Anatomy of an Auto Lending Fraud

Auto Lending Fraud cost US finance companies, banks and lenders billions annually.  But I often get the question, “How do lenders lose money when they can actually repossess the car if they find fraud later.  The answer is, it’s often not that simple and even when the car is repossessed, they can still lose money.

Early Payment Default

Banks can lose money due to bad loans.  Most lenders lose money when loans default within the first year.  This is called Early Payment Default and it can run as high as 2% of loans in certain segments of lending like subprime, and even higher in deep subprime.   PointPredictive analysis suggest that as much as 30% of these loans contain some fraudulent misrepresentation in them.  The lenders can repossess these cars but they rarely recover 100% of the value and end up taking large losses.

Fraud Rings

Banks can lose money to outright fraud on the loan file by individuals or fraud rings.   These are often very dangerous fraud schemes where luxury cars are often sent to foreign countries in shipping containers after the purchase.  The lenders cannot repossess these cars because they essentially disappear.

Dealer Fraud

The overwhelming majority of auto dealers are good businesses.  However there are a few bad apples that can give dealers a bad name.  PointPredictive analysis suggest a small minority – approximately 3% represent real risk of fraud to a lender.  Common dealer frauds are often linked to recruiting straw borrowers, inflating the collateral value of the car or faking entire loan applications to steal from lenders and banks

This is typically the type of fraud that you will read about in the newspapers because dealer fraud is pretty common and when it happens can cost lenders millions.

Anatomy of an Auto Lending Fraud

To understand Auto Lending Fraud we don’t have to look any further than a recent case at Navy Federal Credit Union.   Navy Federal Credit Union was recently scammed out of $1.1 million in loans by a shady car dealer – Andysheh  Ayatollahi, who eventually  fled to Iran after perpetrating a massive scam against lender he worked with.

Lets look at the steps that Andysheh took to perpetrate his fraud scheme

Step 1 – Buy a Dealership

The first step was to buy a dealership and Andysheh did just that by purchasing a 50% stake in Car Store, a used car dealership in Virginia Beach. He purchased the stake in the Car Store from Reza Azizkhani who would become his partner in crime.  He paid $350,000 for that 50% ownership.  That was back in 2007 and at the time the dealership was operating above board.  But all that was about to change.

Step 2 – Hire Collusive Finance Managers 

It takes a village to pull off the perfect auto lending fraud scam and  Reza and Andysheh were determined to pull it off. To make it really work they needed finance managers  and sales people that would do whatever they told them even if that meant lying to banks, , creating fake documents to back up those lies and shredding those documents if the police ever caught on.

Step 3 – Get Luxury Cars

If you’re going to lie, lie big.  And that is what the Car Store did.  To fill their lots,they didn’t want the cheap economy cars, they wanted the luxury cars that could net them big money.  So they filled their lot with luxury cars like Jaguars, BMW’s, Lincoln Navigators and Mercedes Benz.

The bigger the car, meant the bigger the loan that they could get and that meant more money that they could put in their own pockets.

Step 4 – Get Borrowers – Straw Borrowers

The 4th step in their scheme was to get borrowers that were easily fooled.   They recruited desperate or needy people and turned them into “Straw Borrowers”. These were people with very poor credit and limited financial savvy that could be easily manipulated.  These were people that would let the sales person and finance manager put whatever they wanted on the application without questioning why.

Step 5 – Find a Target

To perpetrate a fraud, they needed to find a target bank that they understood very well.  A bank where they knew the processes, procedures and policies for getting a loan approved.  They set their sights on Navy Federal Credit Union as the target.    This way they could tailor their loan applications in a way that they knew that they could get them approved.

Step 6 – Move Product, Write Fraudulent Loans

Now that everything was in place, Reza and Andysheh were ready to begin the scam.  Starting in July of 2007, they began to dramatically increase their sales. They recruited straw borrowers and started selling cars with one small catch – the loans were far higher than the purchase price and all the information in the loans was fake.

The scam was to inflate the car price

The typical scam that they pulled was to run multiple fictitious applications through with fraudulent information to find the maximum that Navy Federal Credit Union with authorize as a loan.  Then they would inflate the value of the car they were selling to match that maximum amount the bank would lend.  In exchange for the straw borrowers complicity, Car Store would split the proceeds of the excess loan amount with them.  Everyone would win.  Except the bank of course.

Inflate Borrowers Income and Create Fictitious Documents

In mid 2007, for example they sold a 2002 BMW to an employee of a barber shop.  The borrower had poor credit and made a modest salary.  That didn’t stop Car Store from helping they buyer secure a loan on that car for $60,000 dollars.    Under the direction of Andysheh, the Finance Manager falsified paystubs, income and other documentation to show that the borrower actually had two jobs with income of over 8,000 a month.

And that was just the tip of iceberg.  Andysheh and the Car Store would go to any length to get a loan approved. The would even go so far as creating fake paystubs, earning statements or calling the bank to impersonate employers to verify income of the straw borrowers.

The losses racked up quickly

By mid 2008, the Car Store had racked up over 60 loans to Navy Federal Credit Union totally over 1.1 million dollars.  Many of the early loans were starting to go default and the lender was catching on.

As the Feds caught on, Andysheh realized he was in trouble and that is when he started to try to cover his tracks.  He instructed employees to start to destroy all the evidence and had the Finance Manager stay after hours and on the weekends to shed any and all paperwork.

When it was all said and done, Andysheh fled the country to Iran to avoid facing criminal charges.  He later returned late last year to face those charges and faces 27 months in Federal prison.

The Cost of the Fraud

In the end Navy Federal Credit Union and Insurance Companies lost $867, 388.  Close to 90% of the loan value that they had loaned went into loss.  The cost of auto lending fraud doesn’t stop there.  Consumers ultimately bear the burden of these losses in the form of paying higher interest on future loans.

Auto Lending fraud is not a small problem but a growing one here in the US.  The auto lending industry is booming and lending more to more risky customers than anytime in our history.  This is often a precursor of future risk that will be exposed.

New Behavioral Analytics Track Suspicious Behavior

To curtail fraud, lenders should have systems in place to monitor the behaviors of all dealers and the applications that those lenders submit.  PointPredictive offers the industries first Pattern Recognition algorithms to help lenders stop dealer frauds.

Contact fmckenna@pointpredictive for more information.