Fraud exposure in auto lending exceeds $7.7B in 2021

Auto loan fraud increased 5% year over year to $7.7 billion in 2021 as stimulus funds dried up and employment fraud, income misrepresentation and use of synthetic identities grew.

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, Point PredictiveChief Fraud Strategist Frank McKenna told Auto Finance News. “Not a day goes by that you don’t read of somebody that has taken advantage of [government] programs with fraud,” he said. Point Predictive is a fraud and risk management platform provider for lenders.

As stimulus programs subsided by the end of 2021, fraudsters looked to new avenues to use their skills, McKenna said. “Auto fraud was an area that these fraudsters started to go after trying to use those stolen identities or some of the synthetic identities they created.”

Synthetic identity fraud — the combination of real and false identity information — accounted for $1.7 billion of the total loss exposure in automotive lending, according to Point Predictive’s 2022 “Auto Fraud Trends Report.” Straw borrowers, who do not disclose who a vehicle is actually being purchased for, contributed to $1.2 billion of the total loss exposure in 2021.

The cost of employment and income fraud reached $4.7 billion, accounting for more than 60% of the total fraud exposure in 2021, as borrowers misrepresented their identities to increase their likelihood of approval, according to the report. The dollar amount of loans tied to fake employers totaled $35 million in 2021, compared with $7 million in 2019 when Point Predictive started tracking employment misrepresentation.

Digital shift benefits fraudsters

Fraudsters also benefited from the auto finance industry’s shift toward digitization and automation, McKenna said. “If you’re a fraudster, you sit at home in the middle of the night and apply 10 to 15 times, and if you get declined it’s no big deal.” However, these fraudsters are less likely to bring falsified information into a dealership, he added.

The combination of digitization and misrepresentation in 2021 led to the detection of fraud on more than 16,641 loan applications in 2021, a 260% YoY increase, according to Point Predictive analysts. The suspicious loan applications had a combined value of $309 million and included employment, income, identity and straw borrower fraud.

The influx follows Point Predictive’s December 2021 report that auto loan application fraud linked to fake employers surpassed $1 billion.

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