BHPH Underwriting, Scoring, And Static Pool Analysis
Establishing underwriting criteria that maximize sales without compromising the collectability of retail installment contracts has been one of the biggest challenges for buy here, pay here dealers for many years. To make matters worse, the BHPH industry is changing complexion at a rapid pace. No longer are dealerships able to be down payment-driven businesses without compromising sales.
As big money continues to pour into this industry, the need for more sophisticated methods of evaluating potential customers and deal structure is becoming a necessity rather than a luxury. BHPH scoring models can be the solution. These models can be designed to maximize sales by focusing more on the prospective customer’s strengths and less on the down payment. BHPH scoring is nothing more than the application of numeric values to standard underwriting criteria. Best case, scoring models should not be designed to eliminate repossessions. They should be built wide in scope so that they offer as many prospective customers as possible an opportunity to prove that they will pay for a vehicle.
BHPH scoring should not be confused with FICO®-, BEACON®-, or EMPIRICA®- scores. Credit bureau scores are produced from models developed to access and measure data related to past payment history, amount of debt, amount of credit used as compared to the dollar amount of credit available, length of time credit is established, the number of times paid late, search for and acquisition of new credit, and types of credit established. These scores usually range from 300 to 850.
Imagine creating your own scoring model and the number 375 as it relates to your company’s ideal BHPH customer. This score considers his type of residence, length of time at residence, number of residence changes, time in the area, type of job, time on the job, number of job changes, monthly income, previous car credit, previous repossessions, length of credit history, and credit bureau score. Now, imagine limiting your sales to only those prospective customers that score 375 or greater during the next 30 days. The repossession rate on those accounts would be low and the accounts that do repossess should do so later in the life of the note rather than earlier because all of the customers would be stronger than your company’s ideal. Conversely, if every deal that you originated during the next 30 days scored below 375, you could expect that the repossession rate on that pool of notes would be greater and the repossessions that do occur would do so earlier in the life of those particular notes.
While scoring models can greatly enhance a dealer’s ability to sell more cars, they can also show a user where to limit the risk if the models also work in conjunction with a static pool analysis feature. During each month, BHPH dealers originate retail installment contracts with varying ranges of risk as shown in the example given in the previous paragraph. When using a properly designed scoring and static pool analysis system dealers are able to identify the degree of those variances and the financial impact of such.