In fraud fight, lenders go after dealerships

Auto lenders are taking an increasingly hard-nosed approach to identity theft fraud, and dealerships are feeling the heat.

Lenders are enforcing the letter of the law, legal experts and dealership vendors say. Sometimes that means more aggressively making dealerships buy back deals gone bad, especially in cases where the buyer was likely an identity thief and — in the lender's view — the dealership's finance and insurance office didn't do an adequate job of verifying the customer's information.

Buybacks for identity theft are nothing new, but lenders facing big losses on bad loans have become more aggressive about enforcing the "representations and warranties" commonly listed in dealership agreements, which include wording that makes the dealership responsible for customer data being accurate, experts said.

"Lenders are now coming around with even tighter language in the dealer agreements making them liable for ANY shenanigans," Mike Jarman, CEO of dealership vendor TurboPass Corp., of Austin, Texas, wrote in an email, "especially if there's a repo or credit loss taken by the bank/lender."

He added, "Lenders have teams now scouring original documents, to bring back to dealers for relief." The TurboPass system allows the dealership's customers to go online and independently verify their own income and bank statement information, eliminating the need for the lender to demand verification.

"I would say identity theft is one of the top three risks dealerships face" in F&I compliance, said Gil Van Over, president of Gvo3 & Associates, of Crown Point, Ind., a specialist in dealership F&I compliance training.

The other two leading threats are closely related, Van Over said. One he called credit-application fraud, where the applicant's information is exaggerated to inflate their income or other qualifications. The other is "power booking," where the dealership inflates the value of the vehicle to justify a bigger loan, commonly by adding features and options the vehicle doesn't actually have.

Mike Green, CEO of Credit Bureau Connection, said many dealerships are poor gatekeepers and that lenders can't afford to leave things the way they are. "It's going to be the death of the car industry. They cannot keep taking bad paper from the dealerships," he said in a phone interview. Credit Bureau Connection works with dealerships on F&I compliance and credit reporting.

Meanwhile, Green said, many dealerships aren't organized to address identity theft or other forms of fraud. "I think a majority of car dealers today do not have any fraud programs," he said.

That includes an absence of Red Flags Rule compliance, he said. The Federal Trade Commission's Red Flags Rule went into effect in 2011, aimed at preventing identity theft. Dealerships are required to create and maintain a written plan for complying, but compliance and enforcement are spotty, legal experts said.

The plan is supposed to spell out how the dealership will detect "red flags" — warning signs that customers aren't whom they claim to be or that the information on a credit application isn't right — and who's responsible for doing what when those red flags appear. Examples of red flags include a photo ID that does not look like the customer, an address that doesn't match the customer's official records, or a customer who is in an unusual hurry and doesn't want to take delivery in person.

"Compliance levels vary," said Tom Hudson, a partner at Hudson Cook in Hanover, Md. The law firm specializes in consumer finance law and often represents dealerships.

"But there's a lot of noncompliance. When we ask who the dealership's Red Flags officer is, we frequently get blank stares," he said in an email.

About 70 percent of loans that go bad for nonpayment in the first six months involve some form of fraud or misrepresentation — especially if the borrower doesn't make the very first payment, according to PointPredictive, a San Diego vendor for auto lenders. The company assigns a score to credit applications based on the presence or absence of warning signs of fraud, indicating their riskiness.

Yet "a lot" of finance managers, sales managers and even dealers believe that once a deal is funded, it becomes the lender's problem and not the dealership's, said Steven Wolf, a dealer with five stores in the Houston area.

Not so, Wolf said. "Thirty, 60, 90 days later, you've got to buy the car back."

He added: "We're the eyes and ears for the bank. You've got to make sure the person is who they say they are, makes what they say they make, lives where they say they live."