Better Lending Through Technology

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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Stips and verifications protect both the dealer and the lender. Stips give the lender confidence that his or her decision to fund the loan was based on accurate information. This helps the lender remain profitable by reducing the chance the account will charge off. That means the finance company isn’t forced to raise its interest rates to make up for losses. The use of extra stips can also catch identity theft, straw purchases and situations in which the dealer may be asked to buy back the vehicle.

Stips are here to stay, but that doesn’t mean that they have to unnecessarily slow down funding. Finance companies are finding ways to use modern technology to streamline stip requirements. For example, some lenders use the InstantID tool from LexisNexis to help determine when to require certain stips. LexisNexis searches its nearly four billion consumer records to find matches for the customer’s application data, including his or her address, phone number and Social Security number. The tool produces a score, which indicates the likelihood that the data on an application is inaccurate or fraudulent. Lenders can use the score to determine whether to ask for certain stips, such as proof of residence. In cases where the score is very high — and therefore it isn’t likely that the data is incorrect — lenders may waive some stips to be more efficient. InstantID also catches issues that would take more time for an underwriter to find. For instance, the tool can point out that the customer on the application has died, that the Social Security number was never issued or that the number was issued before the customer’s birth date. Using InstantID, lenders have a better shot at asking for the right stips on the right applications. This speeds up funding for dealers and decreases charge offs for finance companies.

Lenders also have a service they can use to speed up their own verifications. The Work Number (a service of TALX Corporation) provides automated employment and income verifications for people who work (or have worked) for any of the 1,400 employers in its database. The information comes directly from the companies’ payroll systems each pay period, so it is always up to date. Lenders can use this service over the phone or online. With no waiting on hold or worries about the data being tampered with, this service is gaining in popularity among finance companies.

As the nonprime industry continues to expand, some lenders are introducing “dealer scorecards” to assess the performance of the business they receive from a dealer. Possible metrics include delinquencies, closure rates and other efficiencies. A better score equals more privileges from that lender, such as special rate programs, faster funding and less required stips. This practice will benefit dealerships that weed out straw purchases, identity theft and other issues before they send applications to lenders. It will also encourage other dealers to play a more active role in screening their customers, thus saving time and money for their lenders and themselves.

Preston Miller is chief operating officer for originations at AmeriCredit.