Lender Leverage = More Approvals

A Financial Services Professional has a responsibility to customers and lenders to conduct himself or herself in accordance with the highest standards of ethical conduct at all times. As an F&I Professional, you also have a responsibility to your dealership and your sales force to obtain an approval for every deal possible. The primary consideration must be development of a long-term mutually beneficial relationship between your finance sources and the dealership.

Lenders really do want to approve every qualified deal they receive. As a Professional, you have a responsibility to take the time, and make an effort to know what is important to each of your paper buyers, so you can obtain an unqualified approval on as many deals as you possibly can. When you do your job honestly and effectively, you become an integral part of the credit evaluation process.

Deal Structure
The first thing every lender considers is the deal structure itself. Based upon the lender's stated guidelines, maximum advance, debt to income ratio, etc. does this deal meet their requirements? It is critical that you know what is important to your paper buyer, and what guidelines she used to evaluate a deal, so you can structure the deal in advance to ensure an approval. Nothing irritates a paper buyer more than receiving a deal that doesn't even remotely meet their guidelines. To increase the chance of receiving an approval, an F&I Professional is responsible for evaluating the information contained in the credit bureau report to assist the sales department (and the customer!) in structuring a deal prior to submission to a lender.

Portfolio Mix
Every lender has a portfolio mix, which is the percentage of paper they want to achieve in each tier level. Not only does each lender have a portfolio mix, each paper buyer has their own portfolio, and each dealership also has a loan portfolio. It is absolutely critical that you determine what percentage of Tier I paper your lender is looking for, what percentage of Tier II, etc, and how your dealership stacks up by comparison. Keep in mind, your lender needs (and expects!) a mix of paper. While it may be tempting to always give your best paper to the source with the best buy rate, doing so will adversely affect your portfolio mix with those lenders buying your Tier II, Tier III, and Tier IV customers.

Look-to-Book
Lenders also evaluate a dealership's performance by their look-to-book ratio. Based on the number of deals they looked at from your dealership, how many did they actually book? Obviously, if a lender looks at 60 deals from you in a given month, approves 30, and receives 15, they're only being compensated for a fraction of their efforts. Why work a deal they might never receive, especially when it's from a dealer that only sends them a deal after everyone else has turned it down? If a lender approves a deal, they should get the deal, unless the tier is unrealistic, based upon their stated guidelines.

The Customer Interview
It's essential to interview the customer prior to submitting the deal to a lender, to provide your paper buyer with sufficient reasons to justify an approval. Properly used in your customer interview, the Credit Bureau report can significantly increase your chances of obtaining an approval. While Regulation Z specifically states that it is NOT illegal to discuss their credit bureau information with a customer, always ask the customer's permission before doing so. Do not, under any circumstances, give the customer a copy of their credit bureau report. If the customer's loan is denied, they are entitled to a free copy of their report from the credit bureau.

Analyzing A Credit Report
A credit report reveals many aspects of a consumer's borrowing activities, and all are considered to some degree when a lender evaluates a deal. The key to analyzing a credit report is to know what your paper buyer is looking for, so you can assist him in assessing the deal. In addition to a customer's FICO score, all lenders also consider the customer's Payment History, Outstanding Debt, Credit History, Inquires & New Account Openings, and Types Of Credit In Use.

Payment History
From a lender's perspective, previous delinquencies, charge-offs, and defaults are the strongest indicators of whether or not this loan is a good risk. Delinquencies are evaluated in terms of severity, recency, and frequency. Obviously a 30-day late payment is not as serious as a 90-day late payment. Recency and frequency are also considered. A 30-day late payment that is only one month old indicates higher risk than a 30-day late payment four years ago. The older, smaller, and less frequent the delinquency: the better that customer will typically score.

Outstanding Debt
The presence of a number of sizable outstanding balances, and the ratio of those balances to the customer's credit limits, also helps determine the risk associated with a new loan. Large outstanding balances, a high ratio of balances vs. the customer's credit limits, and balances owed on a large number of credit cards, generally indicates greater risk, and therefore a lower Tier Level.

Credit History
The trade lines in a credit report provide an indication of how long the customer's credit has been established, and the types of credit they have obtained in the past. From a lender's perspective, a short credit history typically indicates greater risk, but depending on other factors, even those customers with short credit histories may still meet their guidelines.

Inquiries & New Account Openings
Inquiry references indicate whether the consumer has been actively seeking additional credit and, if so, what type. Numerous inquiries and new account openings typically indicate greater risk, but only as part of the overall credit picture.

Types Of Credit In Use
The type of credit in use by a customer can also affect lender decisions. The presence of personal finance company loans might indicate the consumer's inability to obtain credit from less expensive sources. A consumer with no bankcards, or one with too many, also indicates a higher level of risk. The worst credit risks would have no bankcards and several finance company loans.

Lender Scoring Systems
In addition to the credit score obtained from their credit bureau reporting service, most lenders today also utilize an internal computerized scoring system that assigns different numerical point values to various aspects of a customer's individual characteristics to determine their credit worthiness. Virtually all of these factors can be found on either the credit application, the credit bureau report, or on the buyer's order/deal sheet.

Regardless of the scoring or evaluation system a lender uses, there are three key elements on which a paper buyer bases her decision: (1)Capacity- the customer's ability to pay, based upon their income, net worth, investments, other indebtedness, and credit score guide, (2)Character- the likelihood the customer will pay, based upon previous credit experience, occupation, stability, education, references, family, and paying habits, and finally, (3)Collateral- the customer's willingness to pay, based upon the type of collateral, their down payment, equity, and the ability to locate the collateral. Insufficient capacity is the #1 reason most deals are rejected!

Keep in mind, since a paper buyer never sees the customer, you must paint a picture of the customer that will allow her to justify approving the loan, despite the negative aspects of the deal. An F&I Professional must learn the circumstances and details surrounding any adverse credit information disclosed by the customer or revealed by their credit bureau report, prior to submitting the credit application (You only get one chance to convince your paper buyer!). That means you must find reasons why this customer is now a good risk, and document it, to help your paper-buyer justify an approval or changing a tier level.

Build Your Case For Approval
As you evaluate a customer's credit application prior to submission, you must learn what happened in the customer's past, but more importantly, what is their current financial situation? What is the customer's ability to meet this new/larger monthly obligation, considering his or her other monthly obligations?

Will there be a near term increase in income or decrease in debt? What other sources of income (spouse, child support, investments, etc.) does the customer have available, or they could depend on, to help meet this obligation? Is there any way to include that income to help strengthen the deal? How long has the customer been with this employer? How long has he/she been employed in this field? Is the customer likely to be employed in this field for the duration of the contract? What assets does the customer have to fall back on, i.e.: savings accounts, IRA's, stocks, mutual funds, real estate equity, any recognizable investments, or other family assets?

Based on the value of the vehicle being purchased, will the customer ever have equity? Substantial negative equity throughout the term of the loan greatly reduces a customer's willingness to pay. Considering the customer's intended usage of this vehicle, their past usage, and mileage on their current vehicle, will the actual cash value of their new vehicle continue to be, or ever be, in excess of the amount owed? Would a shorter term be possible? If the payment exceeds their capacity, would a longer term be possible?

To convince a lender to buy a marginal deal, you must emphasize the strengths of the deal, such as: years with current employer, true cash down payment, or good previous auto credit. Other positives might be the reason for purchasing a vehicle, the reason for any adverse credit, or a demonstrated ability to make similar payments in past. Always inquire as to whether there will be a near term increase in earnings or decrease in debt. Look for additional assets, reserves on hand, and any other extenuating circumstances, that would be positives you could emphasize with the lender. (See illustration)

Lender Leverage
If you want to leverage your lender relationships, you must know what is important to your paper buyer, so that you can accurately anticipate his or her response to any negative aspects of a particular deal. You must also structure every deal properly, manage your portfolio mix, and monitor your look-to-book ratio. It is imperative that you evaluate the credit application, the credit bureau report, and interview the customer… prior to submitting the deal to a lender. Following the customer interview, you should obtain all necessary support documentation prior to the submission, and understand the criteria used by each lender to determine a customer's creditworthiness. And finally, an F&I Professional must develop and maintain a professional relationship with every lender, based upon honesty, integrity, and mutual respect. Never attempt to convince a paper buyer to make a poor business decision. Instead, give them a logical basis on which to make a favorable decision! And I guarantee you'll get more approvals!