Communication: The Key to Lender Approvals
By Steve Hall
At CFS, we review nearly 1,500 credit applications a month for dealers and have consistently achieved over a 31% delivery ratio. We accomplished this by focusing on two things: (1) communication with the customer through a strong customer interview and a complete application and (2) communicating with our lenders to select the right program for each customer. These two processes go hand in hand. First of all, it will be very difficult to select the right lender without a complete and detailed customer interview. Here we are conducting a fact-finding session to identify what the strengths in the detail are, as well as where our gaps are. Once we identify what information is accurate and verifiable, know the total down payment and what type of vehicle we are looking at, we can start the lender selection process.
The goal is not just to obtain an approval for the customer but to actually get a fundable approval for the customer. There are many times a deal gets approved but the lender will be unable to fund the deal. Due to high application volume and the need by the dealer to have a quick credit decision, lenders do few-if any-verifications up front. Thus, without accurate and verifiable information to support the information listed on the credit application and any additional stipulations requested by the lender, your approval will not be funded.
With this in mind, it is crucial you know what your lenders look for in determining their credit decisions. Many lenders have developed internal scoring systems on which to base their credit decisions. You then must know if the lender buys strictly off of the scorecard or if they just use it as a guide to make decisions. Secondly, you must know what each lender requires for funding, what their debt loads and budget requirements are (payment to income, debt to income), and what they look for in determining the scorecard.
The best way to explain this is by giving you some real examples. Lets talk about budgeting. Some banks will debt load for recent judgments and collections, whereas some banks do not debt load anything. So if I have a customer who only makes $1,600 a month and has $6,000 in recent charge-offs or collections, I will need to consider the lenders who will not debt load me for these charge-offs/collections in order to get my maximum call. What if my customer has qualifying credit but only has a nine-month job and was out of work for six months in between his last jobs? Even if your lenders approve the loan, many lenders require a complete three-year work history with no more than a 30-day job gap. So if we see that we have a job gap or do not have a three-year work history, we must select a lender that does not require a three-year work history with no job gaps.
Let's take a look at co-signers. Some banks will consider co-signers (mother signing for daughter or son) and some banks, no matter how strong the credit is of the co-signer, will only base it off of the primary applicant. So when you have a co-signer, you must know where to send it. For example, Auto One will let you combine income on any two people, no matter what the relationship is, even if they live at different addresses. Other lenders may use co-signers, but limit it to a parent/guardian signing for the son/daughter.
Let's now focus on scorecards. Many banks who operate off strictly a scorecard can give the dealer a significant advantage if and only if the dealer understands how the lender's scorecard works. Most lenders base their scorecard off the performance of their previous portfolios. Thus, if you can identify what characteristics about your customer score high with each lender, you can dramatically increase your approval ratio and delivery ratio by selecting the right lender for each customer. Here are some of the characteristics I have seen score high on lenders' score cards: (1) high income-over $2,500 a month; (2) recent car credit or mortgage; (3) time in bureau; (3) number of open accounts; (4) how long the average account was open for; (5) positive credit in the last 24 months; (6) bankruptcies; (7) installment credit; (8) low number of revolving accounts still open; (9) low balances on open accounts-especially revolving accounts; (10) time on the job; (11) time at the residence; (12) the type of job-professional. Talk to your lenders and find out which of these characteristics, as well as any others, score high marks with them. Then review your customer's application carefully and determine where that applicant will score the highest. Also, when banks come in and visit you, ask them if they use a scorecard and what factors score high and what factors score low with them. If their scorecard is different from the lenders you are signed up with, it may be worth considering adding them to your portfolio of lenders.
If your customer lacks these characteristics that score high, you need to look for lenders who do not use a score card, but actually allow a human being to still make the credit decision. They offer much more flexibility. Thus, if you have a applicant that has low income, limited credit history or a lot of recent derogatory accounts, you may want to try to structure a deal with a large down payment, put the lender in an equity position and focus on the stability (job time/residence time) of the customer.
In summary, what I am trying to get across is that you can deliver more deals at higher gross profits with less headaches by simply interviewing your customer completely and understanding your lending programs and what they look for in approving your customers. Communication is the key-communication with both your customer and your lender.
Steve Hall is President/CEO of Custom Finance Services, a leading provider of sub-prime management services, inventory management systems, and lender relationships throughout the Mid-Atlantic region. shall@dealeronline.com.
