We’ve talked about dangerous auto loans for years, but now there’s a new statistic to add to the swaying tower of potentially economy-damaging loans: A fraud-detection company used algorithms to spot $1 billion in auto loan fraud in just under three years.
Point Predictive uses artificial intelligence machine learning software fed billions of historical loans to teach it how to spot legitimate information in a loan application. It turned out that from February 2019 to December 2021, over 5,000 auto loans contained fake employers with fake payment histories for buyers. Point Predictive blames borrowers it says in its press release:
Point Predictive found that in fake employer fraud cases, a borrower sets up a fake employer to generate fake payslips, fake income, and synthetic identities for auto dealers and auto lenders during funding. The fake employers were identified by Point Predictive’s fraud analysts when examining loan applications flagged by Auto Fraud Manager – the company’s syndicate risk assessment solution used by auto lenders nationwide.
During the investigation, the identified fake employers were linked to fake websites, fake income, high rates of confirmed synthetic identities, and high rates of defaulted loans.
“The rise in the use of fake employers on loan applications is astonishing, and the $1 billion threshold just proves the growing threat of this problem,” said Justin Hochmuth, senior fraud analyst at Point Predictive. “We’re uncovering about 100 new fake ones Employers created each week. The exceptional work of our team and the power of Auto Fraud Manager proves that we are tackling this threat head-on and driving value for our partners as we work to significantly reduce fraud across multiple industries, from auto loans to mortgages to personal loans and apartment rentals”.
Point Predictive says it has saved merchants up to $21,000 on each fraudulent loan detected, especially since fraudulent loans have default rates of 40 to 100 percent. While such programs may well be promoted only by loan applicants, we should not forget that in the heady days leading up to the 2008 meltdown, home loan writers were very active in running such programs to get people into houses they couldn’t afford could . Of the New York Times:
In a study published last yearFor example, researchers examined the 721,767 loans made by an unnamed bank between 2004 and 2008 and found widespread income fraud in their loans with little documentation, which real estate agents sometimes call liar loans.
More colorfully, journalist Michael Hudson, in The Monster, his 2010 book about the mortgage industry during the boom, told the story of the “art department” at an Ameriquest branch in Los Angeles: “They used scissors, tape, wite-out and a photocopier to fabricate W-2s, the tax forms that show how much a wage earner makes each year. It was easy: put a low-income borrower’s name on a W-2 of a higher-income borrower, and like magic, a bad credit prospect suddenly looked a whole lot better. Branch staff stocked the office break room with all the tools they needed to produce and process official documents. They called it the “Art Department”. ”
The proliferation of inflated income claims is sometimes cited as evidence that borrowers have defrauded lenders. Undoubtedly this has happened in some cases. But it’s not a likely explanation for the broad pattern. It’s a stretch to think that without insider help, most borrowers would have known which lies to tell, or how
There are many parallels between today’s Wild West auto loans and the 2008 mortgage crisis. The auto loan business is an ill-regulated mess. Let’s just go through some of the issues consumer reports found last year:
- A credit rating does not necessarily dictate the terms of the loan being offered. Borrowers in every credit rating category — from super-prime with scores of 720 and above to deep subprime with scores below 580 — received loans with APRs ranging from 0 percent to more than 25 percent.
- Some high-credit scorers receive high-priced credit. While low-credit borrowers are, on average, offered the worst terms, about 21,000 prime and super-primary borrowers, about 3 percent of all borrowers in this group, received loans with APRs of 10 percent or more — more than double the average rate for high scorers in our data.
- Many borrowers receive loans that they may not be able to afford. Experts say consumers shouldn’t spend more than 10 percent of their income on a car loan. But almost 25 percent of the loans in the reviewed data CR exceeded this threshold. For subprime borrowers, that figure is nearly 50 percent, about 2.5 times higher than for prime and superprime borrowers.
- Underwriting standards are often lax. Lenders rarely checked borrowers’ income and employment to confirm that they had sufficient income to pay off their loan. For the loans CR examined, these reviews took place in only 4 percent of the cases.
- Late payment is common. More than 5 percent of the loans in the data — 1 in 20, or about 43,000 in total — were reportedly in default. While arrears have been falling over the past year and a half, likely thanks to pandemic-related deferral programs, industry bodies and regulators are bracing for a potentially sharp spike in the coming months.
Not only is fraud rife, these loans are also used in asset-backed securities – a financial product made up of multiple loans bundled together by a financial institution and sold to investors. Similar to the mortgage-backed securities that crashed the economy in 2008, these products combine risky loans and seemingly risk-free loans to ensure investors a steady return. Of the financial times Tuesday morning:
Turning to another corner of the market, I asked Jenn Thomas of Loomis Sayles, who covers asset-backed securities, if this market has felt any reverberations from the stock sell-off. ABS didn’t miss a beat, she said.
She describes the pricing of consumer ABS – secured by auto loans, credit card debt, personal loans, etc. – as stable to a range limit in recent weeks. Three new issues (subprime autos, prime autos and personal loans) were rated yesterday as the stock market was on a rollercoaster ride and all were oversubscribed. The $40 million triple-B tranche of the consumer loan ABS, yielding 4.4 percent, was nearly five times oversubscribed. “The demand is so great,” she said
But as we have seen, it only takes a strong financial breeze to send asset-backed securities into a chain reaction that can bring down entire economies. At the end of the day, it is ordinary people who will suffer the consequences of this risky marketplace.
Auto debt grew to a staggering record high of $1.37 trillion last year, exploding by $80 billion between 2019 and 2020 experiential. The rating agency also noted that the average payment for a new car reached $609 per month in the third quarter of 2021, up from $565 in 2020. Used car prices also rose to $25,909 — a 26 percent increase compared to two years ago. The arrears on these loans remain relatively constant in the range of 4.5 percent despite the increased costs. Low arrears mean lenders have no reason to stop the free flow of cash. In fact, as CR reported over the weekend, lenders also make money from garnishments. The good times seem to be endless for auto loan originators!