MADISON, Wis.-As credit unions look to bolster their auto lending portfolios in rough economic times, they need to be on the lookout for dealer fraud and properly monitor their programs to avoid uninsurable losses.
"Credit unions need to make sure they do their due diligence on their dealers," said Brad Mundine, Regional Manager, CU Protection Risk Management at CUNA Mutual. "I think that's one area that is chronically overlooked."
While explicit fraud perpetrated by a member is potentially insurable, dealer fraud is not and must be dealt with in the contract between the CUs and the dealers. Mundine encouraged CUs to investigated Better Business Bureau complaints and consumer affairs reports before getting into business with new dealers. Contracts should clearly address dealer responsibilities, fee structures and provide recourse clauses for potential fraud.
"Make sure who you know who you are doing business with," he added. "With an indirect program, half the time the credit union may not meet the member face to face and they certainly won't see the vehicle."
Common dealer scams include adding options on the buyer's order that don't exist for the model being purchased, adding warranties or GAP protection without member authorization, overfunding loans and forged signatures on loan documents. Insufficient scrutiny of funding packets has left more than one credit union not discovering the fraud until the vehicle is repossessed and without a recourse clause in the dealer agreement, credit unions are forced to eat the full extent of the fraud.
"You have to review every one of those funding packets that comes in not only to make sure that every loan falls in your indirect lending guidelines but also to make sure that every I is dotted and T is crossed," said Mundine. "When you have car dealers that intentionally or unintentionally pull a fast one on a member, a credit union needs to make sure they are protecting (him). By protecting yourself, you will in turn protect the members as well."
