Tools help lenders weather pandemic's credit upheaval

While the coronavirus pandemic is shifting consumer credit metrics and disrupting marketplace trends, credit and automotive finance experts say lenders are adapting to the changing environment.

Lenders have more tools at their disposal for guidance and clarity than they did during the 2008 financial crisis, such as employment verification instruments and alternative credit data. Also, longstanding processes and human intervention in dealerships and on the side of the lender can help auto sales without adding undue risk to their portfolios.

Several major auto lenders have listed quicker decisioning and automation among key priorities. When evaluating customers heavily impacted by the pandemic, however, those tools may not be as effective as a traditional loan officer.

"For some lenders, that meant tweaks to the pricing structures or tweaks to the strategy itself, but not, like, a full-blown brand-new strategy," said Vladimir Kovacevic, co-founder and managing partner of Inovatec, a leading software provider to U.S. and Canadian financial institutions.

Raising minimum FICO score requirements is another common lever for lenders, as is asking for larger down payments, said Joanne Gaskin, vice president of scores and analytics at credit-scoring agency Fair Isaac Corp.

Credit bureaus also have several tools lenders can leverage on trickier deals. The highest unemployment rate since the Great Depression is prompting lenders to pay close attention to proof of employment on potential automotive deals.

Equifax maintains a database of income verifications for dealers and lenders called The Work Number that provides up-to-date employment information about would-be vehicle buyers.

Experian launched two tools on income and employment verification in 2019 that examine an applicant's deposit transaction data and pay-statement information. The company says the tools are in high demand in automotive, personal and mortgage lending.

What is becoming clear is the longer the pandemic lasts, the more permanent the changes to origination practices will be. And, it likely will take years to understand the credit risks associated with the crisis and its impact on consumer credit scores.

"The credit score is an element of a strategy. And the strategy as a whole determines that outcome," Kovacevic said. "There's easy ways to act very quickly and action these things to the way that it makes sense for a risk officer."