This post was created with the help of Tom Kline, a risk mitigation expert and compliance consultant. Tom is a third generation “car guy” and former dealership owner with more than thirty years of experience. Outside of interviews and speaking events, he also shares his expertise in his recent book, Tuck The Octopus: A Better Vantage Point For Dealership Risk And Compliance.
It’s a tough economic landscape for the auto industry. Between fluctuating car values and unprecedented inflation, dealers and lenders are fighting an uphill battle. In the midst of all of this, rising levels of fraud threaten to further undercut profits.
According to Point Predictive data, fraud exposed the auto industry to a staggering $7.9 billion in potential losses in 2023. But that’s just the tip of the iceberg. From sophisticated credit washing schemes to increasingly convincing income misrepresentation tactics, fraudsters are becoming more creative– and more destructive– in their approaches.
What’s Fueling the Rise in Auto Fraud?
The surge in auto fraud isn’t happening in a vacuum. Experts have uncovered several key trends driving the increase in fraudulent activity.
Advancing technology
The digital revolution that promised to streamline auto sales has also armed fraudsters with unprecedented capabilities. At the forefront of this shift is artificial intelligence, particularly the rise of deepfake technology. These sophisticated AI tools can now generate remarkably convincing synthetic media, from forged documents to fabricated video verifications, creating new vulnerabilities in traditional identity verification processes.
But the threat doesn’t stop at synthetic content generation. We’ve also seen an alarming increase in cybercrime. According to an Apple report, there was a 20% surge in data breaches between 2022 and 2023.
When cybercriminals breach databases, they harvest real personal information– social security numbers, addresses, and phone numbers. This stolen data then flows through dark web marketplaces, where bad actors can cobble it into sophisticated synthetic identities complete with supporting documentation.
Lagging security adoption
While many bad actors rapidly adopt cutting-edge tools and techniques, many dealerships remain anchored to traditional operational models. This growing technology gap has created a dangerous imbalance where criminals are often a few steps ahead of the businesses they target.
Risk mitigation and compliance expert Tom Kline suggested that some fraudsters may be keeping tabs on businesses that are falling behind. “Fraudsters often test before they strike,” Kline noted. “For example, when they steal vehicles, they will come in and observe beforehand and see where the keys are. And in most places, it’s super easy to see.”
This technological divide isn’t just a gap– it’s an invitation for opportunistic criminals. While dealerships hesitate to invest in advanced verification systems and digital security measures, fraudsters continue to refine their tactics, finding and exploiting weaknesses in outdated processes.
Rising affordability risk
In addition to the increase in opportunities for fraud, economic hardship is also becoming more widespread, leading many to act deceptively out of desperation.
According to Point Predictive’s 2024 Auto Lending Fraud Trends Report, affordability risk reached a critical peak in October 2023. The reason behind this trend? Put simply, a tough economy.
From 2018 to 2023, consumers saw major increases across all cost of living expenses. Among homebuyers, the median mortgage went up by 93.6% while income increased by only 23.5%. During this time, homebuyers went from retaining 29.4% of cash after expenses to only 14%.
This economic pressure cooker has forced many lenders to reconsider traditional risk assessment tools like price-to-income ratio (PTI), which may no longer accurately reflect a borrower’s ability to repay in today’s inflationary environment.
Furthermore, Point Predictive’s research reveals a clear correlation between low affordability and specific types of fraud:
- Credit washing: Borrowers artificially inflate their credit scores by systematically disputing all negative items on their credit reports
- Income fraud: Applicants misrepresenting their earnings through fabricated pay stubs or employer verifications
- Straw borrower fraud: Borrowers recruiting individuals with stronger credit profiles to apply for loans on their behalf
While these schemes stem more from financial desperation than criminal intent, they still pose a risk to your business.
Emerging Patterns in Auto Fraud
Auto fraud is never good news for your business, but not all fraud is created equal. Recent research has uncovered patterns that provide crucial insights into where and how dealers face the greatest risks.
The rise of synthetic fraud
The landscape of auto fraud is shifting dramatically. Synthetic fraud attempts surged by 98% in 2023 according to Point Predictive. By the fourth quarter, dealers estimated one in every 120 auto loan applications involved a fictitious credit profile.
Income and employment deception
While elaborate schemes grab headlines, more commonplace deceptions pose an equally serious threat. Income and employment fabrication account for 43% of fraud risk faced by auto lenders. The scope of this problem is striking. While most lenders estimate that 1-10% of pay stubs are forged, some report forgery rates as high as 20%.
A particularly noteworthy trend is “gig hiding,”– where applicants report a switch from gig economy work to traditional industries within 30 days of application. This practice exceeded 8% of applications in 2023, creating significant risk exposure.
The true cost of fraud
The financial impact of these deceptions is severe and varies by type. For instance, among approved applications with fake employers, 40% of loans charge off. This results in an industry-leading 82% loss rate, perhaps due to lenders’ difficulty in identifying fraud until it’s too late.
Income misrepresentation, on the other hand, shows a more nuanced risk profile:
- At low price-to-income (PTI) levels: Truthful applications default at 3% vs. 3.7% for misrepresented income
- At PTI limits: Truthful applications default at 4% vs. 7% for misrepresented income
Gig employment concealment carries its own risks, with early payment default rates 2.5 times higher than average– not to mention potential auto insurance coverage gaps.
How to Protect Your Business Against Auto Fraud
Like any area of business, fraud-proofing your dealership isn’t a one-time task– it’s an ongoing process that requires continuous effort to stay ahead of evolving schemes. Fraudsters are constantly developing new tactics, making it essential for dealers and lenders to maintain robust and adaptable security measures.
Stay up-to-date on the latest trends
Knowledge is your first line of defense against fraud. By staying informed about emerging schemes and attack vectors, you can often spot and prevent fraud attempts before they impact your business.
Setting up Google Alerts for terms like “auto fraud schemes” and “dealership fraud” provides real-time notifications of new threats, while industry webinars and podcasts offer deeper insights from security experts and peers who have encountered and overcome fraud attempts.
You can also subscribe to industry newsletters and publications to get updates about real-world experiences and prevention strategies. For instance, our LinkedIn newsletter Auto Finance Insider goes out every month and covers the latest stories in the auto industry, including fraud.
Consult with industry experts
You don’t need to be a fraud prevention specialist to protect your business effectively. Instead, you can leverage the knowledge of established industry experts who have spent years studying patterns, investigating cases, and developing prevention strategies.
Fortunately, many experienced professionals offer consulting services to provide help on a fractional basis. This approach can be particularly valuable for smaller or mid-sized businesses that need expert guidance but may not have the resources for a dedicated fraud prevention team.
Beyond one-on-one consulting, industry experts share their knowledge through various accessible formats, including webinars, podcasts, and books. Tom Kline’s recent book, Tuck The Octopus: A Better Vantage Point For Dealership Risk And Compliance, offers comprehensive insights into risk management and fraud prevention strategies. Resources like this can be a great place to start before deciding whether you need to hire a specialist.
Level up your security tech
As previously discussed, there’s been a lot of development in fraud technology in the past couple of years, and modern attacks require modern defenses. Thanks to recent developments in verification software, you can embed powerful technology into your sales process to weed out bad actors.
CheckMy Driver enables dealers and lenders to screen customers in less than five minutes. By combining ID and insurance verification, it creates a secure process to flag suspicious details you can dig into before closing the deal. Talk to our team to learn more about how it can work for you.
