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Better Lending Through Technology

November 2006, F&I and Showroom - Feature

by Preston Miller - Also by this author

Stips, short for stipulations, are important to more industries than just auto finance. You show your driver’s license to board an airplane. You enter a password to log onto your computer. You may even scan your employee badge before entering your workplace. It’s all part of verifying that you are who you say you are. In the auto finance industry, stips are documents required by lenders to validate customer information. They’re a vital part of the nonprime auto finance industry. Without them, many customers would have trouble obtaining a loan because finance companies would see them as too risky. However, too many stips can delay lenders’ processes, resulting in slower funding for dealers. In hopes of alleviating this issue, some lenders are beginning to use new technology to reduce the number of required stips and speed up funding.

If you’re in the prime F&I business, your life is — for the most part — stip-free. Except for an occasional pay stub or personal reference, finance companies don’t often require stips for customers with prime credit. They also stay away from conducting verifications themselves; they don’t need to because prime accounts tend to have negligible delinquencies. Customers with good credit usually pay lower interest rates, which reduce profit margins for lenders. In the world of prime lending, the name of the game is efficiency. So these finance companies simply can’t afford to add more steps to their processes.

The nonprime arena is just the opposite: These lenders can’t afford not to verify customer information. The lower a customer’s credit score, the riskier it is for finance companies to make the loan. To offset this risk, nonprime customers pay higher interest rates. However, wide margins alone won’t lessen the impact of elevated delinquencies and charge offs. To remain profitable, lenders must fully understand the customer, vehicle and structure of every loan. Even one error — a customer’s monthly income of $2,500 instead of $3,000, for example — can make a big difference in how lenders structure the deal, or whether they want the deal at all.

Common stips for nonprime loans include proof of income and residence, but finance companies may also conduct their own verifications before funding the dealer. Lenders usually call the customer’s employer to make sure he or she works there. They also call the customer’s insurer to verify that the car has coverage, and may even call the customer directly to confirm details about the vehicle and other items on the contract.

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