Byrider Leading the Way in Subprime Underwriting!
So-called alternative credit-data sources such as records of phone and cable TV payment histories are gaining greater acceptance among automotive lenders in deciding whether to finance a vehicle purchase.
So says Peter Oburu, vice president-automotive analytics for Equifax, a credit tracking and analytics company.
“Lenders and the auto industry were a little leery when alternative-credit data was introduced a few years ago,” he tells WardsAuto. “We’ve demonstrated alternative data is viable. It is becoming more acceptable, especially in nonprime segments.”
It’s particularly useful in scoring consumers with thin credit-bureau files or none at all, he says. “Consumers are not one-dimensional, and neither are their credit profiles.”
Traditional credit data relies on the likes of mortgage and car payments to score consumer creditworthiness. But that leaves out non-homeowners or first-time car buyers, especially young people.
“Most scores are built with credit-bureau data,” Oburu says. “That’s rich data, but if you are building a model across the range of the credit spectrum, especially if you are moving from the prime to nonprime segments, you want additional information beyond the traditional kind.”
“In our industry over the last four or five years, model-building overall has become very competitive,” says Lou Loquasto, Equifax’s leader-automotive finance and dealer. “People in this game, Equifax included, are using more and deeper alternative data than ever before.”
For Byrider, a used-car sales and finance company, Equifax developed a risk-assessment model that uses traditional credit data augmented with alternative data sources such as telecom and utility information.
It creates better borrower profiles, says Gary Harman, Byrider’s chief risk officer who wanted to “mitigate risk and increase financial inclusivity for our buyers who happen to be subprime or deep-subprime borrowers.”
The software, spun off Equifax’s Ignite model, has allowed Byrider to score 100% of its applicants, including those with no or thin credit files.
Byrider says the hybrid model allowed the company to increase approvals 10%, yet with the same loss rate.
Could a risk-assessment model rely solely on alternative data?
“Yes, but why would you do that?” Harman says. “Subprime customers typically don’t have a big credit-bureau profile. Some have very thick bureau files with lots of bad things in them. I’m really interested in people who don’t have much bureau information at all.
“They might have a payday loan or buy from a buy-here/pay-here dealership that doesn’t do bureau reporting. Just like any data, you are looking for stability and creditworthiness.”
He says he can assess those positive financial factors as much from how conscientiously people pay utility and phone bills as those for credit cards.
Regarding traditional vs. alternative credit data, Harman says, “It’s not that one is better, it’s just that combined they give you a broad view of what the consumer is really like.”
He describes his typical customer as someone with relatively limited household income ($30,000). “They’ve had some past credit issues, mostly because they are fragile financially. That’s who we’re selling cars to.”
According to an Equifax study, “the No.1 way a customer can go from subprime to prime – get their score to jump 50 points or more – is to take out an auto loan and pay it back well,” Loquasto says.
Many lenders have pulled back from subprime financing. Last year, there were 9.2% fewer auto leases issued to consumers with subprime credit scores, the smallest subprime share since 2011, according to Equifax data.
Yet auto lending remains robust across all financial fronts.
“I’ve been in auto 24 years, this is competitive as I’ve ever seen it,” Loquasto says. “Lenders who don’t use alternative data are going to fall behind.”
An Equifax survey indicates prime and subprime Millennials expect to spend the same amount on their vehicle (about $20,000). The study also says subprime Millennials appear more aware of their credit situation compared with subprime Baby Boomers.
Online resources have helped consumers become more aware of their credit standing, says Rebecca Kritzman, Equifax’s senior director-automotive marketing.
Story by: Steve Finlay | WardsAuto 2018.