Auto loan balance with suspected fraud activity surpasses $600 million

Total outstanding loan balances with suspected fraud activity surpassed $1 billion in the second quarter, with auto loans accounting for more than half that amount, according to TransUnion.

According to TransUnion's proprietary fraud data, $621.9 million in auto loans had a high likelihood of containing synthetic elements, comprising 61.6 percent of total outstanding loan balances suspected of synthetic fraud. Two years ago, the total outstanding balances of consumer loans suspected of fraud activity was about $850 million.

Auto loans with this type of fraud represented 0.05 percent of the more than $1.2 trillion total auto loan balances open in the second quarter.

The incident numbers may be low, but Geoff Miller, TransUnion's head of global fraud and identity solutions, says the loss incurred from fraudulent activity is typically high because a successful fraudster is likely to purchase a big-ticket vehicle.

"Synthetic [fraud activity] isn't prevalent in terms of numbers, but when it happens, when it hits you, it's quite substantial," Miller said.

And it's growing. Auto loans suspected of synthetic fraud activity are up 5.3 percent year over year and 26 percent from the second quarter of 2016.

In the vast majority of cases, fraudsters use synthetic identities to obtain auto loans and intend to default on those loans and steal the vehicle, Miller says. The charge-off rate is typically five or six times greater for loans TransUnion identifies as possibly containing synthetic information, he added.

Still, not all synthetically acquired auto loans go bad. An incredibly low percentage of the loans are being paid back on time, despite being acquired through deceptive means.

"We have seen a customer that has a very poor history tries to create an alternate credit identity to go out and get an auto loan so they can make it to work," Miller says. "It's application fraud; you're misrepresenting your identity."

As more transactions occur online, more cases of fraud are found. In 2011, when TransUnion began tracking synthetic fraud activity, the total amount across all credit lines was less than $200 million.

To investigate the prevalence of fraud activity, TransUnion commissioned Forrester Consulting to conduct three studies and surveys with 465 participants working in fraud detection and prevention, 153 of which specialized in financial services in the U.S., Canada and India.

Almost all financial services firms included in the study — 94 percent — reported some degree of fraud in the past two years, whether it was identity theft, synthetic identity or account takeover.

Forrester estimates that repercussions of fraudulent activity claim 2.39 percent of revenue for financial services firms, translating to billions each year with costs for victim remediation, fraud loss and legal complications for noncompliance.

While synthetic identity fraud doesn't appear to be lessening over time, Miller anticipates a reduction in fraud activity will be seen first by the more sophisticated auto lenders that have fraud-prevention and identification verification tools and resources at their fingertips.

"Some customers will probably see a reduction, but those that are actively trying to solve the problem will then get hit by lenders going to the path of least resistance," Miller said.