Alternative Data and Buy-Here, Pay-Here
by Scott Brackin
Transportation is a key factor in upward mobility in the U.S. In many parts of the country, it is nearly impossible to work without a vehicle. However, in order to buy a vehicle, one must have credit.
For the owner and operator of a buy-here, pay-here store (BHPH), the operator is in the unique position of not only building a financial bridge upward, but to shape the way the industry and regulators view this segment. The buy-here, pay-here operator is not only the dealer, but the finance company as well. Being in this position comes with additional responsibilities and a vast array of challenges. Recently, the FTC penalized a Texas BHPH operation regarding credit reporting. The FTC’s complaint alleges that Tricolor Auto Acceptance (TAA), violated the Furnisher Rule, which was implemented under the Fair Credit Reporting Act. The rule requires companies that report information about consumers to consumer reporting agencies (CRAs) to maintain policies and procedures designed to ensure that the information they report to CRAs is accurate and to allow consumers to dispute information they believe is inaccurate directly with the company that furnished the information.
BHPH, Credit and Regulators
Unlike the large automotive finance companies, the lack of sophistication in the deployment of “traditional” credit information can lead an operator who is more focused on selling cars and less on being a finance company right into the courtroom versus “working” the showroom. Now add in the notion of the “credit invisible,” and an operator can easily be derailed into a sea of compliance issues that can drown the typical operator. The reality is the BHPH operator has the greatest opportunity to service those deemed “invisible.” There are 26 million Americans (11 percent of U.S. adults) who are “credit invisible,” or who do not have a credit file with any of the traditional credit reporting agencies (CRAs) – Equifax, Experian and Trans Union. Additionally, 8 percent of U.S. consumers have “unscored credit records, which means they have insufficient credit history to generate a credit score. CRAs use tradeline data to score consumers. This data includes information about the account, the type of account and payment information. It is essential for accurately evaluating and predicting a consumer’s future behavior, but it does not capture a holistic view of a consumer’s overall financial standing. And although traditional CRAs use alternative data for scoring, this data only includes public records information, such as court records from bankruptcies and liens or judgments.
The majority of underbanked consumers, the “credit invisible,” are not adequately scored through traditional CRAs. The missing link for traditional CRAs is that they don’t have pertinent information from alternative lenders, which many underbanked consumers use for access to loans because they don’t have a mortgage or credit card. Many of these alternative lenders report data only to alternative CRAs. Without data from alternative CRAs, a BHPH operator will miss out on the opportunity to better serve a consumer that already does business with them!
A BHPH dealer who integrates credit tradeline data from alternative lenders can offer consumers more flexibly-priced loans, while at the same time mitigate losses. Alternative credit tradeline data helps dealers capture the highest-risk consumers in lower score bands, while promoting the lowest-risk consumers into higher score bands. This allows BHPH operators who work with consumers who would have identical profiles within the CRAs to be assessed for risk more accurately and access to a more suitable automobile.
Necessity is the Mother of Invention for a BHPH Operator
Many of the consumers a BHPH operator serves today have the potential to become a more loyal repeat customer for the operator. The operator who learns to incorporate a better view of who that consumer is will gain an advantage in developing a better relationship, more effectively negotiate with “would-be” buyers of their paper and increase its production of a compliant lending environment necessitated by the regulators.
Alternative credit data, provided by companies like FactorTrust, not only provides BHPH operators with a more holistic view of borrowers, but it is also an essential factor in ensuring consumers who are below or at the prime level gain upward mobility, improving their credit and overall economic status.
Scott Brackin is the automotive practice segment leader for FactorTrust. Scott has more than 24 years of experience in financial services, credit risk data, and technology. Since joining FactorTrust in 2013, he’s overseen the company’s rapid growth in the automotive segment as part of his vision to become the premier alternative credit reporting agency (CRA) and analytics business for the automotive finance industry.