3 Keys to Underwriting Success in BHPH
The dealer-controlled financing business is not just about making loans, it’s about making the right loans. Since the dawn of buy here – pay here in the 1950s, dealers have been trying to figure out how to decide whom to lend money to. Over the years dealers have used systems ranging from the “fog a mirror” system where a dealer will approve anyone and hope for the best, to sophisticated algorithms that attempt to predict which potential customers will pay. No matter what system you use, there are a few universal truths that you must pay attention to.
1. More is better.
The more information you collect about a prospective customer, the more informed lending decision you can make, and the easier it will be to collect an account. Quick, five-line credit applications containing just enough information to pull a credit bureau report might be fine for conventional financing, but they are a quick way to commit business suicide in dealer-controlled financing. Don’t set a policy to collect five references from every customer and stop once you have those five. Ask a customer for references until they run out of names to give you. Make sure you believe you know a sufficient amount of the prospect’s job and residence history to identify patterns in their stability and any places they might go if they decide to skip with your vehicle. Just like you can’t be too rich or too good-looking, you can’t collect too much information about a prospect.
2. Dig for nuggets of truth.
Unfortunately, some customers have been trained to lie in order to obtain financing. Most have applied for other loans or at other dealerships and been turned down. They have been informed that they didn’t have enough time on the job, at their residence or in the area. They may have been told they didn’t make enough money. Whatever the reasons they were given, they will “improve” those answers when they next apply for financing. If you accept the answers the customer gives you as facts, you will make loans you should be turning down. You must be a miner, digging for the nuggets of gold that are the truth, so you can make intelligent, informed lending decisions. Never allow your customers to complete their own applications; you will get only the information they want to give you. When you complete the application, you must continually dig deeper for more and better information. Then, once you have as much information as you can obtain, you need to verify that information to find the nuggets of truth.
3. There is no such thing as too much verification.
Many dealers collect a paycheck stub or two for verification and consider the job done; however, a paycheck stub only tells you that someone was employed at the end of that pay period. It is a historical document, but it tells you nothing about the current situation of your applicant. Likewise, a rent receipt or utility bill tells you that a potential customer lived there for the period covered by that bill or receipt, but they may or may not still live there. It is important that you speak with a prospect’s employer and landlord to verify the situation has not changed.
You also need to speak to the references. These are the people the prospective customer has provided to vouch for them. They are the people who know the customer best. You do not want to just collect a list of people you may call if you can’t get in touch with your customer when payment is past-due. You want to speak with these people before you decide to approve financing for this customer. Negative responses from these people should weigh very heavily in your decision whether to approve or deny a loan.
These three keys will make your underwriting easier. Collecting and verifying a sufficient amount of true information about each customer will make the decision on each of these customers much clearer. With the right facts in front of you, you will know whether to approve each application. And having the right amount of verified information does one other thing for you, as well. It makes finding each customer much easier when you need to contact them. Follow these three simple rules, and both your underwriting and collections will improve.
Originally published in Special Finance Insider – August 2011
