Vehicle leasing has returned to a spirited level of activity on dealer lots this year. However, leasing requires a close review of a car shopper’s credit; how are dealers properly ensuring they have an accurate income verification to avoid fraudulent activity and other inaccuracies that can lead to future problem with their lender partners, especially for subprime borrowers?
This is an important topic to explore since leasing activity and overall penetration has continued to climb, especially in the first quarter as inventory levels normalized further and incentives on electric vehicles accelerated. In fact, leases made up 24.1% of new vehicle purchases in Q1, compared with 19.3% in Q1 2023, according to Experian’s Q1 State of the Automotive Finance Market Report1.
The company said that the increase in lease volume in the first quarter followed a slight resurgence that began in the second half of 2023. In its heyday several years ago, leasing accounted for as much as 35% of all sales at dealerships. However, tighter inventories drove leasing down, especially following the pandemic1.
Today, dealers with “normalized” inventory levels have been able to grow their leasing again, partly driving the recent new-vehicle lease volume to the 24% mark.
Leasing, often viewed as a financially savvy option, allows customers to drive newer models with lower monthly payments and minimal maintenance concerns. However, a recurring and critical requirement for prospective lessees is possessing qualified credit, and subprime lenders are constantly verifying risk levels for a lease.
What documents are required when leasing?
Leasing a vehicle essentially means entering into a contractual agreement to use the car for a specified period, typically two to four years. Unlike buying, where the vehicle becomes the buyer’s asset, leasing involves the lessee using an asset that the dealer or the subprime lender still owns. This fundamental difference requires the stringent credit requirements for lease customers. Since the car is not owned by the lessee, but by the dealer or financial institution, the lessor needs assurance that the lessee will reliably fulfill their payment obligations throughout the lease term.
This is where proper document and income verification become key. The issue at many dealerships can often be found within their own walls. The steps necessary in proper verification can add friction for the lessee.
What subprime lenders need for a lease
When subprime auto lenders approve the lease application, they ask for a set of documents (referred to as stipulations). These stipulations range from consumer documents (identity, residence, income, employment) to dealer documents (retail installment contract, gap contract). In indirect auto financing the dealer obtains the consumer’s signature, electronically or manually, and sends the documents to the subprime lender. The lender must verify these documents before they can fund the dealer for the vehicle.
Subprime lenders verify documents from an audit and assurance perspective for 2 reasons:
1. Verifying for compliance (missing signatures, name mismatch, misrepresentation of information etc.)
2. Lenders verify income documents to verify ability to pay
The line between verifying for compliance and fraud can be blurry. When loan officers (verification agents/funders) verify a document, they focus on all aspects of the document. If they find inconsistencies in the data or if a signature is missing, they route it to the dealer or appropriate team to fix. Or, if they find the document is fabricated, they route it to the fraud/compliance department for further review. The probability of fraud is higher in direct lending as the buyer must be physically present at an indirect lender.
How dealers and subprime lenders are leveraging advanced data technology
Most subprime lenders have traditionally relied on loan officers physically verifying the documents for compliance and fraud. But with advancements in technology, that is changing. With the latest improvements in AI including Large Language Models (LLMs) and Layout LM Models, data provider partners can work with lenders to extract the data on the documents (OCR) and apply AI models on top of it to cleanse the data. Systematically extracting data turns documents into digital data that can be used to run verification rules to check for compliance and consistency.
These steps are important and necessary, especially to prevent fraud, which can be detrimental to the bottom line for both the dealer and lender. However, advanced data teams, combined with contributory databases, are helping to reduce the threat of fraud.
A contributory database in which lenders share their knowledge helps the entire industry to reduce fraud. Recent fraud trends highlight the importance of lenders working together to proactively address fraud before we have all been swindled of our money. Utilizing a feedback loop and confirming fraud across multiple channels increases accuracy rates to stop fraud in its tracks. It’s important to note that fraud is not lender specific and has a significant impact across the banking industry.
The Financial Services Information Sharing and Analysis Center (FS-ISAC) is a cyber intelligence collaborative focused on financial services. The organization leverages its intelligence platform, resiliency resources, and a trusted peer-to-peer expert network to anticipate, mitigate, and respond to cyber threats. FS-IAC is one of the few contributory communities to leverage a robust peer-to-peer network to identify and resolve cyber threats. These networks help fight fraud as a community.
The integration of AI in the document and income verification process is just the beginning. As AI and automation technology evolves, we can expect even more sophisticated solutions that further enhance efficiency, accuracy, and security that protect dealers and subprime lenders during the lease transaction. Furthermore, as the technology continues to improve, its impact on the industry will only grow, driving a new era of efficiency and reliability in auto leasing.
1: https://www.autofinancenews.net/allposts/leasing/new-vehicle-lease-share-up-nearly-5-percentage-points/
