Auto lending fraud has been rising for several years, but itremains hidden in credit losses, according to new research by a SanDiego, Calif-based technology firm.

After 2016 auto lending originations soared to historichigh levels, the downstream effects are now revealing themselves inhigher fraud losses. It's estimated the annual value of auto loanoriginations that contain some element of misrepresentation may beas high as $6 billion in 2017, which is twice the 2016 estimates,PointPredictive reported in a white paper.

The white paper, based on an analysis of historical loanperformance across several different portfolios, shows that autolending fraud can be broken into three separatecategories: known fraud that lenders have been able toidentify, hidden fraud that ends up misclassified asearly or first payment default, and systemic fraud byunscrupulous car dealers or representatives at car dealers. Each of these categories is a significant contributor to theincreasing fraud losses that we are forecasting for the autolending industry in 2017.

“Our analysis revealed that hidden fraud is the largest categoryof auto fraud risk as it is often mistakenly categorized with allof the other credit losses,” Frank McKenna, chief strategy officerfor PointPredictive in San Diego, said. “Early paymentdefaults range between 1% and 3% of originated loans for a typical auto lender. We arefinding that up to 70% of those loans that default on the firstpayment or within the first six months after funding havefraudulent misrepresentation in the original application. This is a primary contributor to the increase in auto lending fraudrisk we are forecasting for 2017.”

Misrepresentation on the application of a borrower's identity,income, or employment, as well as other key factors such as theprice or condition of the vehicle has a material impact on theperformance of a loan.

Credit scores or credit policies cannot be relied on to identifyor prevent these losses, and identity scores only identify a smallpercentage of these types of misrepresentation losses. Apredictive, full application fraud score is necessary to allow thelender to prevent a significant percentage these losses, accordingto PointPredictive.

The white paper also provides insight into the role that cardealers play in various systemic fraud schemes. For mostlenders, less than 3% of dealers are providing loans that areresponsible for 100% of their known fraud and early payment defaultrisk. Often, the frauds at these dealers can be traced to arogue finance manager or other key employee embedded in the financeoffice that works with fraud rings or identity thieves tofacilitate the delivery of fraudulent applications to lenders.

On the plus side, more than 97% of car dealers represent verylow risk to lenders as they have never been associated with asingle instance of fraud.