We’ve been talking about dangerous car loans for years, but now there’s a new statistic to add to the economy’s wavering tower of potentially ruinous loans: A fraud detection company used algorithms to detect loan fraud automobiles to the tune of $1 billion. in just under three years.
Point Predictive uses machine learning AI software powered by billions of historical loans to teach it how to spot legitimate information on a loan application. It revealed that from February 2019 to December 2021, more than 5,000 car loans contained fake employers with fake compensation histories for buyers. Point Predictive strongly blames borrowers, says in its press release:
Point Predictive has found that in fake employer fraud cases, a borrower creates a fake employer to generate fake pay stubs, falsified earnings, and synthetic identities for car dealerships and car lenders when financing. The bogus employers were identified by Point Predictive fraud analysts while investigating loan applications flagged by Auto Fraud Manager – the consortium’s risk-scoring solution used by auto lenders globally. national.
During investigations, identified bogus employers were associated with fake websites, falsified earnings, high rates of confirmed synthetic identity, and high rates of delinquent loans.
“The increase in the use of fake employers on credit applications is staggering, and the $1 billion threshold only proves the growing threat of this problem,” said Justin Hochmuth, senior fraud analyst at Point Predictive, “We uncover approximately 100 new fake employers popping up every week. The exceptional work done by our team and the power of Auto Fraud Manager proves that we’re tackling this threat head-on and driving value for our partners as We’re working to dramatically reduce fraud across multiple industries, from car loans to mortgages and even personal loans and apartment rentals.
Point Predictive claims it has saved dealerships up to $21,000 on each fraudulent loan discovered, especially since fraudulent loans have a default rate of 40-100%. While such schemes may very well be propagated solely by loan seekers, let’s not forget that in the heady days leading up to the 2008 meltdown, home loan writers were very active in setting up such schemes to get people into homes they could not afford. . Of New York Times:
In a study published last yearfor example, researchers looked at the 721,767 loans made by an anonymous bank between 2004 and 2008 and found widespread revenue falsification in its low-documentation loans, sometimes referred to as liar loans by real estate agents.
More colorfully, journalist Michael Hudson told the story of the “art department” of an Americast branch in Los Angeles in “The Monster,” his 2010 book about the mortgage industry during the boom: “They used scissors, tape, Wite-Out and a photocopier to make W-2s, the tax forms that show how much an employee earns each year. It was easy: Paste a low-income borrower’s name on a W-2 belonging to a high-income borrower, and like magic, a bad loan prospect suddenly looked so much better. Branch workers have equipped the office break room with all the necessary tools for making and handling official documents. They nicknamed it the “art department”. ”
The prevalence of overstatement of income is sometimes presented as evidence that borrowers have deceived lenders. This has undoubtedly happened in some cases. But that’s not a likely explanation for the overall trend. It’s a stretch to think that most borrowers would have known what to lie to say, or how, without insider help.
There are many parallels to be drawn between today’s Wild West auto lending and the mortgage crisis of 2008. The auto lending business is a poorly regulated mess. Let’s review some of the issues Consumer Reports found last year:
- A credit score does not necessarily dictate the terms of the loan offered. Borrowers in all credit score categories – ranging from super-prime, with scores of 720 and above, to deep subprime, with scores below 580 – received loans with APRs ranging from 0% to over 25%.
- Some high credit ratings get high-priced loans. While on average borrowers with low credit scores are offered the worst terms, about 21,000 borrowers with prime and very high credit scores, or about 3% of the total borrowers in this group, received loans with APRs of 10% or more. more than double the average rate of high scores in our data.
- Many borrowers are put into loans that they might not be able to pay. Experts say consumers shouldn’t spend more than 10% of their income on a car loan. But nearly 25% of the loans in the data CR reviewed exceeded that threshold. Among subprime borrowers, that number is almost 50%, about 2.5 times higher than prime and super-prime borrowers.
- Underwriting standards are often lax. Lenders rarely checked borrowers’ income and employment to confirm that they had sufficient income to repay their loan. Of the loans reviewed by CR, these checks occurred only 4% of the time.
- Crimes are frequent. More than 5% of the loans in the data – 1 in 20, or around 43,000 in total – were said to be in arrears. As delinquencies have declined over the past year and a half, likely thanks to pandemic-related deferral programs, industry groups and regulators are bracing for a potentially steep uptick in the months ahead.
Not only is fraud rampant, but these loans are used in asset-backed securities – a financial product made up of multiple loans packaged by a financial institution and sold to investors. Much like the mortgage-backed securities that rocked the economy in 2008, these products bundle risky loans with seemingly risk-free loans to ensure a steady profit for investors. Of FinancialTimes Tuesday morning:
Moving on to another corner of the market, I asked Jenn Thomas of Loomis Sayles, who covers asset-backed securities, if this market had felt any repercussions from selling stocks. ABS didn’t miss a beat, she said.
She describes the pricing of consumer ABS – backed by car loans, credit card receivables, personal loans, and more. – as stable to the point of being limited in recent weeks. Three new issues (subprime auto, prime auto and personal loans) were priced yesterday as the stock market was on a rollercoaster ride, and all were oversubscribed. The $40 million triple B tranche of the consumer loan ABS, yielding 4.4%, was oversubscribed by a factor of almost five. “The demand is so heavy,” she said.
But as we’ve seen, all it takes is the strong breeze of a financial mess to send asset-backed securities into a chain reaction that can bring entire economies crashing down. In the end, it is normal people who will suffer the consequences of this risky market.
According to Experian. The rating agency also found that the average payment on a new car reached $609 per month in the third quarter of 2021, up from $565 in 2020. Used car prices also soared to $25,909, an increase of 26% compared to just two years ago. Defaults on these loans remain fairly stable in the 4.5% range, despite rising costs. A low delinquency rate means lenders have no reason to stop the flow of free money. Indeed, as CR reported over the weekend, lenders also make money from repossessions. The good times seem to be endless for auto loan writers!