Ford to Look Beyond Credit Scores in Sales Push
August 25 2017 - 5:59AM
Dow Jones News
By AnnaMaria Andriotis
A major auto lender has decided to change its approval process
to look beyond credit scores in an effort to pump up sales.
The move by Ford Motor Co.'s financing unit is expected to
unfold in coming years, even as concerns mount about rising
auto-loan losses in the industry. Ford Motor Credit is expected to
announce the plans as soon as Friday.
The company says it is looking at ways to increase loan and
lease approvals for applicants with limited credit histories. These
consumers are often denied credit because they lack a history of
managing debt and as a result have low credit scores. Ford's credit
division plans to review new data to try to determine whether these
customers, as well as those with more robust borrowing histories,
are likely to repay their loans.
Subprime auto lending industrywide has allowed consumers with
missed loan payments and other blemishes on their credit reports to
get financing. This helped fuel new U.S. car sales, which hit
record highs in 2015 and again in 2016. But as losses have
worsened, many lenders have pulled back on originations to risky
borrowers.
Ford's U.S. sales are down 4.3% during the first seven months of
the year compared with the same period a year prior, while total
U.S. new auto sales are down 2.8%, according to Edmunds.com. Wells
Fargo & Co.'s auto lending volume fell 45% in the second
quarter from a year earlier due to tightening underwriting
standards. Ally Financial Inc.'s auto loan originations fell 8.5%
for the same period.
Some lenders are looking elsewhere to drive loan volume. One
area of focus is borrowers who have low credit scores because they
haven't used debt from banks and other mainstream lenders.
Ford Credit is among the largest U.S. lenders to say that it is
looking at using alternative methods of underwriting, beyond the
traditional factors that are mostly centered around credit reports.
"No financial services firm would take that decision lightly," says
Jim Moynes, vice president of risk management at Ford Credit.
A string of smaller financing providers, including credit unions
and online lenders, have also been assessing factors outside of
credit reports and scores for applicants with thin credit
records.
Ford Credit is hoping the new ways to assess credit will better
predict risk among a broad array of borrowers. While its charge-off
rate is lower than the industry average, losses are rising. The
company wrote off $82 million in U.S. consumer loans and leases as
a loss in the second quarter, up 30% from a year prior.
Ford Credit says it doesn't think its decision will lead to more
losses because it will be reviewing more data than it currently
checks on loan applicants. While the overall result will likely be
more loan approvals, there will be some tightening as well as
because some borrowers who currently get approved might not under
the new model.
The origins of the shift date back to last year when Ford Credit
e ntered into a contract with fintech firm ZestFinance to conduct a
study of alternative data's ability to assess the likelihood of
loan applicants defaulting. That study was based on a pool of
existing Ford Credit borrowers.
Ford Credit decided to extend this new type of underwriting to
all applicants, including those with thin credit records. Factors
such as whether applicants supplied the same cellphone number on
previous loan applications and whether they have occupational
licenses could help to green-light their loan applications, said
Mr. Moynes.
Proponents of the strategy say would-be borrowers with limited
credit histories are often unfairly locked out of low-cost lending,
while critics say it's another way to dress up subprime lending to
people who have had financial problems.
(END) Dow Jones Newswires
August 25, 2017 05:44 ET (09:44 GMT)
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