Why Credit Washing is a Major Threat to Auto Lenders, and What to do About it | Lightico (2024)

By Leor Melamedov

Auto fraud is running rampant in the auto lending industry. While there is no end to the types of deceitful schemes fraudsters are cooking up, Auto Finance News reports that the number one concern of auto lenders is the dramatic increase in credit washing.For the uninitiated, credit washing is the practice by which unscrupulous individuals approach creditors with false claims of identity theft. This allows them to “wash” the negative claims off their record and take out car loans at rates they aren’t qualified for. Inevitably they end up defaulting on the loan, leaving lenders stuck with the balance.Adding new documentation requirements that are unconnected to credit reports can help lenders detect discrepancies that point to credit washing. Yet with customers increasingly losing patience for physical paperwork and time-consuming processes, the market is ripe for a total digitization of the loan application system. This will allow lenders to benefit from both increased turnaround times, decreased loan abandonment, and of course, lower incidents of credit washing and other schemes.

Credit washing is hurting lenders and growing by the year

As with other types of fraud, individuals who engage in credit washing generally fall into two categories. There are those who simply can’t or refuse to wait for their bad credit history to clear after a period of seven years, and want to buy a car now –– without paying a hefty subprime interest loan rate that can reach up to 18% or beyond. Such individuals are breaking the law, but usually are happy to get a regular car (that they will likely default on).Then there is another category of credit washing, perpetuated by sophisticated fraudsters who repeatedly engage in this process at a larger scale with the goal of making a profit.These criminals cry wolf over identity theft, get a boost in credit score when the trade line is temporarily removed from their credit history, and go on to buy luxury cars that they sell right away for a significant profit, since they have no intention of ever repaying the loan. By the time the lender resolves the dispute, the damage is done.According to Ankush Tewari, vice president of credit risk strategy at LexisNexis Risk Solutions, “Once you’ve booked the loan and the consumer has the car, now it’s just a matter of time before someone who fraudulently obtained that car is going to default,” saidUnfortunately, suspected credit washing has ballooned in recent years. Since 2018, the rate of credit washing attempts has increased by a whopping 500%. Some lenders are even reporting that up to 98% of the identity theft claims they receive are “frivolous and unsubstantiated.”

How to prevent credit washed loan applications from going through

The biggest challenge that auto lenders face when it comes to credit washing is that while the claims of “identity theft” are being investigated, the negative information is temporarily lifted from the borrower’s credit report. This boosts the credit score long enough for the credit washing scheme to go through undetected.Therefore, lenders need to look at more than just credit history during the loan application process. Proof of income, educational attainment, and utility bills are just some of the additional sources of documentation that can reveal important discrepancies.Lenders are also recommended to share fraud data among themselves in a common repository, allowing repeat offenders to be caught.Adding additional documentation requirements may be the most surefire way for auto lenders to prevent credit washing from affecting them. But lenders must be aware that excessive paperwork is likely to slow down the entire loan application cycle, and increase the probability of lenders abandoning it in frustration. In fact, a Lightico survey found that customers who wait longer than 48 hours to complete a loan application are 2x as likely to abandon the process.A completely mobile online loan application can bypass all of these issues by allowing borrowers to upload and fill out documents, forms, and ID onto a secure mobile environment that takes care of all the ID verification via AI and geopositioning. With the click of a text message link (not an app), customers can easily provide all the documentation lenders require, with zero physical touch points or paperwork required.