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Synthetic identities a $250 million problem for auto lending industry.

A Layered Approach to Combat Synthetic Identity Fraud

With fraud losses growing rapidly it begs the question: Exactly who should address the issue? The dealer? Lender? Technology service provider? The answer is most likely all of the above.

Fraud in the automotive industry is increasing at an alarming rate, making it one of the hot topics of discussion at the recent annual auto shows. While many attempts to defraud auto dealers and lenders are foiled before they happen, fraudsters continue to get more sophisticated at finding weak controls they can evade. 

The topic of fraud is important as the industry continues to try to find solid footing after a few years of tepid post-pandemic growth. The Equifax February 2024 U.S. Credit Trends data report shows that total outstanding balances on auto loans and leases have increased to $1.633 trillion, up 3.1% year-over-year. Additionally, the severe balance delinquency (60-plus days past due) rate in February was 1.61%, which is 17 basis points higher than February 2023.

Fraudsters are focusing more of their activities on areas such as new-account fraud, where they create new, fraudulent identities or synthetic identities. Synthetic identity (ID) fraud is a fictitious identity, often built with a combination of real data and fabricated information. Fraudsters use a synthetic ID in an attempt to gain credit with the fictitious identity to monetize a transaction.   

The use of synthetic identities in auto has grown more than 59% per year since 2020, according to recent Equifax data – creating a significant risk for the industry with an impact expected to exceed $250 million in losses over the past five years.

There also have been a growing number of cases of individuals falsifying vehicle paydowns, where fraudsters are duping dealers into paying or crediting these fraudsters with funds based on phantom equity built up on vehicles used when selling inventory to dealers.

 With fraud losses growing rapidly, it begs the question: Exactly who should address the issue? The dealer? Lender? Technology service provider? The answer is most likely all of the above. Unless each party contributes to a layered approach to reduce the threat, the fraudsters will continue to win.

 What Solutions Can Help With Today’s Required Layered Approach?

Each segment of the auto industry can play a role in maximizing the best protection against theft. No one solution can stop fraudsters, but rather a variety of solutions that can easily fit into the current lender and dealer processes as an added line of defense to help decrease losses from bad actors.

A layered approach to detecting fraud is a good way to defend against it. Early alerts can warn the dealer/lender of potential or known identity theft and application fraud in real time and quickly identify identity documents not consistent with issuer formats. 

One example of service providers stepping up their efforts for the industry is Cox Automotive, which announced at the 2024 NADA Show that they will add Synthetic ID Fraud Alerts to their Dealertrack capability. This solution leverages proprietary data sources and is integrated with best-in-class fraud detection, helping to protect dealers against fraudulent transactions earlier in the F&I process.

 Another part of this layered approach are instant validation tools. These solutions offer a fast, secure and user-friendly experience that uses mobile carrier data to instantly validate a customer’s identity and mitigate fraud while also populating key fields within the application to reduce data entry and accelerate the transaction process.

Strengthening Internal Controls

Internal controls play a pivotal role in reducing fraud risks. Auto dealers and lenders should enforce robust internal policies and procedures governing customer authentication, credit underwriting and account monitoring. Regular audits and reviews can help identify vulnerabilities and ensure compliance with regulatory requirements.

 Continuous Education and Training

Educating employees about the evolving nature of synthetic ID fraud and imparting training on fraud detection techniques is essential. Staff members should be equipped with the knowledge and skills necessary to identify suspicious activities and escalate concerns promptly. Ongoing training programs can empower personnel to remain vigilant against fraudulent schemes.

Synthetic ID fraud poses a pervasive threat to auto dealers and lenders, necessitating a multi-layered approach to mitigation. By prioritizing vigilance and layered proactive measures, the automotive industry can mitigate the impact of synthetic ID fraud and safeguard its financial interests and reputation.

Sharla Godbehere.jpgAll statistics provided in this article were developed from Equifax databases and are provided for illustrative and informational purposes only.

Sharla Godbehere (pictured, left) is vice president of sales in auto lending at Equifax. She is responsible for launching the FinTech vertical practice at Equifax.


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