COLORADO SPRINGS, Colo. - Subprime auto lenders are struggling to weed out phony information from loan applications.
Fraud - such as lying about income, employment or home address - is said to be particularly common in the subprime segment, since even the legitimate customers are hard up for credit.
'We see fraud every day,' said Steve Hall, president of Custom Finance Services, Alexandria, Va., which trains dealership finance and insurance departments.
There are no easy answers, but lenders are trying different ways to tackle the problem:
The National Automotive Finance Association has proposed that its members share information on common scams or maybe identify repeat offenders. But the project is on hold because the Pittsburgh-based group is afraid of slandering its customers or violating anti trust laws.
More subprime lenders have started using credit bureau reports and 'credit scoring' based on their own data, to check creditworthiness. That is faster and cheaper than phoning the employer, landlord or professional tax preparer for every customer. But lending strictly 'by the numbers' may exclude the kind of customers subprime lenders want.
Within their own organizations, some lenders are making it harder to make exceptions to the rules by limiting the number of people who can approve exceptions, and by paying and training the clerks better who make the calls to verify customer information.
LOTS OF INTEREST
The National Automotive Finance Association sponsored a roundtable discussion on fraud here, at its third annual subprime conference last month. The group heard a presentation on fraud at its meeting last year, but this year's session was designed to encourage more discussion, said Mark Raskin, vice president of subprime lender Auto One Acceptance in Dallas, who led the discussion.
Jack Tracey, the organization's executive director, said interest was so strong that he had to find a bigger meeting room for the fraud discussion.
Said Raskin: 'Fraud is a serious problem, and not just for lenders. It's a problem for dealers, because if losses go up (on loans they originate), they may find themselves cut off by the lenders. It's a problem for consumers, because as losses go up, pricing goes up.'
Everyone agrees fraud is a huge problem, but individual lenders keep their statistics to themselves.
'Fraud is something we don't like. We tend to sweep it under the rug,' said one lender at the roundtable.
WHO'S TO BLAME?
The session originally was titled, 'Guarding Against Dealer Fraud,' but Raskin was quick to say dealers should not be singled out, since lenders often have no way of knowing whether phony information comes from the dealer or the car buyer.
Lenders do not like to talk about dealer fraud, because dealers are their customers.
But clearly dealership personnel sometimes participate in fraud in order to get deals approved.
Raskin recalled a case at his firm in which a dealership in the Miami area accounted for $250,000 worth of loans in a short time but had an unusually high number of customers who defaulted on the first payment.
When the lender investigated, it turned out that an unusually high number of customers had provided the same work phone number, which turned out to belong to the dealership. Someone at the dealership apparently was falsely verifying employment, Raskin said.
'Help us with fraud,' said Arlington, Texas, attorney Steve Levine, an associate member of the National Automotive Finance Association who also helped lead the discussion.
He explained why the organization is hesitating to list dealers or customers who have been a problem. 'What are the liabilities for reporting bad experiences?' Levine asked. 'Would there be an `appeals' process for dealers? ... What data would you report? Repos per dealership? Fraud instances? How much do you want to share with competition?'
DATA ARE SCARCE
Statistics on phony auto loan applications are scarce.
'I don't know of anyone who has hard information on that,' said Stuart Feldstein, president of SMR Research Corp. of Hackettstown, N.J., a research and consulting firm that studies consumer financial services markets.
'I have a feeling there is a lot of fudging going on, since these (subprime) people are under financial stress, and you have to have a car to get to work. But you can't fudge your credit report because somebody else holds that,' he said.
Raskin said he could not tell if fraud was increasing. But he said lenders probably are getting better at making it harder - by using credit reports, for example.
The stakes are high.
Subprime lenders must verify every piece of information on a credit application - name, Social Security number, address, phone number, employment, proof of income.
It is important to double-check, even though it is costly. Compared with prime lending, it takes four times as many people to approve and collect subprime loans, according to Fairlane Credit LLC, the subprime subsidiary of Ford Motor Credit Co.
Getting a correct address is essential. Repossessing the car to resell it is probably the only way a lender will salvage any money out of a bad loan. It is not unheard of for subprime lenders to repossess 20 percent of the cars they finance. So they need to know where every car is.
'We called to double-check a guy's phone number once, and it turned out to be a phone in an elevator. I still can't figure out how he did that,' said Raskin.
Raskin guessed that his company catches fraudulent information in 'less than 1 percent' of its applications.
'But we only catch the stupid ones.'