ONTARIO, Calif.-Auto lending fraud typically takes the form of borrowers misrepresenting application information, such as income. But during a recession-and even during a sluggish recovery-CUs need to watch out for the dealer as well.
Those words of caution were shared by Phil Maniaci, VP of Credit Union Direct Lending's (CUDL) eastern division, who has a long career in auto lending. "In a tough economy many dealers run short on cash and sometimes they don't pay off the loan on the trade-in."
Maniaci said the issue that then arises is the member unexpectedly learns he has two loans to pay off, which straps the borrower's ability to repay the new loan to the credit union. Maniaci described a typical situation in which this fraud occurs. "The member gets the indirect loan through the dealer, and the dealer agrees to give the borrower a certain amount of money for the car, which will be applied by the dealer to pay off the existing loan on the trade. But the dealer never pays the old loan off."
Maniaci said the credit union needs to make sure that whatever value the dealership places on the trade that it is "legitimate money" and that the loan on the trade is in fact paid off. "The easiest thing to do is require proof of payoff from the dealership, but this is not often done. So it really often comes down to trust and a strong relationship with the dealer. Know the dealerships you are doing business with-know if they are financially sound, know their past history."
When it come to borrowers scamming the CU, Maniaci said those who fall into the middle credit tiers often are the ones who get away with the most fraud. "We have found that sometimes credit unions take their eyes off the ball here, paying careful attention to the lower tiers and the 'A' credit generally offering little trouble."
