When it comes to collections, lenders should focus on how much a borrower has in his pocket after he’s been paid.
Most effective underwriting programs calculate the minimum net income needed after all the current debts are paid, and they look at how much money is needed to support the number of dependents in the household. Also, lenders have to take into account proposed car and insurance payments and need to determine the amount of discretionary income left over.
“If you’re dealing with 750 Fico scores, I really wouldn’t worry about it, but, if dealing with 500 or 525 Fico scores, you should worry,” said John McCarthy, director of collections and account servicing at Turner Acceptance Corp. in Chicago
The number of dependents is important. Marital status is essential. To understand the risk that correctly, the lender needs to get dealers involved in the process and make certain that the borrower completes the application. Once the lender gets the underwriting worked out and calculates what the borrower can afford, another issue comes up — extended terms.
If, according to formulas, the customer can only afford a $225 car payment, and the loan is priced at $275, there are some organizations that will extend what was a 30-month loan to 48 months.
But that can open up more risks. Because the borrower is upside down on the loan longer, if the consumer is unable to trade it in, the car can end up on the street.
“Income verification can be challenging. For instance, in Chicago, the situation surrounding cash jobs is huge, so how should you deal with income verification?” asked McCarthy.
Turner tells dealers if you can get multiple bank statements, or tax statements, that will help. Job letters are worthless unless they’re from a large corporation such as Apple.
“Commission jobs I don’t count, unless they have a year behind it,” he said.
McCarthy said Turner dedicates effort to first payment default guarantees. He said dealers know if they’re on the hook for the first payment, they will do a better job closing the deal. That helps loan performance down the line.
But as McCarthy said, every company has its own policies regarding prior consumer issues that might keep someone from getting a loan.
He said all lenders need to keep in mind that a good subprime underwriter will be able to weed out someone with legitimate issues that cause trouble, versus someone who might not want to pay his bills.
If a lender can hire an underwriter with skills such as that, and pay them a lot of money, in the end, it’s probably worth it.
At Turner, once a dealer gets approved and the customer’s got the car, prior to funding, a verification call comes from the underwriting department.
Often, he said, these customers are dealing with independent dealers. During the call, Turner verifies the terms of the contract. They also ask the customer to opt-in for texting, which forms a strong connection between lender and borrower.
“We take that relationship with our customers very seriously,” McCarthy said. “We are honestly looking to develop a long-term relationship with our customers for two reasons.”