Why Some Deals Get Bought And Others Don't
By Steve Hall
First of all, approvals start with knowledge. I am talking about knowledge of the programs, underwriting guidelines and funding guidelines. A portion of your deals will always get declined up front. You need to view this as the lender telling you, based on the application you submitted, they do not have enough information yet to make an approval (i.e., please provide more information).
The most important advice I can give you is to make sure you know the lender's program better than they do. Only when you know more about the programs and guidelines than the person on the other end of the phone will you be able to truly maximize your approval ratio. An example of this happened last week when I looked at a deal that had been returned by the funding department of a bank that was doing over 25 deals a month with a dealer. You would think the lender would look every which way to fund this deal for such a good dealer, and I am sure the funding manager did.
The deal was approved based on a Chrysler loan being paid off. When the deal got to funding, the funding department verified that the Chrysler loan was totaled and paid by the insurance company, but still had a $3,800 balance. This automatically kicked the deal out of their program, and the deal was returned. I showed the dealer that although it did indeed kick the deal out of the program tier it was approved under, it still qualified for a lower tier with that same bank (the lower tier allowed for up to $5,000 of derogatory credit). Thus, the dealer was able to fund the deal for an extra $340 by moving it to a lower tier. This was done by knowing the program had a tier that allowed for up to $5,000 of derogatory credit. The funder knew the funding guidelines but not the credit (underwriting) guidelines.
The important thing to remember is: The more you know, the more deals you will capture! You can increase your business an additional 20 to 30% by knowing your programs better than your competition, better than your buyers and better than your funders.
Secondly, while it is important to know your guidelines and programs better than anybody else, it is equally important to know your customer inside and out. Most dealers submit a deal to a lender with only a credit application (which is usually barely filled out) and a credit bureau. When you ask the lender to make a decision based only on these two items, you are significantly limiting your chances of an approval. The clean, cut-and-dried deals (or about 60% of all approvals) are made solely off of these two documents. To get the other 40%, you need to know your customer's credit history, job history, residence history and even some more personal information.
This can be difficult and even uncomfortable to ask, but I believe it is even more difficult to spend several hours with a customer only to tell them their loan was declined! By knowing your customers inside and out, you can overcome just about any credit concerns a lender may have, as long as it meets the lenders' general guidelines.
For example, I looked at an application that had been declined by a lender for "excessive derogatory credit file." Every account the applicant had was an I-9. The customer looked as though she had never paid attention, much less paid her bills. However, I examined the credit file more closely and noticed that although all the accounts were bad, they had all been open for at least five years and all the accounts had been paid on time for over four years. Then in late 1997, all her credit went to collection. After interviewing the customer, we discovered it was due to a divorce where she had gone from two incomes down to just one income. Since then, she had a buy-here pay-here account that was referenced showing that she had re-established herself and recovered from this situation. I remembered one of the buyers at the bank had recently gone through a divorce and would certainly relate to what this customer had gone through. With a good explanation of credit history, cash down and a well-structured deal, we were able to get this deal approved for one of our dealers.
We are always looking for ways to grow our businesses through advertising, inventory, staffing, etc. But none of this matters unless we are prepared to handle the traffic we have coming in the door. The best way to increase sales is to know your programs and know your customers better than your competition and better than your lenders. Information is the key to making and funding deals. Lenders always say they want deals to make sense. It is up to you to know what makes sense to them and show them why your deals make since.
Steve Hall is President/CEO of Custom Finance Services, a leading provider of sub-prime management services, inventory management systems and lender relationships. shall@dealeronline.com
