In my previous article, “Credit Application 101,” I discussed the importance of having a compliant credit application process in place at your dealership. The process included accurate application completion, how to address errors, obtaining applicable signatures, a retention plan, and a recommendation to audit the process.
In this article, I will discuss the five key credit determinants that lending institutions take into consideration when making the decision to extend credit. The key credit determinants include income, occupation, time on job, time at residence, and housing expense.
I find it important to note that credit application misrepresentation is one area of bank fraud that federal agencies take very seriously. When investigating dealers for credit application fraud, they concentrate on changes to these key credit determinants as they are aware these areas are what lenders rely on to make their credit decision.
First on the list is income. A dealer has the obligation to accurately report the consumer’s income to the bank. The income helps the bank determine total debt ratios and ultimately assist in the credit decision process. A dealer should never give a consumer a “bump in income” to make the deal appear more favorable. A dealer should never combine income. If a consumer reports a primary income and indicates additional income from a second job, appropriately report the primary income on the salary line and then input the second income on the other income line on the credit app.
This one is self-explanatory. When submitting an application to the lender, report the occupation provided by the consumer. For example, never give a consumer a “promotion” from cashier to team lead to increase the likelihood of obtaining approval. A common violation I see with altering occupation is when a consumer says they are a self-employed owner of a business, but when the application is submitted, they become a general manager or a manager in order to circumvent underwriting guidelines.
Time on Job and Time at Residence
The third and fourth credit determinant is time on job and time at residence. These two determinants display to the lender that the consumer has established stability. Inflating time on the job or time at a residence, is ultimately affecting stability and that is considered fraudulent. For example, say the consumer reports his time at residence as one year, 10 months. Inflating the time to two years to avoid being stipped for previous address is considered bank fraud.
The final credit determinant is housing expense. The dealer must report the housing expense as provided by the consumer. The dealer should not take a homeowner and turn them into a consumer living with a relative rent-free. Another no-no is splitting the housing expense. There is a misconception that a husband and wife “technically” split the mortgage. The dealer must report the full amount the husband/wife are obligated to pay per their mortgage or rental agreement. Another example is when a consumer claims to have a roommate and states they only pays a portion of the mortgage or rent. Once again, the dealer is obligated to report the amount indicated on the mortgage or rental agreement. They can make a note in the credit application portal that the consumer shares the housing expense and let the lender make the decision.
Dealers can face serious repercussions if alterations are made to a credit application. Coaching the consumer to misrepresent key credit determinants is also considered deceitful. Defrauding the lender to avoid being asked for stipulations or to increase the likelihood of obtaining approval is just plain stupid and not worth consequences.
The repercussions include the dealer having to buy the deal back, suspicious activity reports (SARs) filed by federally insured institutions, federal investigations, hefty fines, and even jail time.
I leave you with this last piece of advice. Adopt a no-tolerance policy for bank fraud and have all employees sign off on the policy. Hopefully, this will help weed out the kinks.
Penelope Bell is an associate with gvo3 & Associates, a consulting firm that specializes in developing and implementing a compliance management system for dealers around the country.