In tight market, financing fraud soars

Posted on Written by Reagan Haynes

Banks are having to battle more sophisticated scam artists who secure bogus loans and fool dealers

An unprecedented spike in boat loan fraud could be prompted by an economic downturn and increasingly savvy criminals, financial experts say.

“It’s pretty scary how sophisticated this is,” said Don Parkhurst, senior vice president of SunTrust Bank.
“Loan fraud is always out there, but it tends to get worse during economic recessions,” he said. “In this last cycle, we’re seeing more loan fraud than in my 30 years in the business.”

Though there is no public data on instances of fraud, Parkhurst estimated bank loan fraud is 10 times in 2008 what it was in 2007.

“It’s not data you can go out there and get, and you’re dependent on the banks that got burned to tell us they got burned,” said Parkhurst, also a former president of the National Marine Bankers Association (NMBA). “Some are embarrassed, especially if they were sloppy. It’s hard to get your hands on the numbers of what’s really being lost. Of every case you hear about, there is probably a bunch you didn’t hear about.”

In 2006, marine loan delinquency was .6 percent. The highest number seen in recent years was .8 percent. That was in 2002, following the terrorist attacks of Sept. 11, according to the National Marine Bankers Association numbers.

“Ultimately somebody has to bear that expense,” Parkhurst added. “It becomes part of your losses (at a bank), which becomes part of what you charge for interest rates. It’s partly born by lower profits for banks, but it’s partly born by larger interest rates for consumers.”

Criminals today seem to have insider knowledge about the processes banks use to review loan applications, Parkhurst said, and tend to operate in large organized-crime rings.

Coming off the heels of a vibrant economy where loans were available with no money down and less than prime credit, some say banks had become sloppy with lending. “No-doc” loans or loan applications with very little documentation required, made fraud easier, Parkhurst said.

“[Banks] have been so competitive after 2003, 2004, that some banks got sloppy,” Parkhurst said. “Some of the systems were weakened.”

Even when tax documents are required, do-it-at-home tax software makes it very easy to submit convincing fraudulent tax documents, Parkhurst said.

Another problem is that banks relied more heavily on credit scoring for their loan approval process than in the past.

“When you do that, you don’t have experienced underwriters looking carefully at red flags,” Parkhurst said.

The topic is so hot among bankers right now that the National Marine Bankers Association is devoting a large part of its upcoming November conference to loan fraud, said Jim Coburn, first vice president of Flagstar Bank and president of the National Marine Bankers Association (NMBA).

“You have a crazy time going on (economically), and that opens the doors for people needing money or trying to find money in different unscrupulous ways,” Coburn said.

Peggy Bodenreider, chair of the NMBA and vice president of marine sales for GE Consumer Finance, said it’s important for bankers to be aware of fraud.

“Even though we have a collusion issue and don’t want to share information, we don’t want to get beat up like the mortgage industry,” Bodenreider said.

A few types of fraud have been prevalent in the marine industry, Parkhurst said.

They include identity theft, which ranges from smugglers to prospective loan applicants having family members with better credit pose as them for financing; dealer fraud; surveyors inflating the value of the boat; and consumers securing financing on a boat twice, or on a boat that does not even exist.

Identity theft
One type of identity theft has brought together all kinds of people, including the U.S. Coast Guard, says Dan Rutherford, president of Ocean Marine Specialties and northeastern coordinator for International Association of Marine Investigators (IAMI).

Rutherford, an investigator who recovers lost and stolen boats, deals often with fraud that involves smugglers. Identity theft is common among people who smuggle drugs and immigrants, he said.

“You’re looking at someone, or a group of people, using someone’s good name or credit to borrow money to purchase a vessel for the sole purpose of using it to import drugs or smuggle immigrants, and then dump the boat,” Rutherford said.

Because of Rutherford and the collaboration between the boating industry and federal officials, this type of fraud is declining, said Bodenreider of GE Consumer Finance. But the banks are still taking a hit, she said.

“That was a tough one to crack from a lender’s perspective,” Bodenreider said. “But we found that smugglers tended to go for a type of manufacturer or boat … Once you see the pattern, then you’ve got some traction where we as a group could go to ICE (Immigration and Customs Enforcement) and get some help with it, and that raised the visibility of this, and it really seems to have slowed down considerably.”

Another, perhaps more innocuous, type of identity fraud comes from “straw purchases,” Bodenreider said. That’s when a potential buyer can’t qualify for a boat loan and asks a friend of family member with better credit to pretend he is buying the boat.

“From a lender’s perspective, we don’t know who the real borrower is or what their collateral is,” Bodenreider said.

Sometimes dealers get hooked into the scam, Bodenreider said. Some might not know the ramifications of taking false documents, or one family member posing as another for loans, or they might just turn a blind eye because they need to make the sale. Other times, dealers don’t realize the applicant is not the actual buyer.

“As a group of lenders, we’ve seen it on both sides,” she said. “And dealers can get hoodwinked, too, just like lenders. They can help avoid that by thoroughly doing credit and document investigation up front.”

Dealer fraud
While dealers are often getting scammed right along with the banks, sometimes dealers are in on the deals.

“We’ve seen situations where a boat has been sold — the boat has a loan on it already — but it’s sold as a new boat,” Parkhurst said. “So in this situation, someone on the inside of the dealership is part of the fraud.”

It works like this: a dealer sells a boat to a customer as a new boat, but it already has been sold and has a lien on it. If the bank does not catch it, it might loan money on a boat that has already sold.

“We actually got caught in one of these” at SunTrust, Parkhurst said. “Luckily, we were the first loan. Another bank went out and made another loan on that boat, and again because of their sloppy practices, they didn’t do the necessary checking to make sure there wasn’t a loan on that same boat.”

Some dealers act out of desperation in order to carry more boats on their floor plan, Parkhurst said.

“A lot of dealers are in trouble right now, so there’s a lot of fraud at dealer level,” Parkhurst said.

For example, dealers are supposed to pay off floorplan loans when they sell a boat, and any money remaining is the profit. Sometimes they operate out of trust. A dealer sells a boat and gets the money, but does not pay off the floorplan loan.

Sometimes, a dealer who may not be doing well will borrow money as if he is trying to secure a personal boat loan, when in fact he is adding the newest model to his floorplan line, Parkhurst said. For example, a dealer might have a floorplan line that allows for 10 boats, but if he has a trade-in that is taking up space and a customer who wants a specific boat, the dealer might take the personal boat loan to pay off his floorplan line and free up space.

“Those people aren’t necessarily criminals in the sense of wanting to do something bad, they’re just desperate,” Parkhurst said. “I’m not justifying it, but it’s not like they’re doing it to rip off money, they’re just trying to save themselves. They think it’s all going to turn out OK, but it usually doesn’t.”

Overvalued boats
Another element of fraud is a direct result of overvalued assets in general, said Brian Bethel at Certified Sales, a liquidator who works with several banks to recover boats where owners have defaulted on loans, as well as those who obtained fraudulent loans.

“The boats were overvalued, and that trickles down from the guy selling the boat getting a high price, to the surveyor agreeing to it, to the loan manager,” Bethel said.

If a boat is valued at $100,000, but is only worth $80,000, the insurance companies finance the boat at a higher price. That allows a buyer to make a purchase without any money down, but if he needs to sell the boat, or if a bank repossesses it and has to sell it, it’s already depreciated 20 percent before it ever hits the water, Bethel said.

Sometimes surveyors are in on the scam, Rutherford said. Buyers will hire surveyors to provide an additional value on the vessels so they can get more financing than the boat is worth, he said.

In fact, many instances of boat loan fraud stay between the borrower and the bank. When liquidators are brought in, they often don’t know the reason for the repossession. Authorities are overwhelmed by the amount of fraud these days and typically only get involved if there is a large amount of money stolen or a large fraud ring at play, Parkhurst said.

There have also been some high-profile cases on the fraud radar lately.

Alan Fabian, a Maryland businessman and fund-raiser for Mitt Romney’s presidential campaign, resigned from his volunteer post following his indictment in Maryland for allegedly defrauding companies of $32 million.

Prosecutors are seeking forfeiture of $32 million worth of Fabian’s assets, including a yacht.

“Unfortunately, we lent him the money on that boat,” Parkhurst said.

The bank realized it when they saw Fabian in the newspaper under suspicion of fraud and embezzlement.

“As long as payments were coming in, we wouldn’t have known,” Parkhurst said.

At that point the government steps in and seizes all the assets, Parkhurst said. “Now you’ve got to work with the government to get your boat back to get your money back.”

But Fabian looked great on paper, Parkhurst said, proving that it’s impossible to prevent all fraud.

“The thing that really stands out to me about these guys is their confidence,” Parkhurst said. “Con man, I think that comes from confidence man.”

No boat?
Rutherford has also heard about cases of using fraudulent documents to buy a boat, so the bank issued a new boat loan on a used boat or for no boat at all.

By financing a used boat as a new boat, not only can a borrower secure more money, the rates are more favorable, Rutherford said.

“In some cases, there’s really no boat that exists, and the borrowers steal the money and disappear,” Parkhurst said. “In some cases, that involves identity fraud, where they try to assume the identity of a real person who has good credit, and try to use credit in that person’s name.

“Obviously in those situations, where a boat doesn’t exist, there are things a bank can do to make sure it does exist, like put a trace on the HIN number, or have a third party look at the boat,” he added.

Due diligence
Banks should use “best practices” to cut down on the instances of fraud, Parkhurst says.

“Delinquency is up anyway because people are strapped because of increases in gas and food prices, and they don’t have discretionary income as they usually would have,” GE Consumer Finance’s Bodenreider said. “That’s a concern and we have to ask ourselves, ‘Are there other things causing it other than economic concerns?’”

Banks are now scrambling to examine trends, she said, and figure out where the problems are occurring.

“We have to make sure we know the customer, to properly ID the customer, and ask ourselves, ‘Does everything line up?’” Bodenreider said. “The second part is to make sure as lenders we ask the question: ‘Are you the one using the boat? Is it kept at your house, on your dock?’ And to ask the questions a couple of times to make sure we know who our borrower is.”

Something SunTrust does is flag any loan application submitted previously by the same customer.

Often, borrowers apply for loans through different sources to obtain the best rates, never realizing it sometimes ends up in the same lender’s hands.

“That’s not unusual,” Parkhurst said. “But when that happens, the system alerts us so that we see it’s a duplicate application, which also saves us a lot of work because we don’t have to do everything again. When that happens, one of the things we do is take look at the tax returns and compare them. If they don’t match, then we know we’ve got a problem.”

That extra step has turned up a lot of fraud, Parkhurst said.

That’s because some who commit fraud have already been turned down for a loan and they adjust income to try and secure the loan they want, Parkhurst said.

At that point the bank alerts the people who have sent the loan to them that there is a discrepancy, Parkhurst said, but authorities seldom get involved at that point.

“There’s so much of this going on right now that it would be fair to say the resources of authorities are kind of stretched thin,” Parkhurst said. “Big rings and situations where banks have lost a lot of money, that’s their obvious priority.”

One thing is clear, bankers have to get better at preventing fraud, Parkhurst said.

“It’s extremely disturbing, the level of sophistication we’ve seen in this cycle of fraud,” Parkhurst said. “In the past, [bank] sloppiness didn’t hurt them, but now we’ve moved into an area where it does, and we’ve got to get more sophisticated.”

He hopes the National Marine Bankers Association conference will help raise awareness of all in the industry as to how to prevent fraud.

“It really helps everyone,” Parkhurst said. “We want these people caught.”

This article originally appeared in the September 2008 issue.

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