Your Cost: $1.8 Billion

It’s alive: that is, synthetic-identity fraud, sometimes called the “Frankenstein of fraud,” is alive and kicking. In fact, it’s a booming business.

Experts say that what dealers and lenders can do about it is to process credit applications by the book, following the Federal Trade Commission’s Safeguards Rule aimed at keeping private consumer information private, and the FTC’s Red Flags Rule aimed at catching inconsistencies in credit applications.

The stakes are high. According to a recent study from credit bureau TransUnion, the potential lender liability from synthetic fraud in auto loans was $1.8 billion for the first half of 2023, an increase of almost 40% vs. the same period a year ago.

Synthetic identity is “the Frankenstein of fraud” because scammers stitch identities together out of bits and pieces of genuine information, says Jason Lord, vice president of product marketing for fraud and identity solutions at TransUnion.

Data breaches of actual, confidential consumer information are probably the most typical source of raw material used to put together synthetic identities, he says. And according to the TransUnion 2023 State of Omnichannel Fraud Report, publicly reported data breaches in the United States were up 83% in 2022 vs. 2020.

“Synthetic fraud begins when you take, say, the Social Security number of a child who died as an infant; the home address, or the phone number, of somebody else who’s in prison; maybe the name of somebody else who’s in a nursing home,” Lord says in a phone interview.

“What these people have in common is, they aren’t likely to be checking up on their credit anytime soon,” he says. Therefore, those victims aren’t likely to immediately alert lenders that phony accounts are racking up charges in their names.

Another part of the problem is that lenders commonly use checks and balances to verify a credit applicant’s identity may not be cross-referenced, Lord says. “Is this name a real name? Yes. Is this Social Security number a real Social Security number? Yes. The problem is whether these things go together.”

Meanwhile, high resale value is another reason synthetic-identity theft is increasing so rapidly in the auto loan sector, and faster than other consumer financial sectors such as credit cards, TransUnion says.

Satyan Merchant, senior vice president of TransUnion Automotive Solutions, says the best opportunity for lenders and their dealer customers to stop synthetic identity theft is at the application stage.

“This makes it even more important for the lender to catch it at the very front door,” Merchant tells Wards.

Synthetic-identity theft isn’t a quick-hit online smash-and-grab. Thieves may devote years to build up a good credit history for a fake identity, purchasing larger and larger items and making the monthly payments until they’re creditworthy enough to get an auto loan.

Once the thief gets an auto loan and takes delivery of a car, it’s time to “bust out.” That is, sell the car, abandon the fake account and electronically disappear, Lord says. Professional scammers have it worked out to where they always have another phony deal in the works, he says.

Lord says once a synthetic identity is established enough to add credit accounts and make timely, monthly payments, the fake account is behaving pretty much exactly like a legitimate account.

In those circumstances, he says TransUnion can analyze a particular account and assign a probability that it may be a synthetic identity. But it may literally be impossible for many lenders to distinguish a fake account from a genuine account, Lord says: “It’s almost impossible to root out.”