Auto Loan Fraud Surges as Scammers Exploit Social Media Tactics

A surge in auto loan fraud, fueled by scammers sharing their techniques on social media, is reaching record levels, posing a risk to lenders and investors, Bloomberg reports.

According to a report from risk management firm Point Predictive, the dollar amount of fraudulent car loans grew by over 16% last year, reaching $9.2 billion, or approximately 1.3% of all auto lending.

This rapid increase in fraud is likely contributing to the rising number of borrowers falling behind on their auto loan payments, as fraudulent loans are more prone to default. The Federal Reserve Bank of New York has also noted a general increase in auto loan delinquencies.

One of the fastest-growing types of fraud is “credit washing,” where credit repair companies file false identity theft claims with credit bureaus or the Federal Trade Commission to help borrowers clear negative marks from their credit histories. Point Predictive’s report indicates that indicators of credit washing were present in 1.7% of loan applications last year, a staggering 162% increase compared to the previous year.

“Credit repair scammers have become a cottage industry,” said Frank McKenna, chief strategist at Point Predictive and co-author of the report. “They’re sharing standardized tactics on social media, and as their message spreads it’s creating a lot more risk.”

Misrepresentation of income or employment remains the largest category of auto loan fraud, accounting for 42% of all fraud last year by dollar amount. This type of fraud can originate from both borrowers and dealers. Point Predictive uses methods such as tracking income levels declared on different applications to detect potential income misrepresentation.

McKenna attributes the rise in fraud partly to macroeconomic factors such as inflation and higher interest rates, which are putting a strain on borrowers. However, he emphasizes the significant role of social media in spreading fraudulent tactics.

Credit washing is often combined with synthetic identity fraud, where scammers create multiple fake identity fragments, such as ID cards and employer names, and combine them to present seemingly legitimate loan applications. Together, credit washing and synthetic identity fraud accounted for over a quarter of all fraud last year.

While roughly one in five auto loans was packaged into asset-backed securities last year, risk premiums on securities backed by subprime loans have not yet shown signs of widespread panic among investors, although premiums on the riskiest bonds are elevated compared to the past decade.

Point Predictive, which offers fraud detection and prevention services, analyzed over 256 million loan applications representing $4 trillion in loan requests for the report. The findings highlight the increasing sophistication of auto loan fraud and the need for lenders to implement robust fraud detection measures to mitigate risks.