One company here that has developed a lending solution that looks beyond a low credit score said it expects to be funding some 2,000 auto loan per month by year-end.
The program, developed by Allied Solutions in partnership Capital Lending Strategies, LLC, in late 2003 is currently underwriting about 400 loans per month.
The loans help build business normally lost since "Capital Lending usually approves 40% to 60% of a credit union turndowns," explained Dick Hetzel, executive vice president with Allied Solutions.
Jeff McDaniel, CEO of First Financial Credit Union of New Mexico, Albuquerque, said that his credit union has been on the program for about 14 months. "We virtually have had no losses," he said. "Total loans out are $16 million and we had about $4,900 in losses. That's not very much. Plus we have $20,000 in a surplus in an insurance company and that fund is growing now."
McDaniel noted that if a credit union has surplus insurance in one car it can carry that over, he said.
Unlike other lending, the program looks closely at a member's credit history to find reasons behind a low score. "He may have had problems with his medical history, maybe a divorce, a catastrophe in the area," Hetzel said. A higher rate is charged to pay for loan insurance to offset losses in case of default, and for loan servicing.
Gap insurance compensates the credit union for any difference between a repossessed car's auction proceeds and any outstanding loan balance.
"Rates charged can range from 11% to 21% for state-chartered credit unions in a state where there is no usury law and in all other instances from 11% to 17.9%," Hetzel said.
The difference between these rates and the 6% rate a member with a good credit rating would get also helps compensate for additional servicing.
"We are yielding about 7.8% on this portfolio. That doesn't include the servicing, which is 1.3% of balance. We are probably yielding 6.5% and that is without cost of funds," Mc Daniel said.
The program aims to "serve the underserved" and is relatively new, Hetzel said. "It's been tried in the past but not to any large degree," he added.
