Crisis protections create auto fraud risks

Auto fraud has increased exponentially in the wake of the coronavirus pandemic as some people attempt to take advantage of the unprecedented moment in time. Investing in identity verification technologies can reduce fraudulent auto originations during the crisis, fraud experts said, but only if dealerships and lenders are on board.

One unexpected, increasing area of fraud risk for dealerships and auto lenders: the federal financial hardship and forbearance strategies keeping millions of Americans from falling behind on auto loan payments.

Thanks to existing protections and additional guidance in the Coronavirus Aid, Relief and Economic Security Act, lenders granting forbearance to customers in need aren't jeopardizing their credit standing.

Lee Cookman, director of product strategy of global fraud and identity solutions at credit bureau TransUnion, said while these tools are preserving legitimate customers' credit standing, they also open a door for fraudsters to ask for delays in negative reporting on stolen credit products.

"If you just raise your hand that you need assistance, [auto lenders will] put you in a forbearance program or a deferral," Cookman said.

"You're going to have a blend of people who are really in need ... [and] people that are manipulating the system."

Jeremy Finer, general manager of Local Finance Co., a small Florida lender that works with non-prime franchised dealership customers and those who don't have histories with the credit bureaus, said it returned double the amount of auto loan applications than normal in May because of fraudulent information. Income misrepresentation was among the most common type of fraud discovered.

"A lot of people were trying to take advantage of the confusion on the furlough, on the job or off the job," Finer said. "The fraud wasn't some new type of fraud — it's just the volume was increased."

There are increasing signs that fraudsters are piggybacking on CARES Act protections rather than using traditional routes. The accommodation period covers consumer accounts impacted as early as Jan. 31 and could extend 120 days after emergency orders have ended.

Some of the fraud indicators TransUnion typically watches for, such as the rate at which consumers dispute tradelines, declined sharply this spring after years of month-over-month increases, Cookman said. Disputing a legitimate tradeline to improve a credit score is a type of credit washing, and the rates of deleted tradelines always include fraud victims and those who pose as victims to improve their score.

Tradelines deleted from consumer credit reports under suspicion of fraud fell 44 percent from March to April. Auto loans and leases deleted for that reason fell 41 percent in that time, TransUnion said, and were down 42 percent year over year in April.

Rates of disputed and deleted tradelines will continue to fall as the pandemic continues, but Cookman believes they could rise when forbearance agreements end.

For consumers who made a heavily incentivized car deal, payments may come due before their income returns to pre-crisis levels. Unfortunately for lenders, requests for assistance and financial scams will look the same.

"The stimulus doesn't come every month," Cookman said. "If they can't find work or they can't meet their obligations, that's where you start seeing that desperation will breed more of the need for that kind of credit-washing type activity again or trying to shelter from collection."

Activity by credit repair agencies, which commonly sell doctored Social Security numbers to consumers in a bid to improve their odds of approval, also is on the rise, according to fraud detection specialist Point Predictive.

Frank McKenna, the San Diego company's chief fraud strategist, said the increased activity is particularly unusual when lenders nationwide are deploying extensive forbearance and payment-deferment programs.

"Some of these credit repair companies are telling their customers or prospects to take advantage of the pandemic, to clean your credit while lenders are on lockdown," he said.

Point Predictive noted a rise in automotive applications with fraudulent elements over the past several months even as the influx of applications slowed dramatically.

McKenna said one lender that works with Point Predictive said it returned 30 percent of auto loan applications in April to originating dealerships, citing fraudulent data.

"The No. 1 concern for lenders is borrowers' employment status and their claim of income," he told Automotive News.

Millions of Americans lost their jobs in March and April as a result of crisis-related closures of nonessential businesses, and lenders are wary of car shoppers referencing a now-former employer to apply for credit. These concerns are compounded by the fact that closures also mean human resource departments, which lenders may tap to validate employment status, may not be accessible.

Melodie Munar, director of originations for Local Finance, said the company uses the Equifax Work Number to verify income. But if an employer isn't registered with the credit bureau's database, the lender reaches out to companies. Local found that on some applications processed last month, customers were employed when they began the process but lost their jobs before the application was sent through.

"There were people who still tried to pass off that they worked where they were working," Munar said. "They were giving a pay stub from early March, but it was May."

Rising fraud adds further stress to an already pressured vehicle market. Lenders, concerned that mass unemployment could lead to a surge of defaults as consumers may no longer be able to pay their bills, reportedly have been constricting lending standards.

McKenna believes the fallout could be similar to what happened during the Great Recession, when early-payment default rates increased 30 percent in automotive accounts. And now, as then, the most financially vulnerable consumers will be hardest hit.

"The people that are going to be most impacted are going to be the people on the edge, that don't make a lot of money, that don't have good credit scores, that haven't been in their jobs a long time," McKenna said.