Auto Loan Fraud Cases are on the Rise – Here’s what to Look For

Auto dealers have many responsibilities day to day, from managing the finances of the business to ensuring customers are satisfied with the service they receive. However, one of the issues facing auto dealers in today’s competitive market is the reality of auto loan fraud. In recent news, the auto loan fraud rates reported rose to the level of mortgage fraud rates at the time the housing bubble was about to burst. These figures give industry leaders and lenders in the auto dealer world pause, even though auto loan frauds pale in comparison in terms of total amounts owed.

Regardless of the smaller dollar amounts of auto loans compared to home loans, auto dealers need to be on the lookout for auto loan fraud to help keep their businesses thriving. Here’s what to look for as a licensed auto dealer.

Types of Auto Loan Fraud

Deceptive auto loan deals take place in several different forms, with some originating from the car-buyer and others from the auto dealer itself. The most common types of auto loan fraud include:

  • Buyers falsifying employment details
  • Buyers exaggerating income
  • Presenting false pay stubs or tax returns
  • Inaccurate details about the car being financed or its value
  • Dealers boosting application details for buyers

While it may seem apparent the reason behind buyers improving their odds of receiving approval for a new auto loan, the question of intent behind dealer embellishments are less understood. In most cases, dealer auto loan fraud, which accounts for nearly 3% of all auto loan fraud cases, is for the purpose of getting an otherwise unqualified borrower through the financing process to close the deal. Unfortunately, these practices, either committed by buyers or dealers, have the potential to derail successful auto dealers who following lending guidelines.

Ramifications of Auto Loan Fraud

Recent reports suggest that auto loan fraud accounts for $4 to $6 billion in losses each year, with trends pointing to an increase in these figures in years to come. While the majority of these write-offs for bad loans may be recouped by lenders in the form of vehicle repossession, the financial loss is significant. And auto loan lenders aren’t the only players on the line if auto loan fraud continues its steady climb. Auto dealers face severe ramifications for loan fraud, albeit indirectly.

As the number of fraudulent auto loans increases, auto loan lenders both independent of dealer partnerships and aligned with specific auto dealers are likely to tighten the reins on qualification requirements. That may mean a higher minimum credit score, lower debt-to-income ratio thresholds, or higher income or assets on the books. Lenders may also require verified documentation showing income, employment, or assets at the time an application is submitted. These additional qualification requirements may reduce auto dealers’ abilities to lend to the same amount of car-buyers. That has a direct impact on total sales volume and ultimately, profitability for auto dealers.

To help combat auto dealer fraud, auto dealers can complete a careful review of borrower applications and request verifying information for subprime or less than ideal customers. Taking simple steps to improve the validity of auto loan applications at the dealer level gives more strength to the market and a reduction in the occurrence of auto loan fraud into the future.

Author:

eric-weisbrot-marketing-managerEric Weisbrot is the Chief Marketing Officer of JW Surety Bonds. With years of experience in the surety industry under several different roles within the company, he is also a contributing author to the surety bond blog.