Prediction: Day Coming When Half Of Loan Apps Have Credit Problems
One person is predicting that the day is coming when approximately half of all members seeking to finance an auto loan will be turned down due to credit problems.
Robert Sutton, chairman and CEO of Centrix Financial, LLC, said that approximately 40% of consumers already have "some kind of impaired credit," adding that the "non-standard member is becoming the standard."
Five years ago Sutton conceived of and launched Centrix Financial, an indirect auto landing program targeting subprime borrowers typically rejected by credit unions. Since 1998 it has signed nearly 200 credit unions-along with other lenders-to its program, and has made 70,000 loans representing nearly $1 billion. Sutton not only expects the market to continue, he expects it will grow.
The appeal to credit unions is three-fold, according to Sutton: 1) Safety and security-Centrix securitizes the loans; 2) yield, and 3) it fits with the CU mission of service to the underserved.
With the latter, critics argue that the lending rates associated with the program are too high; the company responds by saying borrowers would have to turn to even higher rates if not for the program.
The company specializes in loans to consumers whose FICO falls below the 600 score (B+) threshold under which most credit unions begin denying approval. The reason: fear of bad loans gone worse.
But Sutton said his company's experience has found a default ratio of below 5% and a loss ratio of approximately .75%, "which competes directly with the A paper."
The yield that paper delivers may be the biggest selling point. Sutton said that in the case of a federal credit union, for example, where the APR is capped at 17.9%, he said it delivers a spread to the credit union of four points, and after paying for insurance and other costs, it is able to give the credit union a loan yielding 8%-9%.
That size yield in an environment of low single-digit auto loan rates and business lost to other types of lenders is often met with skepticism, acknowledged Sutton. "We hear it's too good to be true, but we heard that five years ago," he said. "But our track record is as good as it sounds."
He said that before it takes on a credit union client it insists the CEO visit Centrix' offices in Denver, see the operation and speak with other credit unions.
"This is not a passing situation," Sutton said. "There has been a major economic event with the Internet (stock) bust. People who had income A still have the bills of A, but now their income is C. Our goal is to become part of the credit union fabric."