A Simple Test to Determine the Most Active Auto Lenders

My son brought home a test recently and the grade on the test was quite low, much lower than the grades he usually brings home. My wife went through the test and many of the answers that were marked as being incorrect were questions that he knew when the two of them studied for the test. She couldn’t understand that questions he knew so easily when sitting at the kitchen table were questions that all of a sudden he didn’t know when he was sitting at his desk at school.

She went over and over the results until she called our son to the table and asked him why he forgot so much of what they worked on. She thought he might have been nervous, or maybe she did a poor job of prepping him for the test.

Our son took one look at the test and said, “That’s not mine, mommy.” Sure enough, when she looked at the name at the top of the paper, it was the girl who sits next to our son who received the poor grade. The tests had been switched. Our son had received a near-perfect score.

There’s a growing debate online about a new website called www.BankingGrades.com. The site aims to identify the most active small business lenders by determining the ratio of small business loans originated to the size of their overall domestic deposits. Many industry professionals have come out against the site, claiming that the measurement is not an accurate barometer of a bank’s small business lending activity.

Reading about the site and the accompanying debate started me wondering whether this type of calculation would work in determining the auto finance activity of banks nationwide and whether the publishing of the numbers would act as the catalyst for any type of change in the industry.

Comparing a bank’s auto loan originations to its overall consumer (including mortgage) activities would tell you how important auto finance is to that bank’s overall lending strategy. Banks that are more active would theoretically have a more comprehensive suite of products, could be more likely to work with delinquent borrowers, and would be more likely to work with a larger group of dealers, raising the likelihood of finding a dealer who works with the bank in question.

The connection between the story at the top of this post and the idea proposed is that context is king. Banks are complaining that BankingGrades.com is looking at numbers out of context and presenting them as fact.

Comparing auto loan activity to overall lending activity would be a good measure of determining how invested a financial institution is in the auto finance market. It would provide context to illustrate that even though a community bank without a large lending portfolio could still be very invested in auto finance, without originating a large volume of loans.

The ratio would also serve as a risk management tool to see if institutions are too concentrated in one particular asset class.

As long as what we’re looking at are the right test scores, it would be a very helpful exercise.