How KYC Identity Verification Can Help Auto Lenders Prevent Fraud

Leor Melamedov

Auto lenders have a lot to lose from auto loan fraud. From reputational damage to hefty fines to the necessity of increasing consumer loan costs, all lenders want to avoid falling target to fraudsters. Yet the “new normal” of remote transactions in wake of the coronavirus crisis has made it harder for lenders to catch fraudsters using traditional KYC methods. The good news is that the digital world — which is commonly seen as a breeding ground for fraud — can also be the antidote to it.

Using the latest KYC identity verification techniques, lenders can weed out bad actors effectively and easily. Here’s how.

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The Different Faces of Auto Loan Fraud

Different fraudsters have different methods of committing fraud. These methods are constantly evolving to avoid detection, becoming more sophisticated as known scams surface. In turn, auto lenders need to develop more advanced KYC methods. These are the most common types of auto loan schemes out there:

  1. True name application fraud: This occurs when someone uses a single person’s real identifying information. When people think of identity theft, this is usually what they have in mind. A fraudster uses someone’s social security number (SSN), credit card number, date of birth, or other forms of personally identifiable information (PII) to apply for an auto loan. In other words, the fraudster assumes the identity of the actual person.
  2. Manipulated fraud: The information on the loan application appears legitimate at first glance. The fraudster uses an actual name or address but adds tiny mistakes (e.g., a slightly misspelled address) that make it difficult for the auto lender to track down the inevitable delinquent payments.
  3. Synthetic fraud: An increasingly common and problematic form of fraud that involves combining parts of a legitimate identity with fake information. This could include taking a legitimate ID number or SSN and then attaching them to made-up names, or combining parts of different people’s identities.

The Consequences of Poor KYC in Auto Lending

There’s simply no way around it: A dearth of KYC procedures directly leads to a rise in auto loan fraud. BNP Paribas’ $8.9 billion fine and HSBC’s $1.92 billion fine are just some of the most prominent examples of crippling penalties for KYC non-compliance.

More recently, in 2019, fraudsters were convicted of conspiring a Ponzi scheme. Over the four-year period, the ring submitted over 80 auto loans, equalling about $2.7 million in attempted fraud, and actually obtained approximately $1.7 million. The scheme incorporated fake names of companies that appeared to be dealerships, when in fact they had no employees, cars, car lots, or dealership licenses.

These fraudsters brought in people to apply for auto financing with banks and credit unions. The applications would claim they wanted to purchase a vehicle from one of the front companies. If a check was issued to the applicant, it would be deposited into the accounts opened by the fraudsters and held in the names of the fake companies.

This is just one of many unbelievable scams that have plagued the auto finance world — and with great consequence. Over the last ten years, companies internationally have been fined $26 billion for AML, sanctions and KYC non-compliance. Occasionally penalties even turn into prison sentences in cases when lending officers are complicit.

The coronavirus has only increased fraud in auto lending, and heightened the need for better KYC. Some lenders have seen that fake proof of income is climbing, as is synthetic identity theft. Overall auto finance fraud has jumped about 30% per week since March 2020, despite a decline in originations. Regardless of the specific scheme or type of deception, auto lenders undoubtedly now face increasing fraud with fewer loans, showing that the overall fraud rate has surged.

The Crucial Role of KYC Identity Verification in Fighting Fraud

Given this new remote reality and the subsequent increase in auto loan fraud, auto lenders need better fraud detection at each touchpoint across the entire loan application process. Typically, it would take a borrower a significant amount of time to complete a loan application. Borrowers were going back and forth between digital applications, call centers, scanning, faxing, and mailing to complete the process.

Fraudsters are prone to exploiting the messiness of these systems. And innocent borrowers are dragged through a process that’s excruciatingly long and difficult. During the “new normal,” such KYC procedures are unacceptable to customers.

Yet the latest technology can ensure the loan application process is completed both more efficiently, and with a decreased risk of bad actors slipping through. These methods of KYC identity verification can be completed in a single mobile environment. This ensures that auto lenders stay on top of KYC protocols and prevent fraud even if their customers are remote. It also ensures that identity verification is not a burden to new borrowers.

Lightico offers an easy-to-implement solution that minimizes the inconvenience of Know Your Customer (KYC) and Anti-Money Laundering (AML) identity verification. Here’s how KYC ID verification works with Lightico:

  1. Customer receives a text message with a link. The link takes them to a secure session with a request for photo ID.
  2. Customer takes a photo of their ID (drivers license, passport, etc.)
  3. Customer then takes a live selfie which is instantly compared to the ID provided. This is used to confirm that the person on the phone and the person on the photo ID are the same.
  4. Customer ID and photo is matched and verified.

The Takeaway: KYC Identity Verification Supports Optimal Fraud Prevention

A fully digital ID verification process makes it easier for auto lenders to catch fraud attempts. The mobile technology involved with digital ID verification is proven to boost loan application completion rates, as well as reduce turnaround time. Unlike traditional manual KYC, which relies on (often variable) agent knowhow and experience, automated ID verification standardizes the process.

Learn more about Lightico’s ID verification capabilities, along with the full platform of eSignatures, digital payments, eForms, and more at Lightico.com.

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