Last month I published an article for Point Predictive titled Fast Money, Fast Fraud Scams. In this I highlight some of the concerns of an increasingly hot market, both in the automotive and mortgage industries. As demand for lending increases, the major competitive advantage for lenders is speed. The speed at which they approve a loan can make or break a deal.
However these changes don’t just attract customers, they also bring the fraudsters out of the woodwork. I’m going to highlight some of my key points here, but highly encourage you to read the whole article.
Law of Supply & Demand isn’t just an economic principle
Supply and demand are laws of economics that are used to determine the price of a good or service. But I believe that this can also be used to determine the likelihood of fraud. As demand increases, and supply decreases we always see an influx of fraud. Both first party, and third party.
Why does this happen?
- 1st Party – Hot markets drive prices upwards. These increases typically outpace the increase in wages which makes it harder for the average consumer to borrow. The need for lending doesn’t necessarily go away which can cause people to lie about certain things in order to obtain approval.
- 3rd Party – As I said before, competitive advantage is usually dictated by speed. And one of the easiest ways to increase the speed of approval is to reduce the amount of underwriting due diligence. Fraudsters recognize this, and take advantage
The Fraud Triangle is Alive in the Auto Market
It’s no secret that the used car market is extremely overpriced right now. Demand driven by temporary lock downs, increased cash supply from government stimulus, and an extreme shortage of new cars due to chip supply. Borrowers that would have been easily approved just last year for a vehicle are now struggling for lending.
A car that cost $15,000 just last year, now has a sticker price of $20,000. The requirements for lending may now make it impossible for borrowers to gain approval due to their income not changing as rapidly. These borrowers feel forced to inflate their income. And misrepresentation that influences a decision is what we in the industry like to call fraud.
The fraud triangle is used to help explain how normal, everyday people, can commit fraud.
- Circumstance – The borrower is in need of a vehicle, but because of the recent price increases they can no longer afford one.
- Opportunity – Fake paystubs have become accessible to the broader consumer market at low prices. This makes it easy to verify falsified incomes.
- Justification – The borrower isn’t at fault for the low supply of new vehicles, or the massive chip shortage. In order to work they need a vehicle.
Government Stimulus Delays Impact of Fraud
In the article I discuss a recent survey that was done by Point Predictive. This study found that 70% of lenders believed that there was no change in risk due to the pandemic. This is staggering because according to a landmark industry study, income and employment misrepresentation is growing.
My belief is that these loans have been propped up by government stimulus. Now that the eviction moratorium is up, and stimulus has come to end, borrowers will need to choose which bills to pay. Housing, or transportation.
Read The full Article here
Disclaimer: Justin Davis (author) works for Point Predictive as a Fraud Consultant
Very, very well put.