As a follow-up to its analysis that stated fraud in auto financing could reach $6 billion this year, PointPredictive released another white paper on Tuesday with suggestions on where that scheme could be nipped before it happens.

PointPredictive’s new whitepaper, entitled “Improving Auto Dealer Fraud Monitoring with Pattern Recognition,” highlights the critical role that dealers play in the growing auto financing fraud infrastructure and how to change the monitoring programs that often find the risky dealers only after major losses have occurred.

The white paper outlines challenges that are common in finance company practices for detecting and preventing dealer-sourced financing fraud in a timely manner and proposes an enhanced approach to addressing these challenges through consortium-based sharing of dealer risk and fraud patterns, pattern-recognition modeling, application-based monitoring and dealer education.

“Our recent study on auto lending fraud trends revealed that, for many lenders, a very small percentage of dealers represent a very large percentage of their fraud and early payment default risk,” said Frank McKenna, chief fraud strategist at PointPredictive.

“This high concentration of auto lending fraud presents lenders with a very difficult challenge — detecting and preventing fraud perpetrated by a few while not burdening the rest of their dealers unnecessarily,” McKenna continued.

PointPredictive acknowledged most auto finance companies cast a wide and inefficient net to address dealer fraud. The firm explained finance companies often will

—Review high-dollar fraud loss cases and review dealers with excessive defaults

—Use performance scorecards based on defaults and charge-offs

—Put problematic dealers on manual “watch lists.”

PointPredictive described these approaches as being often “too little, too late.” The firm insisted the dealer is generally not identified as risky until six to 12 months after the funding of their first fraudulent contract.

The firm went on to note finance companies are also handicapped by a lack of visibility into a risky dealer’s behavior with other providers due to a lack of lender-centric information sharing about dealer risk.

“PointPredictive believes that the most effective way to address dealer fraud in the auto industry is through lender participation in our Auto Fraud Consortium,” said Tim Grace, chief executive officer of PointPredictive. “By looking at each application from a dealer and by gaining a cross-industry view of dealer fraud behavior, we have created enhanced pattern recognition technology that flags high-risk dealers up to six months sooner than most lender’s existing tools.”

PointPredictive recommended that finance adopt a proactive, educational approach with their dealers — since fraud migrates and changes over time.  The firm said finance companies can help dealers understand their fraud risks earlier before major losses occur. 

The firm went on to mention dealers can also learn how to effectively flag income and employment manipulation during the application process, how to identify straw borrowers, and how to detect anomalies in finance manager results that may be leading indicators of fraud. 

“Forming an effective fraud-prevention partnership with dealers will help lenders insure a higher level of confidence in both their loan and dealer portfolios,” PointPredictive said.

Fraud is becoming more and more of a discussed topic this year, especially in light of Santander Consumer USA being penalized by officials in Delaware and Massachusetts in part due to allegations that contained fraud elements.

In an effort to enhance possible collaboration, Lou Loquasto and Mike Urban from Equifax recently shared a trio of suggestions that could help finance companies' fraud prevention efforts.

Furthermore, TransUnion back in January unveiled IDVision, a suite of solutions providing finance companies with what bureau officials think is a holistic approach to fraud and identity management. IDVision is designed to help companies stop sophisticated and evolving fraud while also protecting and restoring their confidence in conducting business.

To receive a copy of this PointPredictive whitepaper or to obtain more information about its Auto Fraud Consortium, contact the firm at info@pointpredictive.com.