If you work in the auto finance industry, chances are you’re no stranger to the increasing, and varying methods of financial fraud criminals are using, one of which is called a straw purchase. This is when a person buys a large item, such as a car or a house, on behalf of someone who otherwise would be unable to make the purchase due to low income or poor credit. If the straw buyer doesn’t disclose that they are buying the vehicle or taking out a loan on behalf of the person who actually will be using and paying for it, this is illegal.
While a straw buyer can often be a friend or associate of the individual who plans to make the loan payments, some straw purchasing fraud occurs internally. According to Investopedia, “Dealers can initiate straw purchases by convincing a person with bad credit to apply for a loan with or through another individual. This can result in scams where the purchase contract has high interest rates.” In many cases, straw buying is an illegal activity, and dealer-initiated straw purchases are considered illegal in nearly all circumstances.
Furthermore, auto lending fraud in general is on the rise. According to Point Predictive’s 2023 Auto Lending Fraud Trends Report, the auto lending industry faced more than $8.1 billion in origination risk exposure in 2022, representing a $400 million increase compared to the previous year.
As a dealer or auto finance specialist, it’s in your best interest to protect your business and assets against straw buyer fraud, both internal and external. Here are some tips for avoiding straw buying scams and ensuring a safer buying experience for both you and your customers.
Verifying the buyer's identity and financial information is a crucial step for used car dealers to avoid falling victim to straw purchases.
One way that dealers can verify a buyer's identity is by requesting valid identification documents such as a driver's license or passport. This helps ensure that the person purchasing the vehicle is who they claim to be. Because falsified documents are easier than ever to produce via generative AI, it’s important for dealers to stay vigilant and know how to spot the warning signs of synthetic identity fraud.
In terms of financial information, it is essential for dealers to thoroughly assess a buyer's ability to make payments. This includes reviewing their credit history, income statements and employment status. By verifying this information upfront, dealers can determine whether the buyer has the means to afford the purchase.
By taking the time to properly verify these details, dealers can protect themselves from fraudulent transactions.
When you implement thorough documentation procedures, you help your employees and business deter straw buyer fraud.
In addition to requesting bank statements and pay stubs to verify the buyer's income and ability to make payments, dealers should also obtain a signed purchase agreement. This legally binding contract outlines the terms of the sale and protects both parties involved. It clearly states who the actual purchaser is, preventing any misunderstandings or attempts at fraud.
Furthermore, conducting background checks on potential buyers can provide valuable insights into their history and credibility. Checking a buyer’s record for previous fraud or finance-related crimes can help identify red flags early on in the process.
Taking these steps demonstrates due diligence on behalf of the dealer while providing added protection against fraudulent activities in an industry where trust and transparency are essential elements for success.
Auto dealers and finance companies can avoid straw purchases by staying vigilant and attentive to potential warning signs, both from buyers and dealers within their organization.
Some red flags to watch out for include buyers who seem overly eager or in a hurry to make the purchase, present inconsistent or suspicious identification documents or if multiple individuals are involved in the purchasing process but only one person takes on all financial responsibilities. These warning signs could indicate that someone else is behind the scenes, orchestrating the transaction as part of a straw purchase scheme.
To avoid falling victim to an internal straw purchase scam initiated by an employee in your dealership, Autolist recommends ensuring that a buyer’s co-signer is with them when drawing up and signing auto loan paperwork. Be sure the buyer signs the same contract as their co-signer and that the contract has a separate, clear-marked signature line for the co-signer either beside or below the primary buyer’s signature. Be sure to retain a physical or digital copy of the signed agreement for your records before approving the loan.
Another effective way for dealers and finance companies to prevent loss due to straw purchases is by installing GPS tracking devices on their assets. These devices can provide valuable information about the whereabouts of a vehicle at any given time. By having this technology in place, dealers can have peace of mind knowing that they can track and locate a stolen vehicle quickly and efficiently.
PassTime GPS devices are effective and efficient vehicle tracking and recovery solutions for asset protection. Choose from a variety of devices in our suite of state-of-the-art GPS technologies to find the right fit for your needs, including:
Installing a GPS tracker not only helps prevent straw purchases but also serves as a deterrent for potential thieves. Investing in a tracking system from PassTime GPS is an essential step for used car dealers looking to safeguard against straw purchases and car thefts. Ready to learn more? Contact a PassTime representative for additional information about PassTime’s suite of smart vehicle tracking and recovery solutions.
