“Trust but verify.” In case you are not old enough to remember, these were words that President Ronald Reagan often used during negotiations with the Soviet Union to limit a particular group of nuclear weapons.
You might wonder, “What exactly does that have to do with subprime loans and vehicle sales?” Subprime loans currently account for about 32% of auto origination’s being approved, the highest level since 2008.
It turns out that “trust but verify” is also good advice for evaluating risk and determining rates for prospective customers. However, as the subprime vehicle market continues to grow most dealers and lenders still rely on traditional credit scores and customer-reported details to maintain stability of their loan portfolios. Unfortunately, these may not be the most accurate or comprehensive ways to assess borrowers’ qualifications:
- Credit scores reflect only a portion of the full picture that affects applicants’ credit-worthiness.
- Insufficient detail can result in the wrong terms and/or risk level being placed on deals, denying qualified applicants or inadvertently approving excessively high-risk borrowers.
- Applications frequently contain inflated or misrepresented information, providing a misleading view of associated risk.
- Verifiable insights into historical job tenure and disruptions, which can be highly predictive of ability to pay, are typically not included or inaccurate.
- Because underwriters and funders try to close deals quickly, manually verifying income and employment is inefficient and often fails to identify inaccurate data.
Access and DOWNLOAD the white paper, “Trust But Verify”, to explore how verification through alternative data sources can provide greater accountability, transparency and detailed insight into borrowers’ qualifications.
