Credit Washing and Synthetic Fraud Push Auto Lenders to Rethink Risk

The auto lending world is experiencing a tidal wave of fraud, according to a new TransUnion report. Auto loan fraud losses are 21 times higher than for credit cards and six times higher than unsecured personal loan fraud.

The surprise is that the problem involves all credit tiers, not just subprime. Some losses stem from synthetic identity fraud. That’s when dishonest people mix real and made-up personal data to create convincing yet false credit profiles. Another fraud source is credit washing, in which consumers dispute legitimate debts to clear their records.

This one-two blow to lenders is causing them to rethink how they evaluate borrowers. Lenders can no longer assume that a high credit score guarantees low risk. TransUnion’s study shows that superprime borrowers flagged for credit washing default at about the same rate as near-prime consumers.

Rising Losses Across the Credit Spectrum

Auto fraud losses are often the most unexpected. The average loss per case is almost $20,000. Comparable losses from unsecured personal loans and credit cards are roughly $3,400 and $1,000, respectively.

Superprime auto loan fraudsters are the worst, causing losses of more than $50,000 per borrower. It suggests that criminals are targeting higher-value loans.

Lenders who rely only on traditional credit scores are licking their wounds. Fraudsters spoof clean credit reports by concealing disputes and falsifying data. Lenders are often fooled and underestimate their vulnerability to losses.

Satyan Merchant, TransUnion’s Senior Vice President for Automotive, said, “Credit washing is a silent disruptor in the lending space. It makes it harder than ever for lenders to distinguish between genuine and manipulated profiles.”

The Need for Advanced Fraud Detection

Lenders are scrambling more advanced ways of detecting fraud. TransUnion beefed up its TruValidate and TruVision models to uncover auto lending fraud. These tools check identities, verify employment and income data, and look for missing account data — a sign of credit washing.

Implications for Subprime Lenders

The stakes are high for subprime lenders, for several reasons:

• They work on thinner profit margins.
• They may be fooled by phony improved credit. 
• Losses force them to tighten underwriting and/or raise interest rates.

Factors such as these threaten lenders with financial losses and reduced competitiveness — subprime lenders need better fraud-fighting tools. Fraud might never be eliminated from auto lending, but its shifting methods require perpetual vigilance. Credit washing and phantom identities are redefining risk rules.

“Lenders must be equipped with tools that go beyond traditional credit risk indicators to uncover hidden fraud signals before they result in costly losses,” said Merchant.