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Games Dealers Play: Credit Application Fraud

All too often, consumers come home from a dealership and realize that they cannot make their new car payments. They often wonder how they could possibly have been approved for a loan that they could not afford. Most often, they are victims of credit application fraud.

News media and federal regulators are increasingly focused upon this problem. Many have drawn parallels to the type of mortgage fraud that wrecked the economy in 2008. In the course of representing consumers in auto dealer fraud cases, we have encountered many instances of car dealerships submitting false information to auto finance companies and banks.

The process used by most finance companies makes it very easy for dealerships to perpetuate - and get away with - credit application fraud. Most dealerships have consumers fill out a credit application form. Sometimes the dealer will fill out the form itself. This handwritten form is typically not provided to the auto finance company. Instead, credit information is entered on a computer program by a dealership employee and transmitted electronically to the finance company. Some dealerships commit fraud by changing the consumer's information.  

One common type of fraud involves providing false income information. For example, in one recent case that we evaluated, a consumer had been retired for more than 12 years and earned retirement income of about $2,000/month. But, the credit application submitted by the car dealership showed that the consumer was employed and earning over $3,000/month.

Another type of fraud involves changing the consumer's finances. In the example above, the consumer paid $900/month for rent. But, the finance application submitted by the dealership to the finance company showed that the consumer had no housing expenses. 

So, the bank that agreed to finance this deal believed that the consumer was employed and had $3,000 a month available for expenses and could easily afford $400/month for car payments in addition to the cost of food, insurance, utilities and other expenses. In reality, however, she has only a little more than $1,000 a month after housing expenses. That leaves her only about $600 to cover all monthly expenses other than her car payment.

Sometimes car dealerships commit fraud by providing false information regarding the consumer's down payment. In this common scam, the dealership may tell the finance company that the consumer is paying thousands of dollars down when, , in reality, the consumer is paying little or nothing down. Consumers are harmed by this fraud, because they pay higher sales taxes and, in some cases, may not realize that their credit was approved only because of false information.

Yet another type of fraud is so common that it has been given its own nickname: powerbooking. Powerbooking is when a dealership provides false information to a finance company about how the car is equipped. For example, a consumer might purchase a car that is a base model with few features that has a book value of $12,000. But, a car dealership that is powerbooking the deal might tell the finance company that the car has is the luxury model with leather seats, a power sunroof, and a navigation system, with a book value of $16,000.  Dealerships committing this type of fraud are usually overcharging the consumer, and they don't want the finance company to know that the collateral for the car is worth much less than the loan amount.

When confronted with evidence of fraud, car dealerships typically argue that the consumer agreed to make the payments and that wanted to buy the car. Dealerships, however, are very skilled at wearing consumers down and persuading them to enter into bad deals. Sadly, many consumers lack the financial skills to manage their budget.

Predatory car sales cause real harm to consumers and their families. When consumer buy a car that they cannot afford, the result is usually repossession and harm to credit. Consumers without access to adequate public transportation have difficulty maintaining employment. Too often, car dealer fraud can result in financial ruin and the destruction of families. Federal regulators are turning their attention to this fraud, and it is about time.

 

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