Auto lenders and dealers were exposed to hundreds of millions of dollars more in fraud and more than triple the number of suspicious loan applications in 2021, Point Predictive said last month.
The fraud prevention and analysis company, which collects data from a consortium of lenders, singled out phony employers, income misrepresentation and synthetic identities as key components of last year’s increase.
Point Predictive’s fraud team found more than 16,600 suspicious loan applications — a 260 percent increase — seeking a combined $309 million.
The company estimated lenders were exposed to $7.7 billion in fraud altogether last year, up 5 percent from 2020.
“The pandemic laid the groundwork for rising fraud risk in 2021 as fraudsters learned to use falsified information and identities to benefit from unemployment and paycheck protection programs,” Frank McKenna, Point Predictive chief fraud strategist, said in a statement.
“Now that these government programs have ended, automotive lenders are dealing with an influx of fraud. [Last year] was another milestone year for fraud risk, with auto loan fraud estimated to reach $7.7 billion — a number we, unfortunately, expect to continue rising.”
Point Predictive recorded hundreds of additional suspicious employer applications and millions of dollars more worth of fraud exposure every month of 2021 compared with a year earlier.
The most popular fake employer in 2021, which Point Predictive identified only as purporting to be a Houston transportation business, was associated with 1,012 loan applications collectively seeking more than $20 million.
Thirty percent of loans with a fake employer end with a charge-off, according to Point Predictive, which has identified 5,450 fake employers since it began looking for them in 2019.
Point Predictive observed increased income misrepresentation rates during the first half of the year, up 22 percent from the first six months of 2020. However, income fraud peaked for the year in May 2021 and has been declining in many of the months since then, according to the company.
“We believe this was caused by the introduction of COVID-19 vaccines, lifting of restrictions and a reopening of the economy at scale in many states,” the company wrote in its annual fraud report.
But Point Predictive felt income misrepresentation would remain more prevalent than before the pandemic began, and be committed for profit rather than just out of need for a vehicle.
The company said the most common fake income was $48,000, followed by $36,000 and $60,000. McKenna told Automotive News that such round numbers could be a red flag, but said more interesting and counterintuitive was that the phony amounts were so small.
“They’re not lying really big,” he said. The median U.S. annual weekly pay was $984, which translates to an annual income of $51,896 — higher than the No. 1 and No. 2 common fake incomes.
Point Predictive said synthetic identities — fraud involving the creation ofa phony person rather than using a stolen real identity — nearly doubled to 0.68 percent of all 2021 applications. It recorded 76,418 potential synthetic applications spanning a combined $2.85 billion loan value, compared with 38,225 suspicious applications and $1.17 billion in 2020.
Point Predictive attributed the increase to companies falsely claiming to provide a “Credit Privacy Number” to consumers. McKenna said this scam arose several years ago with credit repair companies claiming to have nine-digit numbers that could be legally substituted for a Social Security number as a privacy safeguard.
In reality, the credit repair company provides a Social Security number obtained from the Internet, and the consumer unwittingly begins using a fake identity, he said.
Point Predictive said fraudulent Social Security number activity fell into a variety of categories in 2021.
Seventy percent of the time, the Social Security number was randomly generated “because they are less likely to have a true victim,” Point Predictive said. Nearly a quarter of hoaxes involve either invalid Social Security numbers or Individual Taxpayer Identification Numbers, given to taxpayers ineligible for a Social Security number. The final 6 percent of cases involve Social Security numbers issued before the fraudster was born or from a deceased person.
McKenna said it costs money and requires an additional level of consent on behalf of the borrower for a credit bureau to compare a Social Security number against the federal database of legitimate numbers. He said regulation prevents bureaus from assessing the validity of the information on credit applications and demands a record be created.
Thus, if a fraudster produces a name, address and Social Security number combination new to the credit database, the bureau must treat the applicant as a new, legitimate person starting their credit history, McKenna said.
Point Predictive found the typical synthetic identity in 2021 had a credit history dating back a median of 13 months, compared with 76 months for a real person, and an average of two trade lines instead of the nine found in a legitimate credit history.
Point Predictive estimated auto loan fraud would continue to be a significant challenge this year. It said this would be fostered by thin inventory, lenders automating more of the loan process, criminals switching from stimulus fraud to auto loan fraud and regulations that simplify “credit washing” — neutralizing a negative trade line by reporting it as identity theft.
“Digital automation and the move to digital lending is creating unique challenges for lenders,” Point Predictive CEO Tim Grace said in a statement.
“Throughout 2022, we expect to see net losses increase as car prices normalize and pressure [grows] on lenders to expand their automation efforts as Gen Z and millennials become the majority market. Credit washing also continues to grow as credit repair companies leverage it as a way to satisfy their customers, [with] inventory scarcity creating more fraud opportunity and lenders continuing to see higher levels of identity theft on their new originations.”
However, 2022 will also see Point Predictive open another front against fraudsters.
McKenna said the company plans to launch a product that flags potential fraud to dealerships.
Currently, its alerts are transmitted to lenders.