Subprime Blind! Make Your Dealer Accountable


Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just eighth percent of borrowers, according to a recent Bloomberg article. And, those loans were recently bundled into $1 million of bonds, according to Moody’s Investors Service.

With loan fraud increasing at a record level, no matter the cushion or acquisition fees set aside, it may or may not be enough to bury the loss.  The question: who’s to blame?  Is it just the finance company if they aren’t requiring income verification? Why should a dealer care one way or the other?  Besides, it’s a loophole and the car dealer just wants to sell cars.  If a finance company doesn’t want to verification of income many go to the path of least resistance and send the customer to the bank with fewer stipulations.  Proof of income can make the difference if you get a deal over the curb or not.  

Over the years you can’t help but watch the trends. It’s a vicious cycle.  Banks loosen up and buy about almost any customer bankrupt you name  but once the delinquencies increase, the finance companies tighten back up again and add stipulations for loan approval.  Can’t blame the car dealer if they took advantage of a good situation? Or can you?

Limited verification of loan applicants’ stated incomes and employment “creates more uncertainty around whether borrowers will be able to afford their monthly payments, which becomes particularly important if they have poor credit records and risky loan terms,” the analysts wrote.

The Blame Game

Auto dealers need to be held accountable. Having the old school mentality sticking customers into any car — any car — creates a less stable economic environment for everyone. The chances of the customer being able to afford the car payment is not likely and will result in a repossession. Sometimes the customer may even have a high FICO score 700 and above but the income consists of only a Social Security payment, which may be just enough to make rental payment and grocery shopping.  Two to three months later they are left having to make a decision to either make the car payment or pay their rent.  Nothing good comes from the lack of budget consideration and poor deal structure.  

Loan fraud is increasing at a record high. Lenders are doing their due diligence and are vigilant in their inquiries to determine if the culprit was the customer or the dealer.  If the customer goes bad on the loan, the lender will contact the customer and investigate. Should the dealer have any misstated criteria, such as misstated proof of income or power booking, the bank will push back the loan.  This is happening a lot more today than ever before.  Case in point: a recent auto dealer came under fire for misstating income and power booking and has had to fork out millions in damages.

It only makes sense that the dealer validates the customer information to assure the individual is not an identity theft victim and or to assure the structure is right and can easy enough fit.

Doing the Right Thing

Training sales and finance is a critical component to subprime and not running with blinders on. A process that may flag for derogatory credit earlier on is vital. Determine the customer’s pay back history prior to lending them on a car so you can be assured that they can likely budget for the vehicle based on verifiable criteria.

This may even mean offering the customer the ability to do some of the heavy lifting prior to the customer walking into the dealership through digital retailing self-desking capability. The customer should have the advantage of determining what terms of credit, based on a soft pull option, they will be approved for prior to coming into the dealership.  

In recent headlines a car dealer is charged with predatory lending by overstating income and power booking, such as stating the vehicle had more equipment than what it actually did. This is why it’s up to the dealer to do the right thing.

A dealer should assure the customer is aligned with the right vehicle that fits their budget.  A dealer should assure that a be customer, who is on the right vehicle and able to make payments on time, also has the ability to purchase a service contract should a repair be necessary.

The idea is to think long term and realize when the customer benefits you benefit.  Banks do not dictate if the customer becomes the dealer’s customer for life. The dealer is. It’s a balancing act. It takes two to tango.

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Rebecca Chernek has nearly three decades of consulting experience in the automotive retail industry. She started her career by working with her father at their family-owned auto dealerships in Have De Grace, Maryland. She gained hands-on skills and experience in almost every aspect of the automotive sales process: new used cars and trucks sales, F&I, Director of Finance for volume operations and general management. Rebecca has helped hundreds of automotive car dealers throughout the U.S. and Canada streamline their processes and closing techniques and significantly increase profits.