In the June issue of F&I, the article “Taking on Today’s Tightening Market” discussed how top auto finance experts are evaluating their business practices in the wake of the subprime meltdown. Lenders have tightened policy and decisioning parameters in response to the credit crisis to manage risk and insulate themselves from uncertainty in the market. However, many lenders recognize that one size no longer fits all, and are applying different strategies based on varying geographic
and customer segments. While this approach adds a layer of complexity to their decisioning logic and processes, it also enables the use of alternative data to make better credit decisions and selective tightening of riskier sub-segments.
The good news for automotive lenders and dealers is that non-mortgage products have seen a nearstatic to relatively-modest increase in delinquencies. In fact, many consumers are choosing to walk away from their mortgages entirely while continuing to make payments on credit cards, auto loans and other consumer debt. Finance experts believe this is because consumers realize their credit scores recover
faster from foreclosure than from bankruptcy.
It’s too early to tell how long this trend will continue or how it will impact lenders in the long term, but the initial findings are positive, and there are ways auto lenders can respond. In a recent Webinar, “Credit Risk in the New Economy,” three top executives weighed in on today’s credit risk factors and discussed new ways lenders are approaching this risk.
Scoring Models Being Updated
Established credit scoring models still work, but the experts agree it is time to make them more effective. That’s why companies like Ford Credit, Chrysler Financial and AmeriCredit have announced the adoption of risk-based pricing models, and why GMAC Financial Services
recently employed credit risk officers for consumer credit.
Lenders now understand that as the economy changes so does consumer behavior. The need right now is to better understand what those changes are and be able to react to them as quickly as possible.
“If a significant change in consumer behavior occurs, the effectiveness of the system is impacted until the change can be understood and explained statistically,” said Tim Bates, a senior credit risk management executive, during the Webinar. He also said it’s imperative lenders understand the drivers that cause changes in consumer behavior and to measure those drivers as quickly as possible.
During the same presentation, Tom Johnson, vice president of product development at Zoot Enterprises, a provider of decisioning and loan origination solutions, explained how the use of analytics, additional data sources and champion/challenger testing is helping lenders
establish better policies to meet their changing needs.
“Testing allows you to predict and understand consumer behavior better, and in turn, respond rapidly to market changes,” said Johnson. “Using additional data from both internal and external sources gives a broader picture of your consumers and allows better credit decisions to be made.”
Andy Callen, executive vice president of CG2 Direct, agreed. “You need to be able to change with the market monthly if not quarterly. Simplistic scoring models just aren’t enough anymore. Custom scoring
helps to better manage risk while allowing you to enter new markets effectively and in a much shorter time frame.”
In order to attract profitable customers that aren’t a credit risk,
financial institutions need to employ strategies and technology solutions that allow them to adapt quickly and take advantage of opportunities. Based on his experience, Callen believes automated decisioning systems provide the best option. “Financial institutions that can adjust dynamically to stay in sync with the market can better
compete for good loans,” he said.
Johnson said lenders are already moving to real-time tools that accelerate their ability to adjust to a changing market, as well as allow for greater complexity in decisioning logic. “Financial institutions that use internal and external data more effectively can individualize offers differently based on numerous factors, including
geographic location and customer behavior segmentation,” said Johnson. “By better utilizing available data and more complex logic, institutions can focus on their most profitable customers.”
Capitalizing on Micro Opportunities
Micro opportunities exist in many forms for lenders, each providing chances for new revenue growth. The key to capitalizing on them is to know where to look and to act quickly, accordingly and safely. Because these opportunities are limited in time and region, lenders are employing systems that are highly flexible, dynamic and powerful enough to filter them.
Lenders are also instituting robust risk management strategies to avoid jumping into a new situation without a safety net. These new models allow lenders to adapt to each new market by providing a separate set of intelligence, processes and analytics that are capable of keeping up with changes in consumer behavior in each market.
In the past, many “A” lenders tried and failed to go after underserved markets while those specializing in subprime have come out OK. Because consumer information in these markets tends to change more frequently, there is a greater need to keep up with those changes. This is why a different set of rules needs to be applied. Using alternative data in decisioning allows lenders to keep their core policy in place while offering more nontraditional loans.
Micro opportunities often seem very risky to lenders on the surface. But by using additional tools to create a better risk profile and a safer, more flexible lending environment, lenders hope to insulate
themselves against these risks and experience growth, regardless of market conditions.
Today’s credit crisis is offering opportunities for auto lenders to seek revenue growth in areas they may not have considered before. Adding sophistication to their scoring models and updating their systems to adapt quickly to market changes should improve their ability to attract the right consumer and make them the right
offer. These changes will make life more difficult for F&I managers, but the end result will be a healthier market.
Eric Lindeen is director of marketing for Zoot Enterprises, a provider of advanced instant credit decisioning and loan origination solutions. He can be reached at [email protected].