So, what do you do when your sales are stalling because you've already financed new cars for every man, woman and child with a credit score north of 500? Well, you simply abandon credit scores in the underwriting process and instead explicitly mandate that your loan officers approve every potential car buyer that walks through the door with a pulse.
Maybe we're exaggerating a little, but according to a new report from the Wall Street Journal, Ford Credit "has decided to change its approval process to look beyond credit scores in an effort to pump up sales." Which is a genius strategy if we understand it correctly.
The company says it is looking at ways to increase loan and lease approvals for applicants with limited credit histories. These consumers are often denied credit because they lack a history of managing debt and as a result have low credit scores. Ford’s credit division plans to review new data to try to determine whether these customers, as well as those with more robust borrowing histories, are likely to repay their loans.
The move by Ford Motor's financing unit is expected to unfold in coming years, even as concerns mount about rising auto-loan losses in the industry. Ford Motor Credit is expected to announce the plans as soon as Friday.
Ford Credit is among the largest U.S. lenders to say that it is looking at using alternative methods of underwriting, beyond the traditional factors that are mostly centered around credit reports. “No financial services firm would take that decision lightly,” says Jim Moynes, vice president of risk management at Ford Credit.
Ford Credit is hoping the new ways to assess credit will better predict risk among a broad array of borrowers. While its charge-off rate is lower than the industry average, losses are rising. The company wrote off $82 million in U.S. consumer loans and leases as a loss in the second quarter, up 30% from a year prior.
Of course, this move comes just as more traditional lenders have decided to pull back on auto loans presumably because they're growing increasingly worried that mounting auto inventory on dealer lots is confirmation that the industry is at the tail end of a nasty bubble. In fact, as we pointed out last month, Wells Fargo slashed their auto loans by 45% in 2Q 2017.
Meanwhile, JP Morgan will still underwrite your subprime auto loan but only if they can dump it on unsuspecting investors via a toxic ABS deal (see: Deja Vu: JPM Slashes Auto Loans For Their Own Book; Ramps Up ABS Issuance For The Suckers).
Of course all of this comes just days after Equifax Chief Economist Amy Crews Cutts pointed out that 2016 and 2017 vintage auto ABS deals are mysteriously performing more like 2007 securitizations than those underwritten in 2010. Per Bloomberg:
“Performance of recent deep subprime vintages is awful,” Equifax said in a slide show on second-quarter credit trends.
“We’re seeing an increase in delinquencies across all credit scores, but in the highest credit quality, it’s just a basis point or two,” Chief Economist Amy Crews Cutts said in an email Tuesday. “In deep subprime, the rise is more substantial. What stood out to me was the issuers. Those that have been doing this for a decade or more were showing the ‘better’ performance, while those that were relative newcomers were in the ‘worse’ category.”
But sure Ford Credit, now is probably a great time to abandon "traditional credit metrics" in your underwriting practice....while you're at it, maybe consider following in Chrysler's footsteps by offering a $1,500 discount to people with "Low Credit Scores."
"April 2017 Pricing on all new vehicles may include up to $1500 in finance rebates that have certain credit requirements to be able to claim this rebate. The finance office is Credit Score based and you must be below 620 to qualify. If you are over a 620 you must add up to $1500 to the price. Varies by make and model. Not all units are eligible for this rebate. Call Dealer for Details."
That said, somehow we suspect that offering $0 down, 0% financing for 80 months to everyone with a pulse doesn't actually pencil out over the long haul...but good luck with that.