How Fraudsters Perpetrate Automotive Financing Fraud

Identity fraud has become one of the most common schemes among fraudsters recently, with U.S. consumers losing more than $31 billion to identity fraud in 2015. Fraudsters are setting their sights on unsuspecting and unprepared industries, and there’s a laser focus on the automotive financing industry. In fact, the value of auto loan originations that contain a fraudulent element is estimated to reach $6 billion in 2017.

But fraudsters are now taking it one step further: synthetic identity fraud. With this type of fraud, identity thieves use a combination of real and fictitious — or sometimes even completely fictitious — personal data to create new, “synthetic” identities that can be used to build credit, obtain driver’s licenses and defraud creditors. As this fraud becomes more common, it’s important for this industry to understand how it happens, how it affects them and steps they can take to fight it.

How Fraudsters Create Synthetic Identities

These synthetic identities should worry the automotive financing industry. Not only does a synthetic identity let people who normally wouldn’t qualify for credit purchase a car, but it can also result in the car (and the fraudster) disappearing forever with the dealership left holding the bag and the debt.

This synthetic identity fraud (also called credit profile number fraud) is more common than automotive dealers recognize: These thefts account for approximately 85 percent of the more than 16 million identity thefts in the United States yearly.

Here’s how it works in the auto finance industry.

1. After a data breach, fraudsters purchase personal identifying information (like names, addresses and Social Security numbers) on the dark web.
2. A fraudster selects a rarely used Social Security number (often belonging to a child or someone who’s deceased) and a combination of real and fabricated personal data to create a fictitious identity. Note: If the fraudsters use entirely fictitious data, it’s called synthetic identity fraud (rather than theft), because no theft has occurred.
3. The fraudster completes a credit card or loan application with this synthetic identity, and their data is automatically sent to the major credit reporting agencies.
4. The agencies gather consumer credit history and create an in-depth report.
5. Because there’s no credit history, the application will likely be denied. But the agencies will establish a credit file for the applicant based on the inquiry.
6. Now that the fraudster has a credit file, they will apply for a different credit card (often one accepting applicants with no credit history). The card issuer sees the profile and approves the fraudster for a low credit limit.
7. The fraudster uses the card legitimately and pays the balance on time to establish a good credit history.
8. The fraudster converts that good history into more credit cards and credit accounts and eventually applies— and is approved — for a car loan.

Another common method fraudsters use to develop a proven credit history is by becoming an authorized user on a credit card account. Fraudsters may pay legitimate cardholders to add a synthetic identity to their credit cards, which lets the criminal “inherit” the cardholder’s credit history. Once these trade lines have been reported to the credit reporting agencies, the synthetic identity is removed — but the piggybacked credit history remains associated with the synthetic identity.

How Fraudsters Perpetrate Automotive Financing Fraud

Although these aren’t get-rich-quick strategies for fraudsters (it takes time to build a solid credit profile), they’re quite effective at defrauding automotive dealers. Fraudsters simply take their new identity and established credit and apply online or in person for car loans from unsuspecting dealerships.

Because the auto dealers may be more focused on the thrill of the sale than on the paperwork, they may not be evaluating the veracity of individual entries on a credit application or comparing the different data points to ensure they match. And that means synthetic identity fraud can easily slip through simple fraud filters undetected.

When processing credit applications, dealerships also won’t see same-day inquiries into creditworthiness that might raise a red flag. As a result, aggressive cybercriminals can use their fake identities to purchase multiple vehicles in a single day. Still others may have their fraudulently purchased vehicles delivered straight to a port, where the criminals use stolen credit card numbers to ship the car overseas and sell it for far more than the purchase price.

What the Automotive Industry Can Do to Reduce Their Risk Exposure

Synthetic identity fraud can have significant impacts on a dealership’s finances. Not only must the dealership write off the fraudulent amount, but they also suffer operational expenses on the back end with the creditor.

But dealerships don’t have to be victims if they follow these procedures:

1. Verify customer data. Some large fraud rings go so far as to establish fake call centers to confirm employment and income data, so it’s not enough for dealers to review only select information. They should review credit applications and reports in detail and ensure data matches.
2. Scrutinize customers with limited credit history. While it isn’t unusual for someone right out of college to have little credit history, someone in their 30s should have a more well-developed credit record. If they don’t, it’s worth a second look into their credit reports to see why.
3. Don’t risk quickly approving credit applications just to provide a better customer experience. Dealers may be quick to make a sale and please the customer, but instant approvals without a little research can result in big problems if the customer is using a synthetic identity.
4. Be wary of customers whose only credit history is from authorized user tradelines. This could indicate that the customer is trying to increase (or create) their credit score by piggybacking on a cardholder in good standing.
5. Use advanced identity risk analytics and fraud protection models. A combination of artificial intelligence and trained fraud protection staff allows for a comprehensive view of the borrower’s profile and can better evaluate the risk for synthetic identity fraud.

Fraudsters are always looking for the next big scheme, and synthetic identity theft is an attractive option. It’s easy, it’s lucrative and it has the potential for big payoffs when used against the automotive industry. Dealerships must learn to increase approval rates and make quick credit decisions while not putting themselves at risk for fraud.

That’s why your business needs to incorporate the best of both worlds— a highly skilled fraud protection team that’s using the latest in artificial intelligence technology — to make smart, accurate business decisions. Talk with a ClearSale credit card fraud analyst today to learn how our multilayered approach can help you protect your growing business from the next generation of fraud attacks.