I’m a paradox. I love technology, but sometimes think I would have enjoyed living more in older times. In a lot of ways, I’m very old-school. Take baseball, for instance.
I hate the specialization that has evolved over the past 30 years, especially when it comes to pitching. There was a time when the pitcher who took the mound in the first inning was the pitcher who came off the field in the ninth inning. In 1968, Denny McLain won 31 games for the Detroit Tigers, which was the last time a pitcher won 30 games in a season. He completed 28 games that year. Last season, Roy Halladay led the major leagues with nine complete games. That number is so small, that Associated Press style rules dictate I spell out the number.
Stay with me. I promise to bring this back to auto finance soon.
Specialization has become the standard in baseball. There are starting pitchers, short relievers, long relievers, left-handed specialists, eighth-inning relievers, and closers. Who knows how much more specialized these roles will become. One can certainly point to the increased usage of statistics and data as a key driver of this specialization.
Ready? Here’s where the boomerang starts coming back.
There is a whole whack of data and statistics that get analyzed when determining a consumer’s credit score. Payment history, salary, debt-to-income ratios, amount of debt outstanding, debt usage ratios…The list goes on. Yet, I have only one credit score. Why is that?
If I am running an auto finance operation, do I care whether you pay your Sears bill on time? What if a borrower has never missed an auto loan payment, but is delinquent on every credit card? As an auto lender, to what extent should I take that into consideration? Under this scenario, the borrower would have a terrible credit score. But they represent a solid credit risk for a car loan because the person has never missed a payment.
This leads me to the point of this post. Why isn’t there more specialization in credit scoring? Why are there only three bureaus and each bureau only spits out one score for each individual? Why isn’t there the equivalent of a cadre of relief pitching specialists? Why aren’t there different credit scores for different asset classes? Why is the big picture the only one worth looking at when it comes to analyzing credit-worthiness?
This idea brings me back to about 10 years ago, when I first started writing about the subprime mortgage industry. One of the first terms I learned was “story loans,” which is how a lot of lenders thought of the subprime industry. They were called story loans because every subprime credit score had a story attached to it. And that story was what needed to get analyzed before making a decision on a loan application. I don’t think that the auto finance industry needs to revert to manual loan underwriting, but certainly with all the data that is available, someone might be able to develop a specific credit risk profile for specific scenarios, either loan amounts or asset classes.
You can easilly create a scoring/decision model that will do exactly what you are talking about using the Monetrics relational decision engine. Monetrics starts off where bureau scores end. The Monetrics engine allows you to put human decisioning logic on top of a traditional or proprietary score. And is is very easy to understand and use.
Mike is correct. True underwriting would identify the opportunities and then use specialists to fine tune the results. However, laziness and the quest for operational cost reduction were part of the ingredients of the house of cards built by reliance on esoteric formulas designed by geeks and not by subject matter experts.
Just remember, that most of these systems are like driving a car by using only the rear view mirror as the guide.
I am waiting for FairIssac to explain why the loss results of lenders using their systems did not perform as predicted;or, are they saying that the lenders wanted the loss rates associated with their asset sourcing over the last 5-6 years.
In lending, adversity is the true test of the quality of manangement. Stupid in = stupid out.
I totally can appreciate what your saying Mike having originated mortgage loans, slinging paper as a Finance Manager, and most recently working for Experian. Actually, most of us don’t understand that there are different types of specialized risk models that consist of different types of score card to calculate your credit score and each credit bureau has their own proprietary risk model as well. For instance, most captive auto manufacturer lenders want the Auto Fico V2 risk model overlay when review a consumer’s credit score as it gives a little higher weighting to the person’s previous 24 month auto trade line history. So, if a person has had a previous auto credit tradeline and they have paid on time, they will have a marginal credit score lift when comparing an Auto enhanced or Auto overlay risk model. Currently, I have seen some lenders moving to the new Fico V08 model which strips out authorized user account tradelines and modifys some other inquiry score weights. In addition to the type of risk score, each bureau has it’s own proprietary score, such as Experian-Scorex Plus, Equifax-Beacon, and TransUnion-Empirica. Also, each bureau has it’s own way of storing data and updating a consumer’s tradeline as well, which is why it’s a great idea for a lender to use multiple bureaus depending on file strength. Overall, lenders are opening their eyes to different risk models, like the Vantage mentioned above outside of Fair Isaac Co’s FICO risk model, and are accepting consumers with say just a mortgage late or even a mortgage foreclosure. Lenders have made a lot of progress from even just 10 years ago where most lenders just looked at one bureaus fico score, without an auto enhancement, etc. Indeed, there are specialized credit risk models just as their are specialized pitchers in the MLB. I like the analogy!
If not for the Community Reinvestment Act of 1977, we might not have credit scoring today. Lenders needed an objective way to prove they weren’t engaging in red lining. We’ve come a long way!
Additionally, most lenders know that people will pay their car payments over other debts because it is ultimately Pay or Walk
There are adjustable rate auto loans in Canada today that seem to be somewhat popular. From my perspective, that as much as the make sense from a lender perspective, not sure if in today’s interest rate environment if it makes much sense to the consumer? Rates are already super low so there seems to be only down side risk to the consumer. In a declining interest environment, I think consumers would love adjustable rate programs for auto loans.