Cracking Down on Auto Dealer Fraud and Misrepresentation
By Jay Anderson, Senior Strategy Consultant
The relationship between auto dealers and lenders is symbiotic. When lenders suspect that one or more dealership employees may be misrepresenting borrower data in an attempt to sell more cars, they need to understand the potential impact and decide if and how they want to address it with dealership executives. Proving whether false or inflated data originated from the borrower or a dealership employee can be challenging.
Like any lending, there is a fine balance between volume and risk. Once a lender starts to see a higher percentage of loans that originated from a particular dealership defaulting, it warrants some investigation ¾ especially if those defaults are coming from the same finance manager.
Like any misdeeds, there are different degrees of severity. One of the most common car dealer misrepresentations is “power booking.” Power booking is when a dealership employee overstates the features and/or equipment of the vehicle to fit their sales price into a lender’s loan-to-value requirements. As a result of power booking, the lender may be tricked into approving a loan that does not in fact meet its loan to value limits as the collateral is worth far less than the lender has been led to believe.
Power booking can also hurt consumers if they agree to a price based on features or equipment the vehicle does not actually have. Sometimes, however, consumers know this is happening and collude with the dealer to qualify for the loan. In the case of default and the vehicle is repossessed, if the book sheet to actual vehicle features and equipment are inconsistent, most lender dealer agreements allow the lender to recoup the discrepancy.
Fake (ghost) down payments
Also surprisingly common are fake (also called “loaned” or “ghost”) down payments. Ghost down payments involve dealerships intentionally inflating the sales price of a vehicle and creating a fake down payment that matches the inflated price. The purpose is to help borrowers get approved for loans they otherwise may not qualify for. Here’s what this looks like:
1. The lender requires $3,000 cash down from the borrower as larger cash down is correlated to better loan performance.
2. Borrower agrees to purchase a car for $29,000, but they don’t have enough money for the required down payment.
3. The dealership salesperson or finance manager inflates the sales price on the loan application to $32,000 and states that the borrower has put $3,000 down.
4. The lender approves and funds a loan they wouldn’t have otherwise done (or does it at a lower interest than they would have otherwise done) taking on greater risk in the transaction than they believe.
This is fraud.
Overstating a borrower’s income (with or without their knowledge) to qualify for a loan is also a common form of dealer fraud. It can seem innocuous. When the borrower is sitting with the salesperson or finance manager and they disclose their income for the credit application, perhaps they are prompted with a statement like “that doesn’t include your overtime pay, right?” Sometimes the dealer’s finance manager simply inputs the income that they know is needed to get the loan approved. The result is that a consumer ends up with a payment they cannot afford, and the lender gets a loan with a higher likelihood of default.
Fake employment data and verification
When a borrower is a clerk at Walmart or Costco, lenders have a good sense of the average income for those jobs. Dealers know that to inflate a borrower’s income to qualify for a loan, they may also need to falsify employment details, up to and including creating false verification of employment.
Shady dealerships often have a stable of fake employers they recycle when needed. They may use a generic-sounding business name such as “ENC Corporation” and list the borrower’s title as “General Manager.” Some dealers go as far as coaching borrowers on tacking on supplemental income sources, such as Social Security, manipulating or forging pay stubs and bank statements.
Much more rare, but very dangerous for lenders, organized fraud rings have even been known to create fake independent dealerships. If a lender or an employee of a lender is overly focused on growing auto loan volume, they can be duped into bypassing standard due diligence processes and accepting fake loans from fake dealerships. In one recent case, the fraud ring was using vehicle identification numbers (VINs) stolen from cars at other dealerships to create these fake loans.
These are scams that can only last a few months since titles cannot be produced, but in the meantime, lenders can be defrauded for millions of dollars.
In the auto sales business, the phrase caveat emptor (may the buyer beware) is well known. Lenders need to beware as well. It is easier than ever for consumers to forge documents for income and employment verification, and often shady salespeople or finance managers are happy to coach consumers on what they need to do to get a car loan approved. They even take it upon themselves to do so without the consumer’s knowledge in plenty of cases.
There can also be incentives at lenders that run cross purposes. The employees that manage dealer relationships are pulled between driving volume and managing risk. Dealership relationships are important to lenders, so choices need to be made about when to accept some misbehavior and when it goes too far.
Learn more about how Point Predictive helps lenders understand dealer risk with DealerCheck™ for Lenders.