A Christmas Story – How Lenders Can Combat Seasonal Fraud

A Christmas Story

By Jay Anderson, VP of Product Delivery

When Disney launched its streaming service, Disney+, I decided to purchase a subscription as a family Christmas gift. I came across the Simpsons while looking for something mindless to watch while I worked out in the mornings and started all the way back at Season 1 Episode 1.

Appropriate to the season, the very first episode of “The Simpsons” was a Christmas special. I followed Homer Simpson as he discovered he wouldn’t be receiving his much-anticipated Christmas bonus that year. Not wanting to disappoint his family, he didn’t mention this to his wife or children and instead desperately tried to find a way to come up with the funds to give his family the presents they wanted. He became increasingly creative as Christmas neared without much success.

While humorous when watched from a different situation, the unfortunate reality is that this Christmas story is far too common in the U.S. today. Most people in that position find themselves owing rent and a car payment during the holidays as well. When 47% of Americans struggle to manage an unforeseen expense of $500*; money for Christmas (as any subprime collector will tell you) often comes by skipping a car payment and catching up a few months later when their tax return is received.

But where is the seasonal fraud?

People who can’t afford a $500 expense are financially devastated when their car has troubles, however minor they may be. Many people don’t know how (or don’t have the time) to maintain or perform repairs on their cars when something goes wrong, and financing repair costs is not straightforward and often comes with high interest rates. Because of the necessity of a reliable vehicle, many individuals will simply trade in their car for a newer vehicle preferably with a warranty.

When this happens later in the year, consumers are often taking on a larger car payment and increased insurance obligations right before their largest discretionary spending for the year. It’s a recipe for disaster.

Loans originated in October, November, and December are 10% more likely to default than loans originated the rest of the year. That difference is further exacerbated when the consumer has a credit score < 650; they are 14% more likely to default.

What can lenders do to combat the Christmas crisis?

1. Don’t chase the paper. Car sales are at their lowest during the last quarter of the year, and it’s tempting for lenders to stretch their “buy box.” It’s also tempting for car salesmen to push worse loans forward as their incomes also shrink, and they have gifts to buy for their families. Wait patiently for the volume to pick up in tax season and into the summer when customers don’t have to wade through snow and slush to make their purchases.

2. Set up customers for success. The most creative collector I’ve had the pleasure of working with developed a strategy from the beginning of the year to prepare the consumers in his portfolio for the December splurge. He would have his customers pay about 10% extra on their payments throughout the year contributing to their next payment, so they could skip a payment at the end of the year without falling behind.

3. Leverage consortium data to detect fraud and misrepresentation, so you aren’t bit at the end of the year. These customers don’t typically come out of the gate lying. They learn as they begin shopping that if they want to obtain a reliable car with a payment they can afford, they need to make themselves appear more qualified on paper with their income to debt ratio. A “good” finance manager may coach them along the way. By reviewing what they shared with lenders previously, you can gain a better understanding of where they truly stand.

To learn more about the consortium, please reach out. We’re also happy to discuss more strategies to combat the Christmas crisis and talk about other ways to improve your risk strategies. Happy holidays!

*According to the “Wealth & Wellness Index” published by Personal Capital found here: https://www.personalcapital.com/assets/public/src/2022-Wealth-and-Wellness-Index.pdf