Used-Car Dealers Focus of Probe Into Loan Fraud

Cars on a used car sales lot - California USA
B Christopher/Alamy

By Supriya Kurane

U.S. federal and state authorities are investigating used-car dealerships to examine if they are inflating borrowers' income or falsifying employment information on loan applications to ensure that anyone can buy a car, The New York Times reported, citing people briefed on the matter.

Falsified loan applications may lead borrowers to ultimately fall behind on their repayments and that could spell trouble for investors such as insurance companies and public pension funds, the newspaper said.

With auto sales recovering from their recession-era slump, the industry's supply of used cars has started to rise again.

Under pressure to generate more and more loans, salesmen at some used-car dealers are suspected of getting inventive, the newspaper said. It isn't known how many subprime auto loans have been made on the basis of falsified applications.

While still in the early stages, the investigations are also examining whether lenders, including some large banks and credit unions, are turning a blind eye to signs that the loans are fraudulent, the Times said.