SAN FRANCISCO — Financial institutions are keeping their loan analysts busy looking at credit applications from potential car buyers.
Such closer examinations are likely to occur in cases such as when a would-be borrower has a blemished credit history, but shows no evidence of being a serial loan defaulter or someone with multiple money problems.
The fundamental question analysts and credit scoring try to answer is, “If this person has the ability to pay back a loan, will he?” says Douglas Ekizian senior manager of PricewaterhouseCoopers' Consumer Finance Group.
He participates in a panel discussion entitled “Keeping Pace With the Changing Markets,” at the American Financial Services Assn. vehicle-finance conference held here in connection with the National Automobile Dealers Assn. convention.
Better loan decision-making comes from requiring additional documentation of credit-application information, such as income and employment.
Loan analysts also “are doing more than a cursory review of credit-bureau forensic analytics,” Ekizian says. “They are looking at whether this person is a habitual late payer, has one problem or more than one problem.”
Analysts considering a loan for people with past credit issues “are looking for evidence that it was one thing that caused the earlier default,” says Alliance Acceptance CEO Ray Thousand.
“We will interview the customer and try to find the reason for the prior default,” he says. “Determining willingness to pay back a loan is the gut call of the day. We're looking for evidence of ultimately trying to make good on the loan.”
The goal is to “figure out what went wrong with the earlier deal,” says George Halloran, BenchMark Consulting International's auto-finance program manager.
Someone who currently is employed but who once defaulted on a loan because of a previous job loss may get a new car loan provided the rest of his or her credit history is clean.
Conversely, red flags might go up if someone with a relatively respectable credit score is seeking a large advance for a car loan, says William Shope, vice president-portfolio management at World Omni Financial Corp. “Our analysts would want to look at why.”
Loan defaults rose in 2008 and 2009 because of the poor economy. As unemployment went up, so did the number of bad loans.
“More people lost jobs at that time and the consumer behavior is that they weren't able to pay back loans,” Shope says.
Predicting loan performances becomes less precise when the economy tanks. Ekizian says. “Default rates are not static during periods of instability.”
During the downturn, “we saw higher losses than anticipated so we took steps to mitigate them,” says Shope. “We pushed more deals to analysts to get a closer look and we became more disciplined in structuring our deals.”
In addition to stricter income-verification requirements, World Omni also looked more at debt-to-income ratios, he says. “We also looked at getting the applicant in a car he or she can handle in terms of paying back the loan.”
Even people who have declared bankruptcy might get a car loan today, says Adem Yilmaz, corporate manager-consumer risk for Toyota Financial Services.
Under certain circumstances today, “we'll extend credit to someone who went bankrupt,” he says. “That used to be a no-no.”
Lenders shouldn't let their guards down too much as the economy recovers, he says. “The risk is that you become irrationally exuberant when coming out of a down cycle.”
As one conference attendee notes: “You can make your best loans in the worst times and your worst loans in the good times.”