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Mark Maida

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Payoff Check Fraud: You May Already Be a Victim!

Taking Advantage of Our Trust in Technology, and People

Not so long ago a customer came in to sell us a nicely-optioned Cadillac CTS. We’ll call him Joe. We negotiated a deal and settled on $40,000. Our DealerTrack software showed a payoff of $15,946. He seemed very happy, and so was I. I knew that this model car, with all the extras, would eventually become a very profitable piece of business.

I made the payoff request through our title management system (DealerTrack) in the amount of $15,946. It went through our system, everything was updated, and we cut a check to Joe in the amount of $24,054.

I didn’t know it yet, but things were crooked.

It turns out “Joe” was a criminal who fake-paid down the loan the night before coming to the dealership. He made a shadow payment through a fraudulent checking  account number. Thanks to financial technology and software that credits the account first and asks questions second, the payment never cleared! We were notified by the lender (ABC Financial institution) that the payoff amount we were given through the DealerTrack software system never cleared through the financial institution that it was drawn on. So, instead of $15,946, the payoff was the $15,946 plus the $24,054 which totals $40,000.

Meanwhile, “Joe” had already cashed the equity check in the amount of $24,129 and was nowhere to be found. Because the payoff system credits the customer prior to clearing the bank payment it was drawn on, a crooked consumer can get away with fraudulently obtained equity. The system must change!

The lender and I were left looking at each other sideways, trying to figure out who cheated who. So, the lender and I are going to court to find out who owes who, with a lot of legal representation as well as financial losses by both parties. The upshot is that the lender and I lose, and the criminal gets away without any punishment, criminally or financially. The system must change!

Real-World Fraud Games

At Autobuy, we solved the problem by putting systematic steps in place to guard against this sort of payoff check fraud – and it hasn’t happened since. But dealers need to know about this nasty bit of crime so that they can protect themselves; it combines check kiting with fraud, and results in significant cash loss to dealerships that acquire used vehicle inventory.

Make no mistake: this is an active scam that can happen to you. It’s a sophisticated theft that’s not perpetrated by your average seller; it’s driven by professional criminal enterprises that have the finances, resources and people to make it work flawlessly. That’s key to remember: This sort of fraud ONLY works if the timing is right and there’s a technology/timing loophole to exploit.

You can protect your dealership by putting these steps in place:

  1. Ask your lenders and financial institutions to change their payoff disclosure protocol. This is critical, and dealers should actively advocate for this change! By doing so, you can access more information. I once had a “seller” post 49 payments of $1,049 each, on the night before the transaction – this would have generated 49 red flags had I known.
  2. Establish workflow alerts when payoff irregularities occur.  Train your team to spot curious activity, or vehicles that seem too good to be true at a price that’s right.
  3. Examine your team’s step-by-step process. Make sure they’re using technology to its fullest extent. For example, certain types of title software programs will confirm payoff amounts in the same day, and others will show a snapshot of the amount due.
  4. Rewrite the rules of engagement to protect your interests. Take a moment to confirm payment and details if things don’t seem right. Add additional safeguards such as: when was last payment made, amount of that payment to see if irregular payment, if payment has cleared, and more.

The automotive world is built to meet immediate customer satisfaction, but sometimes technology creates accidental loopholes that criminals can use to exploit the system. It happens when high-tech is applied to a low-tech process. If everything were digital, confirmation could be instant, but that too opens opportunities for hacking and an entirely different type of fraud.

Thanks to our approach, it hasn’t happened at AutoBuy for some time. But it’s out there, and unfortunately, this particular payoff fraud is a perfect example of how bad guys can game a legitimate business. We can defeat them, however, by petitioning to have the payoff protocol changed and by revising our process internally.  Good technology, along with careful human review, can solve the problem, but only if lenders and dealers work together.

Tori Zinger

WOW. This is a really scary thing; I had no idea this type of fraud was happening. Thanks for sharing this article.

Ed Grabowski

Truly frightening, I'll be sharing this article with my dealers.

 

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