Whether subprime auto lending is reaching dangerous levels is debatable, as evidenced by the continued conversation in the media surrounding the space. One seemingly undeniable fact, though, is that subprime lending is on rise.
As such, lenders looking to grow their subprime portfolio should keep decision processes automated, uniform, and speedy to help win business and avoid regulatory trouble, according to Jonathon Dodds, chief executive for the Americas, at White Clarke Group.
When the Consumer Financial Protection Bureau has investigated auto finance companies ― and in certain cases, leveled fines ― the scrutiny stemmed from dealer discretion and disproportionate interest rates found retroactively.
So first and foremost, subprime lenders should develop more sophisticated decisioning models that go beyond traditional credit bureau data, and look at third-party information providers to build custom models based on a specific portfolio’s history and the type of loans the company is willing to buy. At the end of that process, lenders are passing back credit decisions from a fixed model, and are able to show repeating patterns that should eliminate any question of discrimination.
Automated decisions, based on a scorecard of several attributes and additional information, create consistent decisions and consistent policies.
Making quick decisions can also be the key to getting loans from dealers ― or losing out to other lenders. When the subprime sector was suppressed from 2008 to 2011, consumers that knew they fell into that category were happy to take extended loans, regardless of interest rate. But, these days, with multiple lenders competing for business, consumers that fall anywhere between prime and deep-subprime often have their choice of offers.
When a dealer pushes out a consumer’s information to more than one lender, the offer that comes back in 15 seconds is much more likely to be accepted than the one that comes back in 15 minutes, experts say.