TruStage RISK Alert: Fraud Risk and Vendor Management Impact Indirect Lending Portfolios
Technology is increasing the risk of fraudulent indirect loans and making them more difficult to detect. Identity theft, synthetic ID fraud, and document fraud are all becoming more prevalent and have resulted in losses to credit unions.
With inflation impacting the affordability of autos, and when combined with high-tech fraud, the result is a risk scenario that requires a high-tech solution with enhanced borrower authentication and strong vendor management.
Today’s fraud comes in many forms and requires that credit unions exercise enhanced due diligence in the administration of Indirect lending (IDL). Even though there is a shift to digital, many auto dealers continue to rely on cumbersome hybrid or semi-digital processes giving the bad actors an advantage. With auto-decision tools, lenders are less likely to manually review loan applications and the supporting credit and income verification documents. The result can be a higher risk for the following types of loan application fraud:
• Overstatement of employment and income
• Fraudulent pay stub
• Identity theft
• Synthetic ID fraud
• Power booking
Credit unions should also consider the possibility that the dealer is complicit in the submission of a fraudulent application. In some cases, the auto dealer’s financial stability is in question and given the holder-in-due course clause or the “holder rule,” credit unions could be on the hook for damages and uncapped attorney fees.
Ongoing due diligence for automobile dealerships in an indirect program is critical to the program’s success. The foundational elements of a sound due diligence program must include a process which assesses the risk of dealership vendor relationships both initially and ongoing. Be sure to understand how the dealership fits into your member demographic, loan growth, and risk appetite strategies.
Consider a combination of risk mitigations to address fraud risk from the borrower and the dealer. Credit unions are also encouraged to conduct thorough dealer due diligence on an on-going basis, not only when a new dealer is on-boarded.
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