Underwriting is both an art and a science. After all, there’s a certain finesse to putting together a deal since every customer’s financial background varies, but there’s also mathematical aspects of F&I that are more concrete like income verification, credit score, etc.
But that doesn’t mean that lenders need to fumble around in the dark in order to figure out their own best strategy for juggling the duality of art and science. Learning from other lenders about best underwriting practices can help grow a portfolio, prevent complaints, and avoid too much risk.
Here are three best practices for deal structuring:
1. Build a Robust Lending Model
“We run every customer through a [lending] model that we’ve built, which determines basically LTV, down payment, and rate,” Jason Guss, president of Roadrunner Financial, said at Powersports Finance 2017 in October. “… We want to make sure the length and time of the loans [that] are out there are actually appropriate for the customer and there’s also sufficient equity in the deal and that we aren’t taking undue risk.”
Guss added that this helps Roadrunner stay competitive and that while the company faces complaints from dealers like any other lender, it hasn’t been “too problematic” for them, thanks in part to the company’s robust algorithm.
2. Bolster Dealer Training Efforts
American Credit Acceptance has found value in setting up a team at its Spartanburg, S.C., headquarters that manages training and onboarding new dealers, Andrew Hewitt, the lender’s director of motorcycles, said at Powersports Finance 2017 in October.
“Our space — it’s challenging in itself to do a deal, where a dealer might have another stance on how to put it together,” he said, adding that American Credit Acceptance’s dedicated team works to educate dealers on how to submit paperwork properly and more. “It can take some time to get [dealers] to understand [proper deal structuring] if they don’t have any lending background, or they’ve never done emerging-credit-type financing,” he said.
3. Talk to Your Dealers, Including More Face-to-Face Interactions
“Anything we’ve approved for the dealer, we are comfortable taking on our books,” Roadrunner’s Guss said. “We also like to explain to the dealers why a certain customer might have a higher down payment or a lower LTV.”
For American Credit Acceptance, offering face-to-face interactions with its dealers has helped its onboarding process and deal-structuring training, Hewitt said. “My background is in auto where an auto dealer might shotgun [the deal] to 15 different dealers,” he said, “but in the [powersports] space we are in there’s not that many people [where] you can do that, so having that understanding a lot faster takes some time.” By communicating face-to-face with dealers, a lender can not only improve that relationship but better train and help the dealers understand the desired loan structure.