F&I 20 Group Offers Insights from Lenders
Daring to share information is what we do. Getting deals funded is the magic that drives our business. The ability to control the direction of customer financing also has a long-term impact on future business.
These were some of the issues addessed by a lender panel [that] headlined one of Kelly Enterprises’ recent F&I 20 group meetings. Panel members included representatives from Bank of America, Bank One, and Deutsche Financial Services (DFS).
The following Q& A summary between group members and panel participants will be interesting to many of you.
Will variable rate plans be available to help combat the line of credit programs currently being offered for 4 3/4 percent?
RV loans are typically long-term notes. Today’s loan rates are some of the lowest in history. The average turn on RV paper is 42–48 months. Secured loans with variable rates are difficult for lenders to sell in the market place. Typical investors in this market (insurance companies, Wall Street, and other lenders) like to know what the return on investment will be. Variable rates reduce the comfort level of these investors.
What about balloon programs?
Balloon programs are underwritten on two levels. The first level is the strength of the customer; the second level is the strength of the dealer. Lenders anticipate changes. Where is the marketplace going to be in two to three years? Will the dealer still be in business? Without an insurance company insuring the residuals or a VERY strong dealer-lender relationship, balloon payment programs will not be offered en masse.
The best course of action is to pursue this line of thinking with a local banker who knows the dealer and the dealership history. The financial strength of the dealership is a key factor. And make no mistake; a balloon payment program assumes a contingent liability for the dealership. Pay close attention to the details associated with these programs.
When a customer inquires about leasing, the best avenue to consider may be a commercial loan. There will be increased paperwork for all parties, and the customer will need to prove business use; i.e., a movie studio or other entertainment industry.
The type of loans we deal with are typically viewed for personal rather than commercial purposes. Personal loans typically have longer terms and assume less use than for commercial items. Find out more about commercial lines from your lenders. On rare occasions, commercial loans may be worth investigating.
Has the credit scoring system proven to be an effective way of evaluating a customer’s ability to pay back a loan?
Everyone uses FICO scores. These scores predict how a customer will handle short-term obligations up to a 24-month period. They are the starting points when reviewing a customer’s credit worthiness.
In addition to FICO scores, lenders also use an internal scoring method to assist with their internal tier system.
Revolving credit drives FICO scores. Revolving credit is the most expensive type of credit. While the scores are not always indicative of future losses, it is interesting to note that lender losses increase ten fold with customers whose FICO scores are below 650.
Equity in the purchase is a great equalizer in the scoring system. After listening to this lender panel, is it clear that we must obtain down payment investment from our customers.
How are lenders handling the increase in B & C paper?
Bank of America is not currently seeing a significant increase in B & C credit applications. Post 9/11, their credit department’s activity was quiet. However, since November 2001 loan volume has been stronger, and four of the months since November have produced all-time activity records. New RV loans are up 140 percent from last year.
Bank One has experienced an increase of only 1 percent in B & C paper. Due to the credit tier, the loan decision will take more time. The lower the credit score the more important the structure of the deal becomes. Generally, the trends have remained the same.
DFS commented that dealerships are seeing more marginal credit. B & C paper requires that business managers do a better job of interviewing customers. They must secure more documentation. They must advise loan underwriters when they fax supporting documentation. They must make it a practice to note on the application when attachments will follow.
RV loans are very different from auto loans. Our portfolio is for longer terms and the risk is greater when the economy takes a downward turn. Lenders and dealership personnel should take a thorough look at the stability of the customer and provide evidence to support why the loan makes sense.
With B & C paper, good information is the key to securing approvals. A complete application, with additional information about the customer’s assets and verifiable income, is crucial.
The primary bureau for the customer’s primary residence dictates the particular credit bureau that is pulled. Also note that all bureaus are not equal. One bureau may show more information than another may, even when the same company produces both bureaus. Scoring can be standard or auto enhanced. The best practice is to ask the loan underwriters which bureau(s) they review.
What factors contribute to so many deals getting turned down on the first run through?
Lack of information on the credit application. Using the internal custom scoring system, a certain percentage of applications are automatically turned down.
Since some lenders contract data entry services, the attachments to a credit application are not always readily available to the underwriter. Data entry personnel fill in specified fields; extra information is not recorded. The data entry is 99.1 percent accurate for information entered in specified fields.
The best practice is for sales business managers to make certain the application is legible and complete. When the application enters the queue, phone the underwriter and ask them to review the additional documentation sent with the application.
Loan approval authority is limited to only a few senior credit underwriters when a customer’s credit score is below 650. Conversely, when a credit score is 700 or higher and the application is turned down, it should be placed for automatic review.
The two main factors regarding credit scores are revolving credit and repayment records. It is important for sales business managers to recognize that many of the new bankruptcy cases have no prior delinquent payments. Rather, the customer’s revolving credit is out of control and they are filing for credit relief. This means that underwriters are taking a close look at revolving credit since it is the most expensive type of credit.
How many deals are being re-hashed before granting approvals?
Recent delinquencies on the credit bureaus have a huge impact on credit scoring. Now 20 percent of the deals are taking 80 percent of the time.
Lenders do want to make loans. And the structure has to make sense. The lower the score, the higher the customer’s equity needs to be. In other words, the key is down payment. Work with the underwriters to secure counter offers.
Secondary jobs that the customer may hold do not really impress the loan underwriters. If they need a second job now to make ends meet, how are they going to handle the additional payment?
Sales business managers need to develop strong working relationships with their loan underwriters to foster mutual trust and respect.
Conclusion
The lender panel was allotted three hours and could easily have continued throughout the day. Our F&I 20 group participants and the panel members all gained a new respect for “the other side of the coin”. Information exchanges such