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)