How Synthetic Identity Theft is Costing Your Auto Lending Institution, and What to do About it

Synthetic identity fraud is wide-spread in the auto lending industry, and it’s costing billions. Unlike traditional types of identity fraud, which involves assuming the identity of another individual, synthetic identity theft uses a combination of fake and real identifying information. Auto lenders are vulnerable to this type of fraud from two ends: organized crime rings and individuals with poor credit scores. It’s not easy to detect synthetic fraud, as it’s often obscured by a bigger pool of credit defaults. Nonetheless, it’s critical to buckle down on the fight against this new trend, especially given that synthetic fraud costs lenders over $6 billion each year, with an average loss of $10,000 per account. This blog post will explore how synthetic fraud has evolved over the years, what it looks like today, and how auto lenders can prevent it in the first place using streamlined digital solutions.

The evolution of synthetic identity theft

Credit Privacy Numbers, or CPNs, have long been used for individuals to disguise shoddy credit history when taking out loans, enabling them to receive better rates than they normally would. It has its origins in the U.S. Privacy Act, established in 1974, which allows Americans to withhold their Social Security numbers in situations when it’s not required by federal law. CPNs were created by companies as nine-digit numbers meant to be used in loan applications in lieu of a social security number. The usual targets of CPN scams are individuals with extremely poor credit scores. While negative information will be cleared from consumers’ credit reports after seven years, many borrowers simply don’t want to, or cannot, wait. A typical interest rate for a subprime or deep subprime auto loan is anywhere from 12% to 18%. Meanwhile, prime borrowers only pay around 4%. The incentive for car buyers to get an instant fresh start rather than wait is glaringly obvious. Of course, it’s auto lenders who pay the price, as many of these buyers will inevitably default on their loans –– loans they may not have received to begin with (or under very different terms). Professional fraudsters have exploited and scaled this phenomenon, transforming it from an illegal method of getting a car to making serious profits on the lender’s dime. These fraudsters often work in rings, obtaining new CPNs and making (and repaying) small purchases, applying for credit cards, even creating social media profiles to create realistic new personas attached to that CPN. Known as a “bust-out” scheme, it typically culminates with the purchase of a luxury vehicle using the synthetic identity, selling the car for a big pay-out, and disappearing –– leaving the lender with the unpaid debt.

The cost of synthetic fraud to auto lenders

The synthetic fraud phenomenon is spreading at an alarming pace, and getting more sophisticated every year. TransUnion found that outstanding auto loans suspected of being synthetic identity fraud accounted for $630.5 million as of Q2 2019. That’s five times more than in 2011. Meanwhile, Frank McKenna, Chief Fraud Strategist at PointPredictive, conducted an analysis of over 70 million historical auto loan applications that revealed a 140% increase in synthetic identity fraud in auto loan originations since 2016. As if the steep financial price weren’t enough, lenders must also contend with the fact that some versions of synthetic fraud put their innocent customers’ PII at risk. Since synthetic identity fraud uses a mix or real and fake information, it’s the real information that may hurt customers. For example, CPNs are sometimes stolen from children who are too young to have a credit history. By the time these children are grown up and ready to take out auto loans, their credit numbers or history may already be compromised, seriously muddying the loan application process along the way.

Is more documentation the answer?

Lenders’ natural instinct when facing the threat of synthetic fraud is to increase the number of requirements. The thinking goes that the more barriers, or documented proof points are erected between potential fraudsters and the lender, the more protected the lender is. Unfortunately, there are two issues here: First, paperwork heavy processes tend to involve multiple touchpoints, from scanners to fax machines to email. Interactions take place in person, online, and on the phone. The sheer number of different touchpoints and channels makes it easier for crooks to exploit the inherent messiness, and harder for lenders and dealers to detect foul play. Second, lengthy paperwork doesn’t just keep the bad guys out: it also keeps the good guys out. According to Lightico’s recent The State of Digital Lending in Auto Finance survey, consumers who wait more than 48 hours to get their auto loan approved are twice as likely to abandon their car loan application. And 62% of prospective borrowers who abandon a car loan application cite a bad digital or customer experience. In today’s digital and instant world, lenders simply cannot afford to make it even harder for people to get their auto loans approved. Modern consumers will often rather take their business elsewhere.

How to fight synthetic fraud with technology

Fortunately for auto lenders and dealers, technological advances make it possible to cut through the noise and prevent synthetic identity fraud. It’s now possible for lenders to conduct the full loan application process entirely through a single secure mobile environment. With Lightico, customers receive a text message link taking them to a protected session where they can fill out and submit all forms, documents, and pieces of ID. Identity verification is back by technologies such as AI and geopositioning to ensure applicants really are who they claim to be. Mobile auto loan applications make it harder for the fraudsters to slip in while ensuring lawful borrowers can get their identity verified in just eight seconds. Lenders benefit from the increase in revenue that comes from both weeding out the fraudsters and decreasing the abandonment rates of the good guys, all thanks to a radically streamlined system.