Many auto lenders and dealerships are aware of the general risks associated with fraud. However, synthetic identity fraud is especially important to understand because it's often very sophisticated and always evolving. Oftentimes, lenders don't catch the fraud until months down the road. As a result, it can cause great damage to a lender’s portfolio, risk the relationship between lenders and dealers, and potentially impact the dealer’s bottom line if the lender asks for a buy back.
What is Synthetic Identity Fraud?
Synthetic identity fraud is different from other forms of fraud, such as application, collateral, and internal/employee fraud, as well as many other types. Typically, fraudsters use a combination of fictitious data from an actual person -- or completely fabricated information. For example, they may create a false person with a new name that has a real social security number or address.
These fraudsters literally create new personas on the backs of real individuals.
It can be difficult to spot, particularly in a digital or automated world. Lenders oftentimes don't notice it until it's too late and a single identity has opened multiple accounts. This can be particularly painful for all involved.
How Big is the Synthetic Identity Fraud Problem?
The impact to lenders can be especially detrimental. Within a year’s time, Equifax identified 210,000 accounts as potential synthetic identity fraud. These numbers are staggering when you consider there is an average of 4,000 accounts for each major lender.
This equates to potentially $15,000 worth of bad balances per account -- and more than $453 million to the greater auto lending industry.
How Does Synthetic Fraud Work?
Once fraudsters develop their fake persona and identity, they apply for additional lines of credit on auto loans. While this is taking place, they make more purchases on their total line of credit and disregard paying the bill. By the time the lender has identified the problem, the fraudster is long gone. Once a lender discovers the potential fraud, many will investigate to determine if the “right” due diligence was performed to identify the consumer at the dealer. It’s not uncommon for lenders to ask for buy-backs, particularly when there are repeated cases. If dealers cannot document they have a process, lenders may hold them liable for the entire fraudulent amount. Additionally, they can lose lender relationships. Ultimately, everyone involved feels the impact to their bottom line.
How Are Lenders and Dealers Working Together?
Auto dealers and lenders are now looking for solutions to combat these fraudsters. Particularly with COVID 19 forcing many vehicles to be delivered outside the showroom, it’s more important than ever to have processes and tools in place that protect all parties. A critical first step is to leverage highly sophisticated, proactive data and technology solutions that help identify fraudulent activity. It scans data and information on individuals before a deal is completed. That way, everyone involved can ensure the person sitting at the dealership – or in front of a computer at home – is exactly who they say they are. Equifax is offering free 60-day synthetic fraud identification alerts to lenders, technology platforms and dealers.