America’s biggest scam yet? Here’s what you need to know

America's biggest scam yet? Scammers in the US who share tricks with one another on social media are pushing auto loan fraud to record levels in the world's largest economy. Bloomberg quoted a report from risk management firm Point Predictive on Tuesday, March 25, saying the dollar amount of car loans involving fraud grew by more than 16 per cent to $9.2 billion last year.

In dollar terms, loans account for about 1.3 per cent of all auto lending in the US. According to the report, this increase is much faster than the growth in total lending identified by the US Federal Reserve Bank of New York.

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Auto loan frauds skyrocket in the US

The rising number of swindlers is likely contributing to the record share of borrowers falling behind on their auto loan payments, as fraudulent loans are more likely to default. The report highlighted that one of the fastest-growing types of fraud was credit washing, where credit repair companies file false identity theft claims with credit bureaus or the Federal Trade Commission to help borrowers clear black marks from their credit histories.

According to the report, indicators of credit washing showed up in 1.7 per cent of loan applications last year, a 162 per cent increase over the prior year. “Credit repair scammers have become a cottage industry,” said Frank McKenna, chief strategist at Point Predictive and coauthor of the report.

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“They’re sharing standardized tactics on social media, and as their message spreads, it’s creating a lot more risk.” According to Bloomberg data, last year, around one in five auto loans was packaged into an asset-backed security based on S&P Global and the New York Federal Reserve data.

So far, the risk premiums on securities backed by subprime loans — the ones likeliest to get hit by elevated defaults — don’t show signs that investors are panicking. However, the report added that the premiums on the riskiest bonds are elevated from where they have been over the last 10 years.

Point Predictive offers services to identify and combat fraud, which means it could win more business if it identifies more problems in the market. But other industry experts have also pointed to the growing frequency of fraud.

How to detect auto loan fraud?

The largest share of fraud involves misrepresenting income or employment, which can come from borrowers and dealers. Point Predictive said these inaccuracies accounted for 42 per cent of fraud last year by dollar amount. The firm uses ways to detect signs of income misrepresentation, including tracking borrowers' income levels on applications and flagging variations.

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The report said McKenna attributes the rise in loan fraud in the US partly to macroeconomic factors challenging borrowers, such as inflation and higher interest rates. However, social media also appears to be playing a role.

Credit washing is sometimes combined with synthetic identity fraud, in which scammers create fragments of a fake identity — ID cards and employer names, for example — and string them together to present lenders with what appears to be a legitimate application for credit. Credit washing and synthetic identity fraud accounted for over a quarter of all fraud last year.

“What’s driving a majority of the fraud risk in the last 12 to 18 months has been the sharing of schemes like credit washing and stolen social security numbers on social media,” McKenna said. For the report, Point Predictive looked at over 256 million applications it helped review for lenders and dealers, covering $4 trillion worth of loan requests, the firm said.

With inputs from Bloomberg