Last week I shared some thoughts regarding the unprecedented rise in auto loan delinquencies and growing risks impacting many financial organizations. We covered the weighty consequences of competing for market share coupled with less stringent underwriting standards. These factors significantly increase credit and in some cases compliance risk in auto loan portfolios.
We covered five core platform capabilities required to potentially reduce operational risk while sustaining positive consumer opportunities and incremental net revenue.
- Comprehensive history of all transactions, delinquency ratings, and credit bureaus.
- Real time commentary search capabilities including time/date and user stamp.
- Estimated and actual loss analysis on the repossession /sale of the asset.
- Automatically update delinquency information after backdated transactions are posted.
- Bankruptcy sub-statuses (disposition codes) from which to track the process and build work queues.
The value of a credit reporting system supporting a lending platform depends on the comprehensive nature and freshness of the credit information collected and shared, especially the interactive structure of the reporting system itself. In other words, “garbage in….garbage out”.
Effective credit data gathering and application penetrates the “lending fog of uncertainty” surrounding each new loan applicant. Additional data concerning a prospective or existing customer’s credit history improves the risk assessment process. The end result is a better alignment of capacity to pay versus requested debt.
“Full-file reporting” of both negative and positive lending behavior data concerning borrower behavior improves risk based pricing capabilities and mitigates lending risks. Studies have proven that dynamic full-file reporting augments capabilities to better predict borrower risk. Full-file reporting improves the lender’s ability to predict repayment probabilities. A second benefit of full-file reporting is that it increases a lender’s ability to advance credit and enhances the probability of repaid loans.
Finally, Metro 2 is the credit data standard with specifications established by the Consumer Data Industry Association for credit reporting data providers. You will need to have a data furnishing service agreement with one of the major credit bureau associations and be prepared to update consumer credit history information electronically in the standardized Metro2 format.