Some dealership managers falsely believe manipulating a credit application to improve the likelihood of obtaining a credit approval is a victimless crime. The reality is there are a handful of potential victims from a manager’s decision to kink a credit app, including the manager’s family when he or she is jailed for the crime.
I know of no finance source that will consent to credit app fraud. And any finance source employees who looked the other way or did not detect the fraud will likely pay the price, either through lowered performance ratings or other disciplinary actions. Their families will most likely suffer, too.
Now, if the dealership suffers a public relations nightmare because of the fraud and loses sales as a result, you can add the dealership’s employees and their families to that list of victims. And if falsifying a credit app results in a deal the customer can’t afford, the resulting repossession, deficiency balance and lower credit score makes the buyer a victim, too. And don’t forget the credit losses the finance source will suffer because of the fraud.
See, finance sources focus on five key determinants on the credit application: income, housing expense, time on the job, time at residence, and job type. Differences in any of these five key credit determinants between the source information provided by the consumer and the information submitted to the finance source can be considered a violation of your finance source agreement.
The remedy available to the finance source is to require recourse or a buyback on the transaction. Federally insured institutions are required to file a “suspicious activity report” with their regulating agency. Said report will name the dealership as potentially committing bank fraud.
Now let’s look at the five key detriments:
1. Income: A dealer is obligated to accurately present the customer’s income to the finance source, because it serves as the denominator in payment-to-income and total debt ratios. These ratios feed into the finance source’s algorithms for both credit decisioning and pricing.
2. Housing expense: A dealer manager recently told me that one of the credit app aggregation companies hosted a seminar and told dealers that splitting the rent or house payment will enhance the likelihood of obtaining an automated credit approval. That action is taken to circumvent the finance source’s underwriting guidelines, which is one of the basic definitions of bank fraud.
3 and 4. Time: Time on the job and at residence are monitored because of the stability factors that play into the credit decisioning process. That’s why many finance sources require previous address or employment if the consumer has less than two years at either. Increasing time on the job or time at residence to avoid this disclosure is another way to circumvent the finance source’s underwriting guidelines.
5. Job type: Giving buyers a promotion or listing a self-employed small business owner as the general manager of the business to avoid a stip from the finance source can be viewed as credit app fraud.
To promote credit app compliance, you must establish and monitor a policy on accepting and submitting credit apps. Here are the crucial steps:
- Require that both the source credit app and the submitted credit app be retained. Retention of both will permit for auditing of the process and provide a potential defense against claims that the dealer provided false information to the finance source.
- If the F&I manager uncovers additional or incorrect income during the customer interview, correct the source app with a single line through the incorrect info, write the corrected info, and obtain the customer’s initials by the change.
- Do not combine two or more incomes as one.
- When a customer claims to only pay a portion of the housing expense, submit what the customer is obligated to pay either through a mortgage or a rental agreement. Then put a note in the credit app aggregation system.
- Retain all documentation used to change any of the key credit determinants.
- Include the comparison of the five key credit determinants on the F&I and accounting checklist on every deal. Instruct the compliance clerk to bring discrepancies to a manager’s attention.
- Include the comparison as part of the manager’s weekly or monthly deal file compliance review. Also review the credit applications in the aggregator software to confirm the printed submitted apps are consistent with all versions stored in the software.
Credit app fraud is not a victimless crime. Those who believe otherwise should do all of us a favor and find another industry to work in.
Gil Van Over is the executive director of Automotive Compliance Education (ACE) and the founder and president of gvo3 & Associates. Email him at [email protected]