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On Collateral Lending
The amount of data at my fingertips is at times daunting. Tens of thousands of applications streaming in to our processing center provides a unique perspective of the human financial condition in today’s economy.
Generally, we have experienced a slight improvement in credit quality reflected in an increased number of applicants with FICO credit scores above 660. In 2018 the percentage of applicants with credit scores above 660 increased to 51% from 48% the year before and 37% in 2016.
But credit score doesn’t tell the whole story, does it?
The two most prominent reasons applications are denied is Loan to Value percentage (LTV) and Debt to Income percentage (DTI). What may surprise you is that 30% of applications with a FICO greater than 700 are denied for LTV.
I recognize that one of the most insulting names you could call a loan officer is a “collateral lender”…but if the shoe fits? Whether or not they would admit it, your team is rendering credit decisions based on their expectation that the auto will be repossessed and a loss will occur. We tend to focus on the less than 1% of applicants that will default and forget about the 99% that will pay.
Think for a moment about the lost opportunity in that 30%. Do your loan officers recognize what the dollar amount of the negative equity percentage is? What is the dollar equivalent to that LTV value? Is 127% LTV effectively $4,000 or is it $14,000.
What is the negative equity in dollars and would you give that same borrower an unsecured loan for that negative equity amount? If the answer is “yes” then why not grant the approval, write up the exception in the loan decision and take the title as collateral?
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