Car loan fraud is running rampant in the auto finance industry. Far from a victimless crime, synthetic identity fraud and the subsequent financial fallout ultimately hurts you, the auto lender.
In December 2019, over 300 auto loan applications worth $5.5 million were discovered as fraudulent and connected into a scheme involving altering social security numbers. It seems we’re doing well at catching auto loan fraud, but how about preventing it altogether?
While regulatory requirements have increased over the years, the frontend system hasn’t changed much, and it has so many holes that it’s become a liability. That’s because the paperwork-heavy, manual way of originating loans (e.g., collecting documents and ID from prospective car buyers) leaves the door wide open for human tampering.
Fortunately, there are simple-to-implement technologies that offer a digital-first way to combat customer (or dealer) fraud. Read on to discover how digitalization can easily help put an end to this costly phenomenon.
Fraud is an ever-growing problem for auto finance lenders
According to findings by the Aite Group, synthetic identity fraud leads to around $50 billion in losses. The true numbers are likely much higher, as financial institutions often refrain from reporting instances of fraud. In other cases, fraud claims are simply settled or even obscured by false claims of identity theft. In any case, we are talking about major monetary losses.
Yet the consequences of undetected car loan fraud go beyond the immediate financial hit. Fraudulent activity also hurts your financial institution’s reputation, results in KYC fines for noncompliance, having to deal with unpaid balances, and even worsening rates for your future customers as you try to recoup the losses on your margins.
- Here are the main types of fraud we’ve seen recently in auto lending:
Document fraud: When submitting stips to support a loan, a customer with poor credit inflates his or her income, falsifies residency information, makes up employer information and the like in order to get a loan they wouldn’t otherwise be qualified for.
- Identity theft: Bad actors apply for auto loans using stolen identity documents from individuals with good credit, taking a loan out under their name. This typically involves coordinated efforts on the part of organized crime rings. This is what happened in the recent
- Synthetic identity: With synthetic identities, fraudsters fabricate social security numbers (or steal a child’s inactive SSN) to create new credit profiles. In some cases, this is an individual with bad credit looking for a fresh start. More often, it’s a sophisticated system used by professional criminals. Currently, synthetic fraud comprises 80% of all new account fraud, making this one an especially significant issue.
The problem: Broken customer-facing systems leave the door wide open to car loan fraud
As we’ve seen, the fraudsters are getting ever more sophisticated in ripping lenders off. But the loan application methods most lenders are using are as clunky and old-fashioned as ever. In the case of auto lenders, this is far from an issue of mere convenience. An overreliance on cumbersome paperwork processes means the bad guys have an easier way of getting through. They can easily exploit the messiness inherent to physical paperwork and semi-digital processes, and wreak havoc on your institution.
For example, a paltry 7% of income verification documents are actually validated. The vast majority are simply accepted at face value. In addition, lenders rarely look at applicants’ credit reports. Instead, reports are automatically analyzed by systems that can’t catch discrepancies — as long as the numbers fall within certain given parameters, the application is accepted.
What’s happening here? In many cases, lenders are so overburdened by endless paperwork that they don’t have time to get involved where it matters. In other cases, individuals or even dealers can tamper with documents due to lack of a single, “untouchable” digital source of truth. A chaotic system for handling loan applications is the devil’s playground.
The solution: Streamlined frontend tech
Better frontend technology can enable superior fraud detection at each touchpoint throughout the loan application process.
Today, it takes a borrower an average of five touchpoints to finish one loan application. Your borrowers are jumping from digital applications, to call center calls, to scanners, to fax machines to get their applications in the door. In this fragmented environment, it’s easy for foul play to occur.
On the other hand, technologies today allow lenders to handle the entire loan application process in a single mobile environment, mitigating the risk of fraud. These tools can verify the authenticity of documents, the identity of a person being spoken to, the identity of the person sending a document, and so on. Technologies like geopositioning and AI ensure there is no excuse for uncertainty surrounding the truth.
When forms are filled out, documents are uploaded, contracts are eSigned, and identity verification happens all through a single digital channel, your agents will gain peace of mind knowing it’s far more difficult for fraudsters to exploit such a system. They will also recover precious time previously spent on paperwork-heavy tasks. That energy can then be allocated to where the human touch counts: reviewing and checking discrepancies in the application.
A fully digital loan application process also helps different lenders easily collaborate with each other around fraud, such as raising red flags when it comes to repeat offenders.
Finally, mobile technology has been proven to increase loan application completion rates and decrease turnaround time. With all that extra business that is likely to result, dealers will have less incentive to be complicit (or simply turn a blind eye) in fraudulent cases.
Solutions like Lightico prevent car loan fraud and enable customers to complete auto loan applications with the click of a text message link. Lightico’s platform ensures compliance requirements are fulfilled with significantly greater accuracy at faster speeds.