LAS VEGAS — The credit crisis is causing lenders to use more creative risk-management methods in order to make loan approvals. In the past, lenders relied heavily on standard computed risk-management data to approve applications. In the current climate, however, many have tightened up credit-assessment standards, excluding loan applicants with less-than-excellent credit scores.
Additionally, dealers have taken a more active role in the loan process and even screen customers’ credit. Nowadays, it’s become more common for dealers to ask customers about their credit scores soon after they come into a showroom. Such questions were once addressed in the finance office after a vehicle was all but paid for. Times have gotten tough.
Lenders are finding that they need to adjust their risk-management strategies because the number of loans defaulting and being denied has significantly increased. Modern technology allows lenders to enter an applicant’s personal information onto risk-management software. Upon inputting criteria such as a customer’s credit score, occupation, and income, the level of risk associated with approving that person for a loan is produced. In the past, many lenders relied primarily on these so-called “hard numbers.” However, that dynamic is changing. “Risk management is not all science, there’s an art to it,” said Paul Kramarz, risk manager for America Honda Finance Corp., during a panel discussion at the recent Auto Finance Summit. Like their mortgage sector counterparts, auto lenders have changed their loan-assessment processes and now look beyond credit data, so that the same customer may look completely different, possibly more desirable for loan approval.
There has been a recent industry shift toward manually approving loan applications because of the credit crunch; in fact, 60% of loans are now approved using a combination of manual and technology-based risk management. For one, Volkswagen Credit Inc. has changed its look-to-book ratio on used cars, said Bruce Harris, the captive’s vice president and chief financial officer. Customers are currently more interested in used cars than in new ones, partly because they are less expensive, which makes securing loans more accessible. “There’s not the same draw as there is on the new-car side,” Harris said. “The demand is not as high.”
At Honda Finance, the situation is a bit different. The captive is generally benefiting from the manufacturer’s full line of fuel-efficient vehicles. “Honda hasn’t experienced such a volatile swing,” Kramarz said. “If captives come out with incentives, it could affect sales.” Kramarz is more worried about residuals on SUVs and trucks that haven’t fallen yet.
Meanwhile, at Chevy Chase Bank, “target returns are the most important thing,” said Chas Roscow, senior vice president of the bank’s consumer lending division. “You need to assess your deposit-gathering and whether or not doing business with a particular dealer will result in a direct return.” Chevy Chase strives for a 1% return on assets (ROA) after taxes. “We try to keep credit loss at 75 basis points,” Roscow said. “Our approval rate is about 50% right now.”
When the bank reviews applicants, it considers three basic questions: Can he pay? Will he pay? Where will we stand if he doesn’t pay? Lenders, including Chevy Chase, have really backed off from automated underwriting and on-the-spot automated approvals, Roscow said.
Also, indirect lending is becoming more popular because it provides some unique benefits for lenders, Roscow said. Indirect loans offer the borrower lower costs for small or short-term loans, which is beneficial for borrowers who do not have good credit. On the lender side, less risk usually means less profit, but it is a way to sustain business. Roscow said there is less middle-ground today, and look-to-book performance levels have decreased.
Dawn Harvey, administrative vice president and business manager of indirect products at M&T Bank, said looking at the dealer base is extremely important. “We look closely at dealer scorecards, how much volume they have, and what they’re book-to-look portfolio looks like in order to make a loan approval.”
Chevy Chase, though, does not use dealer scorecards. In light of the current lack of available credit he said: “We’re just trying to shore up as much capital as we can.”
—Victoria Fierson