For months we've written about the imminently doomed auto bubble in the U.S., spurred in no small part by an unprecedented relaxation of underwriting standards by banks that would put even the shenanigans of the 2008 mortgage crisis to shame. From stretched out lending terms to promotional interest rates, auto lenders have increasingly played every trick necessary to get those incremental new car buyers into the most expensive car their monthly budgets could possibly absorb.
That said, in recent weeks there has been growing concern that consumers, auto dealers and/or banks have been going beyond simply relaxing underwriting standards and have instead been forced to commit outright fraud in order to attract that incremental auto volume growth. As UBS Strategist Matthew Mish told Bloomberg, “something is definitely going on under the hood...it’s not just smoke and mirrors anymore.”
The evidence is growing. First, the explosion of technology makes gaining access to information to improve credit scores very simple. Internet searches for 'credit score' are at record levels. Second, our survey finds 21% of auto loan borrowers admitted to some form of inaccuracy in their loan applications. Third, there is growing concern reported among auto lenders around fraud, which is the extreme case of this behavior.
Overall, the explosion and adoption of technology makes gaining access to "proven" methods for improving credit scores extremely simple. To this point, the popularity of internet searches for "credit score" has been rising consistently and is near peak post-crisis levels (Figure 7). Similarly, our survey finds that 21% of auto loan borrowers admitted to some inaccuracy in their application for non-mortgage related debt (auto, student or credit card loan). More concerning, this trend may be systemic as 29% of other consumer loan (i.e., student loan, credit card) borrowers acknowledged some form of inaccuracy in their applications (Figure 8).
Of course, this isn't the first time we've noted the probability that fraud is likely running rampant in auto lending markets. In fact, according to a new study from Point Predictive, fraud rates on auto loan applications are currently reaching levels seen in the mortgage market back in 2009. Per Bloomberg:
Borrower fraud in U.S. auto loans is surging, and may approach levels seen in mortgages during last decade’s housing bubble, according to a startup firm that helps lenders sniff out bogus borrowers.
As many as 1 percent of U.S. car loan applications include some type of material misrepresentation, executives at data analytics firm Point Predictive estimated based on reports from banks, finance companies and others. Lenders’ losses from deception may double this year to $6 billion from 2015, the firm forecast.
Those fraud rates are coming closer to the over-1-percent level for mortgages in 2009, when the financial crisis was boiling and more lenders started reporting incidents to one another, Frank McKenna, chief fraud strategist at the firm, said in an interview. While those losses will sting lenders, the impact on the overall economy will likely be much more muted than with the housing crisis, just because there’s less car debt outstanding.
Even so, “We see an extraordinary amount of parallels between the auto and mortgage industries, in terms of the rising levels of hidden fraud,” McKenna said. For home loans, it’s hard to know how widespread the deception was before 2009, because lenders often didn’t report information to one another and may not have even investigated incidents of probable lying much on their own, McKenna said.
And, right on cue, the New York City Department of Consumer Affairs was recently forced to file a petition against a group of Major World auto dealers alleging that fraudulent loan applications had been submitted to lenders that contained, among other things, inflated income and asset statements. Per NBC New York:
According to a petition filed by the New York City Department of Consumer Affairs, sales people at the Major World dealer group prepared dozens of auto loan applications containing inflated income and asset statements. The false information helped unqualified buyers purchase vehicles they could not afford.
In 2014, the I-Team reported on Margaret Zollner, a car buyer who accused staff at Major Chevrolet of tricking her into signing a loan application that falsely stated her income was $60,000, even though she was an unemployed senior citizen who needed food stamp benefits to get by.
Zollner's application also reported that she owned a house, but she rents her home.
"They said I made $60,000 a year. I was on food stamps," Zollner said.
At the time, a spokesperson for Major World suggested Zollner was responsible for signing her name to inaccuracies on the loan application.
All of which helps explain those surging delinquencies....
...and loss severities in ABS structures.
All great signs of a "plateau."