One of the more careless practices that necessitated the subprime bailout was sloppy loan underwriting procedures. Lenders did not sufficiently weigh the risk of lending to consumers who were hard-pressed to repay, leading to excessive loan default. Wards Auto reports that this has led vehicle finance companies to take a closer look at incoming auto loan applications.
Auto loan underwriting depends upon all the facts
If a borrower has a less-than-perfect credit history, greater attention must be paid before a car loan can be approved. Scenarios in which the borrower’s credit report has some dings but does not indicate serial loan default can be workable, said Price Waterhouse and Cooper Consumer Financial Group senior manager Douglas Ekizian. When it is clear that an applicant has the ability to pay back the loan, underwriters must decide whether history suggests that the consumer will pay it back.
In general, better auto loan underwriting decisions come when there is as much information as possible that is available. Full income and employment data is a must so that analysts can do “more than a cursory review of credit-bureau forensic analytics,” said Ekizian.
Auto lending is a gut call
With added detail, a car loan underwriter can pinpoint specific incidents that can cause an odd loan default, according to Alliance Acceptance CEO Ray Thousand. A default following job loss is something that can be overlooked if the rest of the credit history is clean. As the credit market for auto loans has relaxed somewhat, sometimes borrowers with a bankruptcy are considered, said consumer risk finance manager Adem Yilmaz of Toyota Financial Services.
“Determining willingness to pay back a loan is the gut call of the day. We’re looking for evidence of ultimately trying to make good on the loan,” said Thousand.
Auto loan defaults: Children of recession
A boom in auto loan defaults occurred in 2008 and 2009, years that were particularly bad for the U.S. economy. This dragged some of the country’s most respected vehicle loan companies into bankruptcy or in line for subprime bailout dollars. With careful underwriting decisions, the auto lending industry hopes to avoid the mistakes of the past.