December 1st, 2020
Blanket Lenders Single Interest (LSI) or Vendors Single Interest (VSI) covers many collateral losses. However, a significant exposure that is not covered is fraud.
The key coverage components to Blanket LSI are uninsured physical damage, skip by the borrower, and Security Interest Non-Filing Errors and Omissions (E&O). Often upon investigating a Skip Claim or a Security Interest E&O Claim, Lee & Mason will quickly determine that the supposed borrower is not who the lender believes him or her to be. The auto lender has been defrauded.
We are seeing a spike in fraudulent loans across the Northeast and beyond. Situations such as these often involve:
Blanket VSI doesn’t cover fraud, so those involved in auto and consumer lending must take other risk management measures to protect themselves. Ways to do so include:
We recommend that auto lenders increase and improve fraud detection procedures during the underwriting process, especially with out-of-market borrowers, as we anticipate this trend of fraud to continue. Take a second or third look at the documentation provided by the dealer and the borrower.
Lenders should review and enhance fraud prevention procedures with their dealers. Since the pandemic, there have been measures put in place to reduce direct human contact. Bad actors may exploit the COVID-19 (Coronavirus) protection protocols to hide their true identities when purchasing and financing vehicles.
Newly formed dealer relationships should be subject to extra scrutiny and background checks. In some cases, the dealer or employee is part of the fraud scheme. Lenders should review their dealer agreements for the proper safeguards that will allow for dealer recourse in case of fraud. The dealer should be capitalized to the point where it can sustain making good on its misses or poor judgments.
The lender should also review the Banker’s Bond coverage with their agent to determine to what degree the bond would cover a fraudulent loan. It might be time for a lower deductible or for added coverage.