Phony deals cost dealers reputation, vehicles and lenders

Published in Automotive News Sept. 8, 2014

When Pete Shaver bought part of Huntington Beach Chrysler-Dodge-Jeep-Ram in 2012, he immediately found holes to plug in the vehicle sales and finance operation. In the previous several months, fraudulent customers had stolen two vehicles from the dealership worth $65,000. The store's insurer refused to pay up.

So Shaver, who had put fraud preventions in place at his previous stores, got to work.

"We're not going to put ourselves in a position to have a loss," said Shaver, general manager of the Huntington Beach, Calif., store.

Fraudulent customers robbed Pete Shaver of two Dodge vehicles worth $65,000.

For employees in a dealership's finance and insurance office, spotting a potentially fraudulent deal is top priority. A mistake not only can cost a dealership a vehicle, it can hurt the store's reputation and its relationships with lenders. It's a challenge for all dealership groups. Prevention is the key, and dealerships count training, technology and sticking to carefully prescribed processes as their best tools in the fight.

The amount of money consumer fraud costs dealerships each year is hard to come by. But according to a December 2013 report by the U.S. Department of Justice, identity theft alone triggered financial losses of $24.7 billion in 2012 in the United States.

"By the time you figure out you've been hit, those cars are long gone," said Jenn Reid, senior director for Equifax Automotive Services. "When it hits, it's very expensive [for both dealerships and lenders], and it's very painful."

Case study

At Shaver's dealership, the first loss happened when a buyer using a fake driver's license and fake Social Security number persuaded the sales team to sell her a $30,000 2012 Dodge Challenger. The deal unraveled when lenders started their due diligence, he said, but the car was already gone and has yet to be recovered.

A $35,000 Dodge Charger was next when a repeat customer, who had bought three cars in the previous nine months for his employer, came back and wrote a bad check for the fourth. The owner of the business said the person had embezzled from the company and no longer worked there, Shaver said.

One of Shaver's first steps was to install a GPS tracking system, called Morse GPS, on his entire fleet. The GPS units are pricey at $130 apiece -- the dealership sells around 800 vehicles a month and keeps as many as 3,000 vehicles in stock -- but they enable Shaver to quickly find missing vehicles. They also help employees track down vehicles for test drives, speeding sales and improving customer satisfaction. They are reusable, though Shaver ends up selling some to vehicle buyers.

Shaver also installed a new identification scanning system, eLend Solutions' ID Drive. It flags fake or suspicious IDs and prompts staffers to ask more questions. The store wouldn't have lost the Challenger if that system had been in place, Shaver said.

Dealership procedures were tightened. For instance, a company employee no longer is allowed to buy a vehicle without notarized authorization from company owners. That likely would have prevented the Charger theft, Shaver said. The store also switched to a new insurance policy that would more readily pay on a loss. He's still fighting with the previous insurer over the denials on the 2012 thefts.

"An ounce of prevention is worth a ton," Shaver said. "Technology is so good today, and there's thievery going on every minute of every day. The employees need the protection of the dealer and policies and procedures to protect the house."

Spotting patterns

LeAnna Cowan, finance director at Team Ford-Lincoln in Las Vegas, has learned to spot certain fraud clues. Among them:

n Customers coming in on Saturday night after the banks have closed with all the materials that may be required neatly in hand. That could be the sign of a fraud ring, she said.

n A customer with credit challenges who readily agrees to increase the down payment when the bank asks for more. A recent customer at Team Ford-Lincoln agreed to triple her down payment to $12,000, but her cashier's check turned out to be fake. The dealership had delayed delivering the car, so there was no loss.

n Someone who's older than 25 but has no established credit. They may be using a made-up identity.

Dave Robertson, executive director of the Association of Finance and Insurance Professionals, points out another one:

n So-called Jack and the Beanstalk deals in which the customer tells a sad story -- I'm trying to help my brother, who broke his back at work -- and tries to hurry the transaction. Dealership employees sometimes overlook risk factors because they want to help. These situations often occur online or over the phone.

The best preventions, Robertson said, are slowing the process and getting a complete credit application, which enables the finance manager to check the customer's information against other documentation the dealership might receive.

In suspicious deals, the finance manager should ask out-of-wallet questions -- queries an identity thief can't answer by memorizing the contents of a stolen wallet -- to try to verify identity, he said. One question might be: What is the balance on your mortgage within $10,000?

And make sure to thoroughly inspect driver's licenses, said Robertson, relaying a story about a recent fraud at a Florida dealership. A customer made a fake driver's license using a photo he had taken at a drugstore photo counter. But his girlfriend jumped into the picture with him, making for a license with two people in the photo. "It worked. I've seen a photocopy of the driver's license," he said. "They never found the car or the customer. So there's an F&I manager who just failed to check the most fundamental verifiable information available to him."

Training, technology

The expansion of automated compliance tools to help dealers with such requirements as the Red Flags Rule, implemented to prevent identity theft, has made spotting fraud easier, some dealers say. Other tools, such as income verification software or ID scanners that flag fake or suspended driver's licenses, also help.

Customer fraud is "a big issue, and we take it very seriously," said Jeff Dyke, executive vice president of operations at Sonic Automotive Inc., the nation's fourth-largest dealership group ranked on retail sales of new vehicles. "These issues can really be devastating to your store."

Training is key to prevention, Dyke said, as are technology-enabled processes. "We have an individual here in our home office who looks at every Red Flags customer before that deal goes forward," he said.

That review process, put in place in 2010 as part of Sonic's Red Flags Rule policies, prevented 81 bad deals and almost $3 million in fraudulent loans during its first three years in use, a former company executive told Automotive News last year. The system automatically double-checks a customer's identification when a credit report is pulled. On 11 percent of deals, the ID was flagged as suspicious, prompting a series of questions to verify identity.

Identity theft is the most common fraud at Sonic dealerships, the former executive said. More than a third of the company's fraud cases happen in Southern California.

Falsifying income is also common. In a study late last year, Equifax found that 34 percent of auto loan borrowers inflate income by 15 percent or more. Those loans are four times more likely to go into default, said Reid, who worked for dealerships and automotive lenders before joining Equifax.

Steal it back

At AutoNation Inc., the country's largest-volume dealership group, extensive training and strict processes seem to be doing the job.

"Knock on wood, we have very, very few" instances of fraud, AutoNation COO Mike Maroone said. "I would credit the training with that."

AutoNation's F&I staffers are trained and recertified every year, Maroone said. Store general managers go through the same training and certification. Maroone identifies the customer interview as a critical point. Employees ask questions to determine customer needs, getting as much information as they can to share with finance managers. Then finance managers ask their own questions and seek documentation.

"Anybody can be defrauded," Maroone said. "But there's a bunch of real basic things you've got to do, from getting the driver's license, verifying income, getting copies of payroll stubs. In cases of subprime, you're looking at getting copies of utility bills, so you could verify the residence." In some cases, a salesperson might go to the customer's house to help gather the documentation necessary, he said.

Because of the requirements for subprime customers, Maroone said, AutoNation dealerships often refuse to let such buyers take possession of vehicles before financing is approved. Anytime a situation has an element of risk, the store is supposed to take a deposit and keep the vehicle until everything checks out. "We have got an obligation to our lenders and our shareholders to make sure that everything is on the up and up," Maroone said.

Huntington Beach Chrysler-Dodge-Jeep-Ram's new diligence is paying off, Shaver said.

A few months ago, he discovered a $35,000 2014 Jeep Wrangler missing from the lot. The store called police, but they were slow to act. So Shaver's staff activated the GPS on the missing Wrangler, grabbed the extra keys and took off in pursuit. They found it parked inside a gated community, jumped in and drove off. Said Shaver: "We went out and stole our car back."

Jim Henry contributed to this report.

You can reach Amy Wilson at -- Follow Amy on Twitter: @theamywilson

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