Victims of Circumstance

Over the years, we’ve watched the manual underwriting process evolve into an automated one, with loan decisions generated in split seconds. The current market turmoil might upend that methodology, though, as artificially low credit scores keep potential car buyers out of the market.

In a nutshell, here’s the premise: Increasingly, there are consumers who used to be model borrowers, repaying their loans on time, month after month. They lose their jobs — and their ability to make those monthly payments. They either miss a few payments until they get back on their feet, or have their vehicles repossessed. A few months later, they secure new jobs, potentially at lower pay grades. But when they go to apply for vehicle loans, their credit scores are hammered. What may have been close to 800 credit scores are now 580s or 600s.

Multiply that situation by the number of newly unemployed in the U.S. (524,000 in December alone, and 2.6 million for all of 2008), and we could be in for an even longer slowdown in the auto finance sector.

The way I see it, lenders need to delve deeper into the details to determine the root of lower credit scores. Are they largely one-time occurrences that walloped consumers’ credit? I’m not suggesting that we revert back to manual underwriting processes, but we should certainly leverage the tremendous technology available to better identify these victims of circumstance.

If not, lenders will pass up some great borrowers who simply hit on hard times. And borrowers will have to wait longer to secure credit, which will significantly slow the industry’s rebound.