Fraud is becoming more sophisticated, organized and difficult to track for dealerships and lenders. While there's no catchall method to prevent finance fraud, experts say there are steps dealers can take to prevent fraud on the part of staff members and customers both.
Aaron Jacoby, head of Arent Fox law firm's automotive practice, believes one of the most efficient ways for a dealership to find an in-house fraudster is to follow the money.
The first step is to inspect general revenue cash flow from finance and insurance. A sudden spike in sales of a certain product or from a certain finance manager could mean "you found the greatest product to sell or the greatest-ever finance manager," Jacoby said. But it also could mean the manager "has found a way to cheat people on a consistent basis."
"Track the numbers, and try to get to the bottom of why a spike occurred," he said. If dealers don't, and there's a problem with the manager, "at some point or another, it's going to explode in your face," he said.
Skepticism is healthy, agrees Frank McKenna, chief fraud strategist at PointPredictive, a San Diego company specializing in fraud detection. He said unscrupulous finance managers and systemic fraud can wreck a dealership's reputation and trust with customers and lenders.
Lenders will push back a loan if it defaults, and that can mean tens of thousands of potential losses dealerships are on the hook for if fraud occurs. McKenna said the average fraud loss easily runs $30,000 or greater, since when fraud occurs, the cars are less likely to be recovered to offset the losses.
"If a finance manager's performance is too good to be true, it just might not be true," McKenna said. "If they can work miracles and get even the most down-and-out borrower a good-quality loan, they might be doing something extra to get those loans approved."
Quarterly auditing would be best, Jacoby said. Not going over the books at least once a year would be irresponsible.
"It's a lot less expensive than litigation. And it's a lot less expensive than liability that you might face toward a class of consumers. And by the way, it's not that expensive," he said. Beyond the books, it's important to look into relationships between F&I managers and vendors. Attorney Leonard Bellavia, of Bellavia Blatt & Crossett in Mineola, N.Y., cautions dealers to be wary of vendors camping out in the F&I office. Any interfacing with a vendor should be done with senior management, he says.
"The parallel in the service department is if you see there are too many sublets or work that could be done internally," Bellavia said. "Most dealers would say, 'Why isn't that work being done in-house?'"