‘Back-Loaded’ Auto Loans Threaten Small Lenders

PLANO, Texas — A form of fraud where dealer finance departments or banks “back-load” auto loans with disguised personal loans is gaining traction in the subprime auto space, Edward Kramer, senior advisor at Asurity Technologies, said at the Nonprime Auto Finance Conference last week. Smaller subprime lending operations might be ill-equipped to deal with this growing trend unless they adapt.

The fraud consists of an auto dealer inflating the price of an auto loan well above the market value to provide the customer a cash loan and group it under the car-financing umbrella. “Someone comes in and buys a $40,000 car, and the finance person — I usually use Fast Eddy as an example — Fast Eddy says, ‘I’ll tell you what, how about you walk out of here with a car and $15,000?’” Kramer said, noting that the borrower usually was someone who could barely afford the original price of the loan, much less an inflated loan.

“These are not individuals that can afford to pay that,” he said, adding that this sort of lending practices easily qualifies as predatory under UDAAP. “This is going to spread and cause a real crisis — [complete with] regulatory risk [and] reputational risk,” Kramer said.

Many of these inflated loans were 120% of the car value, he said, and sometimes as high as 150% of the value.

So, what can compliance officers — especially ones that wear “many hats” in smaller organizations — do to protect themselves?

First and foremost, Anthony Gibbs, principal, at Anthony Gibbs & Associates LLC, said its difficult for compliance officers to do anything on their own in this case. “It’s a huge thing to tackle fair lending and fair servicing, including UDAAP, when you don’t know where to start,” he said. Gibbs previously served as the regional director of the Midwest at the Consumer Financial Protection Bureau.

Gibbs went on to say that the best place to start is at a risk assessment. “Can you leverage off of some other risk assessment in your organization, even if it’s credit risk?” he said, adding that every lender has some form of methodology, mechanism, or reporting tool for credit risk.

If credit risk isn’t an option, lenders can also start with inherent risk. Ask yourself: Who are you customers? What business are you in, and what are those inherent risks with respect to your products, people, and existing processes?

“Then, you can use that inherent risk broken down at a product and process level to help order things,” he said, noting, for example, differentiating higher risk issues versus lower risk issues. “Don’t try to accomplish too much in one go,” he said.

The next step is to identify other people in your organization who can serve as controls, Gibbs said. “[These people] might not even know they are controls — they might just be doing their jobs.”

Once identified, the control would need to be rolled into some monitoring program, Gibbs said. “Get someone to test and monitor that control to make sure it’s working the way it should,” he said.

“Then, you get a sense of a rotating risk assessment where you’re not trying to solve everything today — you’re taking measured steps and involving the right people to get to a more manageable place,” he added.

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