Defense Against the Dark Arts of Synthetic Fraud in Auto Loans

Wands at the ready, folks – synthetic fraud is like nothing you’ve seen before.

Identity fraud has plagued lenders from time immemorial. Wherever money is on offer, criminal enterprises and bad faith actors are assuredly looking for ways to grab it and run. The auto lending business is no exception. Among the army of would-be con artists out there, though, one sort stands out – the Voldemort, if you will, to the massing Death Eaters of fraudulent borrowing – and that’s synthetic fraud in auto loans.

What is synthetic fraud?

Synthetic fraudsters assemble piecemeal identities from various sources, often pilfering victims’ account data and personal informationfrom dark web sites or from compromised, malware-infected computers. Armed with a veritable spellbook of names, addresses, social security numbers, and other identifying documents, fraudsters can quickly spin together dozens of combinations into complete synthetic identities with which to apply for auto financing.

Then, it’s as simple as walking into an auto dealership, applying for financing on a car with a synthetic identity, driving off, and flipping it for perhaps three or four times its sale price. As Colin Cavey of TransUnion notes, “Someone with fraudulent intent and a false identity can go into a dealership, where they’ll find a lender willing to finance the car of their synthetic identity’s dreams, and before the lender opens for business Monday, the car is being loaded onto a container ship for sale in a foreign market.”

What’s the impact on auto loans?

Synthetic fraud in auto loans is relatively easy for perpetrators, and particularly conducive to high-volume fraud. It’s also even more difficult to recognize than traditional forms of identity theft, because often there’s no single victim to alert the lender to the fraudulent transaction. As a result, creditors log the fraudulent loan as a delinquency and pass the account along to collections, where manpower and resources are wasted attempting to collect on a debt that will never be repaid.

Fraudulent borrowing is projected to cost the auto industry up to $6 billion this year, and synthetic identity fraud comprises an ever-growing share of these losses. How can auto lenders combat this growing threat?

How do we prevent it?

In auto loan fraud as in run-ins with Death Eaters, you’re better off avoiding bad situations altogether by taking steps to minimize risk. Unfortunately for lenders, fraudulent borrowers don’t usually announce their presence with a looming sign in the sky. Fortunately, they don’t have to. Some strategies still prove effective in reducing fraud losses of all types, including losses to synthetic fraud.

First, avoiding particularly risky borrowers can help auto lenders reduce their exposure to fraudsters. Tim Grace, CEO of risk management firm PointPredictive, notes: “We are seeing more fraud because we are doing more risky lending.” Subprime auto lending is on the rise in 2018, and, according to Grace, under-qualified borrowers are more likely to perpetrate fraud.

Lenders can also curb their risk by more rigorously verifying the identities of potential borrowers. Pay stubs, for instance, are often requested to confirm an applicant’s income. These and other documents supplied directly by the borrower, however, can be convincingly forged. Rigorous identity verification should aim to draw information from credible third parties, and not from the borrower alone.

A Secure Defensive Tactic

Using utility data for identity verification is one foolproof way to check whether a borrower’s identity is real or fake. Data collected directly from utility providers can be delivered to an auto lender in minutes, with no opportunity for tampering. With automated utility data in their defensive spellbook, lenders can easily verify borrowers’ name, billing address, and utility payment history against other parts of their loan application, allowing them to separate fraudulent, synthetic identities from legitimate borrowers.

Consider those fraudsters expelliarmus-ed.

Take a look at our solutions sheet to learn more about the identity verification process and how utility data can help lenders deter fraud.

You might also be interested in:

• Utility Bill Identity Verification for the 21st Century
• GDPR’s Resounding Impacts on Identity Verification
• Staking Out the Enemy: Understanding ID Verification in a Digital World

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