F&I Meets Alternative Credit Scoring

A long time ago in a place not so far away, I was involved in creating internal credit scoring models for first a captive, then a major independent finance source.

The unintended consequence of the traditional scoring model is that it only applies to most consumers, leaving a sizable minority with a credit profile that does not contain enough data to generate a credit score.

We would take data from the credit bureau report, supplement it with information from the credit application, consider the deal structure, and calculate the risk level. We always understood the ability of finance managers or credit supervisors to manipulate the consumer information on the credit application.

This scoring model was the genesis of a Walmart greeter becoming a customer relations manager with a minimum of two year on the job and two years at their residence. And, because we assigned more points for checking and savings accounts than not, we reportedly opened more savings accounts than any other source in the country.

Our goal was to create a scorecard that relied solely on the data in the credit bureau report and keep the algorithm in a black box. We succeeded, resulting in today’s credit scoring models.

WHAT’S THE ALTERNATIVE?

The unintended consequence of the traditional scoring model is that it only applies to most consumers, leaving a sizable minority with a credit profile that does not contain enough data to generate a credit score.

These consumers are either young and haven’t had the opportunity to generate a credit profile or have simply chosen to follow their parents’ mantra: “Pay cash for everything.” Either way, those with no score usually get strapped with the lowest tier (and highest buy rate).

Of course, no one pays cash for everything. Even if the consumer does not have a mortgage, not all 30-year-olds are living in Mom’s basement. Many of them are renting and are making regular, on-time payments to a landlord. Why not capture that repayment record as a trade-line for the credit- scoring algorithm?

Similarly, renters sometimes are responsible for paying the utilities. Can we get the public utilities to report the repayment history? Or the cellphone carriers? I think you get the drift.

By capturing these alternative sources of regularly scheduled repayment, the industry may be able to find another source of consumers who can purchase and finance vehicles. Some may even be able to move from the deep subprime to the near prime strata and obtain more favorable credit terms. This could also mean a higher priced and likely more reliable transportation source.

ROADBLOCKS, RISKS, AND DOWNSIDES

It ain’t all paper roses with alternative credit scoring.

It sounds like a great idea to require utility companies to report repayment history, at least to those of us who may benefit from a new market to market our goods to. But if I were running a utility company, I might have some heartburn.

When the utility companies start reporting credit histories, how much of the Fair Credit Reporting Act applies to that industry? I often make the statement that the car industry is the most heavily regulated industry in America, surely utility companies are not far behind. And you want me (as a hypothetical CEO of a hypothetical utility company) to accept additional regulations and potential regulatory oversight?

As the CEO, I now must create a process to ensure that accurate and timely reporting of utility users’ repayment history is reported to all three credit-reporting agencies. This includes a dispute resolution process and department that must be staffed up and trained to handle credit-reporting disputes. Adding expenses for this proposition with no discernible revenue to offset the expense.

I also see the risk of another tool for the exploding synthetic identity theft industry. The sophisticated identity theft rings count on starting a credit profile with an authorized user account and building a credit profile over two to four years before venturing on a shopping spree. With alternative credit scoring, the synthetic identity thief can start a credit profile with a utility bill or a cellphone account or a landlord reporting.

Now comes the tampering of expectations: Believe it or not, not everyone pays their utility or cell phone bills on time. Shocker.

But there are plenty of times that the place of residence stip on a subprime deal is a copy of a past due utility bill. Reporting a delinquent or shut off utility bill would not improve someone’s alternative credit score.

Stay tuned and, as always, good luck and good selling.

GIL VAN OVER IS THE EXECUTIVE DIRECTOR OF AUTOMOTIVE COMPLIANCE EDUCATION (ACE), THE FOUNDER AND PRESIDENT OF GVO3 & ASSOCIATES AND AUTHOR OF “AUTOMOTIVE COMPLIANCE IN A DIGITAL WORLD.”