Auto Enhanced Scores

We used to hear often from members that the reason they got their car loan from a big bank was the competitor’s rate was lower than ours. We used to discount this information, as we knew our rates were lower. We did our surveys.

However, what was happening in many cases was that our competitors were pulling auto enhanced credit scores that would take our members up a couple of credit grade tiers. When we pulled a traditional credit score, we would get a lower credit rating for the same borrower. So we were not competing on a level field.

More specifically, here’s how it would go. Our member would go into the auto dealership. The dealer rep would send the loan application to our credit union and other lenders. We would pull a credit file using the traditional model—let’s say the credit score was 680. With a 680 score, we would classify this as B credit and assign an interest rate of 5 percent.

Our competitors (all big banks) would pull an auto enhanced credit score. Since most members pay auto loans on time, the enhanced score was in the 700s. With a 700-plus score, the big banks were able to offer interest rates in the 3.5 percent range. Why wouldn’t the member want to pay 1.5 percent less? We lost this business due to not using the same model the big banks were using. If we had used the same auto enhanced score, we would have given our members a better rate, too.

We had the same problem for direct auto loans. We would use our traditional model to give members “pre-approved” loans or to try to recapture a loan. The traditional score would be lower than the score a member could get from another lender while at the dealer, so our rate wouldn’t be competitive. Or, if we attempted to recapture a loan, we would have to make an exception to make the loan, as our credit grade was lower than our competitors.

We resolved these issues by switching to an auto enhanced credit score. Here is more detail about how they work.

Every credit bureau uses several different credit scoring models. Most credit unions use a traditional model, something like Equifax 6.0). This model works well for most loan requests. As I have described, a challenge comes when credit unions use a classic credit bureau report to evaluate a borrower’s creditworthiness for a car loan. When we do so, we often are comparing apples to oranges and we inadvertently lose our member’s business to the competition.

Each credit bureau also has an enhanced credit score model for vehicle loans. The concept is that the credit bureau scores the credit file and then adds or deducts points based on how the member pays current and/or past vehicle loans. I’ve already mentioned that most people pay their auto loans on time, so a large majority of the auto loans reviewed for an enhanced auto scare have a better overall credit score than the traditional model would generate. In a few cases, when the member does pay the vehicle loan slowly, the enhanced score is lower than the traditional model.

There is no difference in cost for the traditional vs. enhanced auto scoring. If you are working with an outside company to do indirect car loans, get with your credit bureau and your indirect company representatives and have them switch to an auto enhanced score.

On the backend, you need to find out if your loan origination system can handle auto enhanced scores for vehicle applications and traditional for all others. We just switched our loan origination system so that this function is now enabled for us. Most loan origination systems can handle this change.

The difference in missed opportunities can be impactful to the bottom line as well as our ability to deepen our relationship with our members. If we lose just five loans a month at $20,000 because of using the traditional credit score model (this is an extremely low estimate in my experience), that is $100,000/month x 12 months, or $1.2 million lost loans. At an estimated blended rate of 4 percent on each loan, that is lost gross revenue of $48,000 just for the first year.

The change-over to an auto enhanced credit score model is not a cure-all but it will allow your credit union to maintain a competitive balance.

CUES member Michael Silvers is SVP/business development for $706 million University of Virginia Community Credit Union, Charlottesville, Va.