It happens too often. An auto lender or servicer learns their collateral has been towed for repairs and the garage claims a priority lien that can only be discharged by payment for “major repairs,” compounded by ballooning storage fees, and there is no expectation of payment by the borrower. Faced with paying for expensive charges and fees on a vehicle, many lenders and owners of retail installment contracts give up their lien without much, if any, investigation. The problem is that in many instances the repair claim is unauthorized, exaggerated or bogus. The industry-wide result is likely hundreds of millions of dollars in losses.
“I’ve seen that scenario far too often,” says Zahid Kassem of Kassem Consulting. As a former senior vice president of fraud and dealer management at one of the largest subprime auto lenders, Zahid had success preventing losses from impound fraud, particularly in Florida. There, he would be able to post a bond with the county court, which would call the bluff of the supposed lienor by making them swear to the cost of repairs and fees in court. “In many instances, we found the charges were fraudulent and the fraudster had to cave.”
Such an outcome is not necessarily easy to achieve by a lender on its own. It takes substantial, specialized resources and effort to cover the three main issues at play: lien laws, collateral value and risk. First, on the legal side, the lien laws that fraudsters try to game vary greatly by state, so there is no one size fits all solution.
Knowledge of local lien laws is a must. The timeframe to object or interject into the lien sale process can be quite short. In addition, the judicial remedy is not clearly expressed in some states. Second, on the analytical side, whether it makes business sense to challenge the claim or release its own lien requires the lender to have a good understanding of the value of the collateral. Finally, gauging correctly the risk that a claim is fraudulent necessitates some knowledge of trends and claims in a given market. “This is where analytics are needed to make the best decision given the particular vehicle, lien amount and claimant,” suggests Joshua Wortman of General Forensics.
Despite all of these challenges, the good news is that the lien laws with which the tow truck operator or garage must comply, whether framed under local law as mechanic’s liens, storage liens, garagekeeper’s liens or artisan’s liens, often impose numerous detailed requirements, which must be satisfied by the lot or garage to enforce a lien with priority over the lender. Such requirements relate to the proper form and substance of notices to be given to certain persons, including those holding an interest in the vehicle, the timing of such notices, dollar limits on claims and other substantive and procedural requirements. Given all the hoops a claimant must go through, there’s a good probability proper attention and investment by a lender would identify defects in lot and garage processes that would nullify any claim of a priority interest.
The simple fact is impound fraudsters count on lenders and servicers to not invest the specialized resources and efforts described above to investigate their claims. And truth be told, it has largely paid off for the fraudsters given how thinly spread a lender’s fraud prevention unit may be and the time and effort involved in refuting individual claims.
Left unchecked, loss severities will continue to be impacted. As secondary market investors take more notice of this issue, we will see that both originators and servicers step up anti-impound fraud efforts, especially in the worst offending states: Florida, California, Illinois, Texas and New York.
When it comes to impound fraud and the decisions required, lenders and services ought to take Kenny Rogers’ advice and know “when to hold them and when to fold them.” If the industry starts to pay attention and implements the right process, there may come a tipping point where impound fraud is less lucrative for the fraudsters to pursue. For now, it continues to decimate the value of repossessions.