Borrower fraud soars

The problem in auto loans may approach levels of the housing bubble.

Borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during last decade’s housing bubble, according to a startup firm that helps lenders sniff out bogus borrowers.

As many as 1 percent of U.S. car loan applications include some type of material misrepresentation, executives at data analytics firm Point Predictive estimated based on reports from banks, finance companies and others. Lenders’ losses from deception may double this year to $6 billion from 2015, the firm forecast.

Those fraud rates are coming closer to the over-1-percent level for mortgages in 2009, when the financial crisis was boiling and more lenders started reporting incidents to one another, Frank McKenna, chief fraud strategist at the firm, said in an interview. While those losses will sting lenders, the impact on the overall economy will likely be much more muted than with the housing crisis, just because there’s less car debt outstanding.

Even so, “we see an extraordinary amount of parallels between the auto and mortgage industries, in terms of the rising levels of hidden fraud,” McKenna said.

Common types of fraud include borrowers lying about their income and their jobs. The deception can be perpetrated by consumers, or car dealers, or both. Dealers have an incentive to complete sales, and may better know how to tweak paperwork to get bad loans funded than a regular consumer, said Kimberly Sutherland, senior director for fraud and identity management strategy at LexisNexis Risk Solutions in Alpharetta, Ga., whose firm helps lenders identify risks.

Losses from auto loan fraud this year will likely be $4 billion to $6 billion, up from $2 billion to $3 billion in 2015, Point Predictive said.

The total amount of debt outstanding has risen more than 50 percent since the end of 2010, a rapid increase. Delinquencies among subprime auto loan borrowers are jumping, and in the fourth quarter of 2016, there was over $1.1 billion of consumer car debt that lenders could not collect, Point Predictive said. In a Federal Reserve survey released Monday, banks said they had tightened their underwriting standards for car loans.

But that won’t necessarily translate into a repeat of the mortgage crisis, because the auto financing market is smaller. There was around $1.1 trillion of car loans outstanding at the end of last year, compared with around $10.3 trillion of residential mortgages.

Some car lenders have been shoring up their collections processes. Santander Consumer USA, one of the biggest makers of subprime auto loans, stopped accepting credit card payments from its borrowers, for example.

GETTY IMAGES FILE In the fourth quarter of 2016, there was over $1.1 billion of consumer car debt that lenders could not collect.