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By Brandi Hamilton
Many auto lenders still rely on traditional credit scores and applicant-reported details to predict the stability of loans. However, relying solely on credit scores may not give a comprehensive view of credit risk. Not all consumers behave as their credit scores might indicate, especially when economic conditions may cause setbacks that impair credit.
In fact, a significant segment of the population who have average to damaged credit (i.e., near-prime or subprime), also have positive financial capacity measures, such as low debt to income ratios*. This combination attests to their ability to afford additional financial obligations — despite a low credit score.
Credit scores shine light on only a fraction of the full view of risk or a borrower’s ability to repay a loan, and may not be the most accurate or comprehensive way to assess borrower qualifications. Alternative data sources, such as digital income and employment information, provided directly from employers, in addition to credit scores can help lenders identify and mitigate risk.
Prime Lenders Can Also Find Value from Third Party Income and Employment Verification
There is an obvious imbalance in the verification process that auto lenders can and should work to stabilize. Prime lenders do not verify income and employment data as often as subprime lenders. On the surface, it makes sense, and prime customers (those with 620 and higher credit scores) are often a safer bet, and for many lenders a prime borrower’s credit score offers enough information to prove creditworthiness. Hence, the risks of approving a loan for them is relatively low. But even prime lenders have battle scars from fraudulent or unaffordable loan activities.
All it should take is one $30,000 mistake for a lender to realize that verifying income and employment is the right thing to do for their business, the industry and their customers. Instead of viewing verifications as a tool only for the subprime market, it should be considered standard practice for all lenders to tell a more complete picture of credit risk. Here’s why:
Income Equifax research revealed that the risk of delinquency is reduced approximately 50 basis points for every $10,000 salary increase for individuals earning $10,000-$80,000 annually**. What is most important in this finding is not that better qualified applicants earn more, but that income verification (versus only relying on credit scores) can help identify prospects who are less likely to be delinquent on loans. Being able to quantify the likelihood of default so specifically enables lenders to develop more accurate strategies to improve portfolio performance.
Employment Tenure The length of time an applicant has held his or her job is highly predictive of loan delinquency. While it seems obvious that longer tenure indicates greater stability and more positive loan performance, internal Equifax studies found that:
In the subprime population, borrowers with less than one year of tenure and loans of less than $15,000 are nearly twice as likely to become delinquent than those with ten+ years. Borrowers in the general population with less than one year of tenure are three times more likely to go 90+ DPD than borrowers with ten or more years.
Credit scores do not include job tenure data, but verifications from The Work Number® can add such insight across all income levels. This level of analysis provides valuable tools for identifying increased risk and opportunities that might otherwise be missed.
Pay Frequency The Work Number® offers the most timely and reliable information on pay frequency. This means deals can be structured to reflect the most realistic circumstances. In other words, terms can be tailored to the most probable estimates to ensure a borrower’s likelihood of keeping payments up to date.
Job Disruption It is no surprise that loan applicants and current customers who have recently lost their jobs present greater risk than if they were still employed. The Work Number® database presents a unique opportunity to notify lenders of employment changes within their consumer portfolio. Because data is updated each payroll cycle, job disruption can be detected almost immediately. Relying on credit reporting alone only indicates the consequences of lost income well after employment has ended. Early detection can create opportunities for lenders and dealers to respond quickly, proactively, and productively.
What Makes The Work Number® Better? The Work Number®, regulated by the Fair Credit Reporting Act (FCRA), provides unique employment data directly from employers. It also helps lenders and dealers efficiently approve more profitable and comprehensively verified vehicle loans than ever before.
This is made possible through:
The Work Number®'s automation and transparency adds to the arsenal of tools necessary for dealers and lenders, and enables them to confidently close more deals. The database allows 24/7 access to employment and income verifications, allowing a salesperson to verify customers instantly, even after hours and on weekends when high-volumes of auto sales are made.
*10 years post the Great Recession, Equifax suggests communication providers review alternative data for emerging qualified customers. (n.d.)
** Equifax internal study of The Work Number, February 2020.