Get the Fraud Out of Here: Highlights from the Dealer Fraud Panel at the NAF Non-Prime Auto Financing Conference

By popular demand, the National Automotive Finance (NAF) Association’s Non-Prime Auto Financing Conference in Plano, Texas, last week included a close look at one of the biggest challenges facing subprime lenders, dealer and dealer-enabled fraud. I was privileged to be on the panel with an experienced group of professionals: Joel Kennedy, Chief Operating Officer at TruDecision, and newly appointed NAF President who moderated the panel; Zahid Kassem, Principal at Kassem Consulting; Frank McKenna, Chief Fraud Strategist at PointPredictive; and Josh Wortman, Data Science Executive at General Forensics.

Joel Kennedy kicked off the discussion, noting the growth in dealer fraud and the importance of identifying and eradicating it. As Joel noted, the time is ripe for the industry to share information and learn more from each other regarding successful detection and prevention strategies.

Zahid Kassem identified the many types of fraudulent schemes perpetrated on lenders every day by both consumers and dealers, limited only by the imagination of the fraudsters. In particular, Zahid had a warning for attendees, urging that credit washing – the practice of consumers fraudulently disputing transactions on their credit report, which are then suppressed by the credit bureaus – is occurring at an alarming rate and needs to be addressed by the industry as a whole. As he noted, bringing this issue out from the shadows should result in both business and legal solutions in the industry. Zahid also provided insights related to other problem areas, such as, dealer misrepresentations of both borrower attributes and collateral values, and gave several strategies for lenders to limit losses.

Frank McKenna quantified dealer fraud as a $6 billion issue for lenders and showed how everyone in the auto buying/finance process – consumers, dealers and lenders – is impacted. For example, he described how up to 30% of early payment defaults are due to practices such as “powerbooking,” in which unscrupulous dealers inflate vehicle prices with non-existent options. As Frank explained, powerbooking causes harm to consumers because they borrow more than the car is worth; harm to lenders because they receive collateral worth less than they believed; and, in a boomerang effect, harm to dealers who must sell on average ten vehicles for every one retail installment contract that is put back by the lender.

Joshua Wortman provided interactive case studies and useful strategies that could entice anyone into becoming a fraud detective, though they best leave it to the experts. Joshua showed how web crawling revealed irregularities at Nissan Manhattan and Reagor-Dykes Ford, both ultimately the subject of large cash payouts to the captive auto lenders. He also shed light on the much too common practice of price inflation at dealerships, which, as he described, has become a larger concern, and how poor or false advertising contributes to the losses, all to the detriment of lenders and consumers.

I discussed the legal implications for lenders if they fail to detect and prevent the fraudulent schemes. I noted that perhaps the best motivation for implementing fraud prevention systems is that options for enforcement are generally limited to breach of contract and fraud claims, yet dealer fraud could expose lenders to penalties and other liabilities to regulators and third parties. Given lenders have a choice of either taking control or merely hoping the authorities step in to provide restitution to victims, the prospect of losses from fraud should also serve to motivate lenders to tighten representations and indemnity provisions in dealer agreements, to the extent market conditions and relationships allow.

If you’d like to learn more about the panelists and the services they offer, please visit the websites below:

Joel Kennedy —
Zahid Kassem —
Frank McKenna —
Joshua Wortman —

Access the material here > Dealer Fraud Presentation Materials from NAF's 23rd Annual Non-Prime Auto Financing Conference