Lenders, do due diligence on dealership clients

From the summer of 2013 through the fall of 2017, lenders approved 80 auto loans for customers at three Atlanta dealerships. The loans were never repaid because the dealerships never existed.

Six lenders identified in a criminal indictment filed in the U.S. District Court for the Northern District of Georgia -- USAA Federal Savings Bank, Digital Federal Credit Union, Pentagon Federal Credit Union, Affinity Federal Credit Union, Air Force Federal Credit Union and NASA Federal Credit Union -- suffered $1.7 million in losses, not at the hands of 80 customers, but to seven people posing as dealerships.

Had lender representatives performed proper due diligence and checked offline to ensure the dealerships existed, losses could have been prevented.

The loans, ranging from $25,015 to $50,000, were approved for dealerships registered by the Georgia Secretary of State. Yet the stores, according to an Aug. 16 statement by the state's Department of Justice, "had no employees, no cars, no car lots, and no dealership licenses."

The lenders likely didn't lose a dime. According to court documents, USAA Bank is insured by the Federal Deposit Insurance Corp. and the credit unions are covered by the National Credit Union Share Insurance Fund. In these types of fraud cases, John Iannarelli, head of JI Consulting Group and a retired FBI agent, says "the federal government will come in and cover the loss."

With criminals increasingly using technology to deceive and commit forgery, Iannarelli said what is considered due diligence on the part of a lender is changing.

"In the cyberworld, you can create anything to look the way you want," Iannarelli said. "Anyone who is in the business of lending money has an obligation not only to prove who they're doing business with for themselves, but for all of us insuring that money."

Fraud thrives when lenders don't undertake due diligence. Banks and credit unions can take a variety of measures to avoid this type of fraud.

Lenders should follow up when lending activity seems suspicious, even if their losses don't seem that substantial. They should also invest in technology and processes that flag suspicious activity. Auto lenders should also consider platforms for sharing suspicious activity with lenders in their region. If the lenders had communicated the losses to one another, it's possible the ruse may not have gone on as long as it did.

Lenders also would do well to maintain regular communication with dealers, and should strive whenever possible to meet in person. Taking these measures could save lenders -- and taxpayers -- grief in the long run.