Several weeks ago, we mentioned how investors are getting nervous because the number of “deep-subprime” loans—that is, those given to consumers with credit scores below the 550 FICO range—are rapidly increasing. Well, here’s another potential point of concern: borrower fraud in U.S. auto loans is also surging, according to Bloomberg, to a rate last seen with mortgages during the mid-2000s housing bubble.
Citing forecasts from a start-up called Point Predictive that “helps lenders sniff out bogus borrowers,” Bloomberg reports that as many as 1 percent of U.S. car loan applications include a material misrepresentation.
That rate nearly matches the mortgage fraud rate of more than 1 percent in 2009, the news outlet says. Though the potential worse case scenario doesn’t include a crippled economy nationwide, as we saw with mortgages, it’s still a reason to pause.
Point Predictive’s analysis is based off data provided by a group of 13 lenders, and it found common fraud includes anything from borrowers lying about income to falsified pay stubs, according to Bloomberg. The phony details might come from consumers or car dealers, Bloomberg says. Here’s more:
About 3 percent of dealers can be responsible for all of a lender’s fraudulent applications, Point Predictive said in a February report. Losses from auto loan fraud this year will likely be $4 billion to $6 billion, up from $2 billion to $3 billion in 2015, the firm said.
During the housing bubble, as few as 3 percent of mortgage brokers helped perpetrate most or all of the reported fraud, Point Predictive said. Loans that required little or no documentation allowed borrowers and brokers to lie about employment, salary, and other key facts about their financial condition. One borrower’s application for a mortgage said she made $6,900 a month, when she actually made about $3,286.
As my colleague Tom McParland wrote back in March, though comparisons to the housing bubble might be a bit overblown—Bloomberg says there was $1.1 trillion of car loans outstanding by the end of 2016; mortgages accounted for $10.3 trillion—but if the trends sustain, we could be on the cusp of higher interest rates and tighter lending restrictions.
If nothing else, it seems to be another sign that the industry’s heading to a bad place.