CHICAGO—As Halloween approaches, credit unions are being warned the “Frankenstein of fraud” may be lurking inside their loan portfolios.
TransUnion’s Jason Lord shared that chilling advice, saying a potential monster had been sleeping somewhat quietly for years, but now crooks are “busting out” a creature that’s beginning to wreak havoc on lenders’ portfolios--especially auto--and will continue to do so at an increasing pace.
And most frightening of all, he said, is that the threat already involves a greater percentage of lenders’ auto loan portfolios than they realize.
The creature in this case is synthetic identity fraud. According to Lord, crooks have been carefully stockpiling fake identities over the last six to eight years, carefully piecing together parts and building up credit for these non-existent borrowers that eventually disappear like ghosts, leaving behind a long line of payments due.
Synthetic identity fraud involves using a combination of real personal information, like a Social Security number, with fraudulent or fabricated information that is then used to open memberships and apply for loans.
Nearly $2 Billion in Potential Fraud
“We estimate that within auto loan portfolios today, there's $1.8 billion of potential bust-out fraud,” the VP of global fraud solutions at TransUnion told CUToday.info. “That doesn't mean that the fraud has occurred, that means it's going to occur at some point. That’s a 38% rise year over year. And, it’s the second consecutive year of this increased exposure…I would say that we are sitting on a bubble right now. It's a giant bubble where there is so much exposure in these portfolios.”
Lord described synthetic fraud as the “Frankenstein of fraud.”
“As a crook, I might be using a child’s Social Security number. I might attach it to the date of birth or the address of somebody who’s recently deceased or somebody who's in prison…I'm creating this fake identity and over time attach this identity to an existing line of credit, which we consider the parent account for the crime,” he explained.
Slow & Steady
Sometimes these parent accounts have as many as 50 synthetic identities attached to them, Lord shared.
“And then, over the course of six to eight years, I am slowly building up credit,” Lord explained. “I'm applying for new credit cards. Maybe it's a retail card at first, and then a bank credit card. Maybe I even apply for a home loan at some point. Then, at some point, I need to do what's called busting out, which means I max out all my credit and then I just stop paying and I disappear. And, because it's a synthetic identity, there's nobody to follow up on, there's nobody to arrest because that person doesn't exist.”
Jason Lord
Auto lending is particularly attractive to scammers, explained Lord. As CUToday.info has reported, TransUnion said it found synthetic identity fraud continues to be among the most prevalent fraud in the market, in terms of both incidences and lender exposure. During a recent Senate Banking Committee hearing on artificial intelligence it was noted that as much as 95% of phony identities go undetected.
New Car Smells (Like Fraud)
“Auto lending is very attractive because it's a high-ticket item,” Lord said. “When you also consider that auto lending has been moving increasingly to a digital-first experience, where you can get financing online and you can even purchase and have a card delivered via online, it makes it even more attractive to fraudsters.”
Crooks deploy synthetic fraud in one of two ways, according to Lord. They actually use the funds to purchase the vehicle, which they then sell. Or they accept the loan funds, never buy a car and simply disappear with the cash.
Lord defended the auto industry, saying the fact crooks are now hitting them hard with synthetic ID fraud is not a result of dealers’ or financial institutions’ online tools failing to prevent the crimes. It is simply because auto is the most attractive target for a criminal to bust out a synthetic ID, he said.
Where The Real Problem Occurs
Moreover, he stressed the real problem in missing the schemes occurs when the pieces of the identity are being assembled, often as the result of information obtained in data breaches.
“This happens because whoever is first providing the credit to the synthetic identity is checking the individual elements only,” explained Lord. “They're saying is this name true? Yes. Is this address true? Yes. Is this phone number true? Yes. But what they're not doing is checking all of these data points in combination to understand if they're true as an identity. That's how the synthetic fraud is slipping through. The problem is once it's slipped through it's really hard to detect, because once you have a credit line you're in a credit bureau and you're in the public record. How do you know that's a synthetic ID at that point?”
Fraud Can be Detected
Yet there are means available to detect a synthetic ID once it has become established, Lord said.
“Things like how many lines of credit are on the single trade line,” he said. “(If) it's 50 and it's for one single address, that's probably a big red flag. There's other types of modeling that can be done using actual credit data to understand whether something is likely real and legitimate or synthetic. TransUnion has a synthetic fraud model that is built explicitly for that purpose.
“Again, a lot of these IDs are maturing now and this is the time the criminals are busting them out,” he said. “In all candor, it's only going to get worse because the fraud controls are not in place.”
Lord said many lenders are now starting to realize what they previously thought of as a credit losses are actually synthetic fraud losses.
A Growing Realization
“There’s a difference between an individual not being able to pay and an individual who never intended to pay, which is what synthetic ID fraud is,” he said. “Lenders could start thinking that. They just need to be more discriminating in who they give loans to. But in reality they could not have predicted that this synthetic person who was creditworthy, never intended to pay in the first place. They're starting to wake up and say, ‘Oh, we need to have a new sort of paradigm of understanding of what these losses are’.”
Lord believes all financial institutions need to begin looking more closely into loans in their portfolios for signs of synthetic ID fraud, and that if they all collectively do that it will begin root out these fake borrowers.