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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
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:
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.
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,