part — one’s identity through the use of fake Social
Security Numbers, or through false addresses, employment histories or
income. It is the most rampant form of fraud because it is involved in
every dealership or consumer deception.
In fact, synthetic fraud balances reached nearly $2 billion through midyear, according to data from TransUnion. Auto loan fraud perpetrated
using synthetic identities accounted for 62% of the total balance.
“Synthetic identity theft is the largest fraud we are seeing in the industry right now,” said Todd Wolf, chairman of the Auto Finance
Coalition (AFC). The AFC, which was founded in 2011 and consists of 165
members, is dedicated to snuffing out fraud rings in the auto finance
industry. The coalition documents its findings in white papers it
submits to the auto finance community, federal regulators and law
enforcement agencies. The AFC has assisted in cases involving tens of
millions of dollars, Wolf noted.
In one instance, Jackson, Miss.-based Magnolia Federal Credit Union was the target of a seven-person synthetic fraud ring in which the
conspirators used fake Social Security numbers and fraudulent employment
history to apply for loans for vehicles at non-existent car
dealerships. The scam even went so far as to have one perpetrator man a
phone line used for the sole purpose of verifying the false employment
records.
Fraudsters will also recruit other individuals to help them defraud auto lenders in a process known as straw-buying. By itself, straw buying
isn’t illegal, but paired with tactics of synthetic fraud, it is
largely successful in fooling lenders.
Straw buyers in North Carolina recruited at least 30 individuals and defrauded 15 credit unions out of $1 million worth of direct auto
loans. The trio created fake purchase orders that were submitted with
loan applications — and established bank accounts and false websites and
physical addresses to corroborate the validity of the fake dealerships.
Most of those loans defaulted, and when the credit unions attempted to
collect on the debts, the fraudsters attempted to convince the financial
institutions that the borrowers were victims of identity theft.
Meanwhile, in Ohio, two men defrauded nine financial institutions — including USAA, PenFed, and Navy Federal — to the tune of $2.7 million
between August 2014 and April 2018. The pair recruited eligible credit
union members to submit multiple loan applications on a single vehicle
without any intention of transferring the vehicle’s ownership.
California was home to the largest — and costliest — straw-buying fraud conspiracy, AFN found. The organized ring, comprised of 21
members, racked up $5 million in fraudulent auto loans on more than 100
vehicles. The perpetrators formed 54 shell companies and opened 45 bank
accounts with various financiers to facilitate the fraud, according to
the San Diego Regional Auto Theft Task Force.
In some cases, auto dealers can serve as the first line of defense against synthetic and straw-buying fraud, Arenas said. “I got into [auto
fraud] when the finance manager at a [Fort Lauderdale, Fla.-area]
Yamaha dealership
reached out to me — he was good at pointing out when something wasn’t smelling right with a customer,” Arenas said, noting that nine
times out of ten, if a person shows up and buys a new WaveRunner after
rolling up in a brand new vehicle, he is more than likely [committing]
fraud with synthetic identity.
“A two-second check of the Social Security Number and driver’s license would tell me if they matched,” Arenas said, noting that auto
loan fraud can be stopped at the dealership level. “The finance company
and dealer need to work closely together,” he added.
