At this time of the year, BHPH dealers are very busy selling vehicles to customers during the tax refund season. However, they often face the dilemma of selling vehicles to customers who have large down payments (from the tax refunds), but with limited or no credit information / history. When the dealer runs a traditional credit bureau check, and gets a “thin file” or “no file” response, then they must decide whether to make the sale to that customer despite having a “big gap” in underwriting information.

Often, underwriters gather customer stipulation information but are subsequently unable to independently verify it. For instance, this occurs when the customer is self-employed and has very limited independent financial information. In these circumstances, BHPH operators often rely on the down payment to mitigate the gap in customer credit information and sell the vehicle anyway. Based upon several studies of losses using Subprime Analytics (www.subanalytics.com), historical losses in these situations are frequently double those of the industry averages. These results are unacceptable and underscore the conclusion that “down payment doesn’t assure repayment”.

During the last two years, I have researched the use of alternative credit information which is typically used in the “payday loan” industry. Daily, payday lenders must assess their ability to convert a post-dated check without collateral or a down payment. When traditional credit bureau information is unavailable, payday lenders have to gather credit information from alternative sources.

In my research, I was surprised to discover that when no credit information is available from the three traditional credit bureaus, alternative credit data often contains the following information:

1) A comprehensive evaluation of the applicant’s borrowing history.

2) ID verification with unique fraud detectors.

3) A tradeline detailing the consumer’s payday loan transaction patterns, bill-paying history including prior installment loans, credit cards, prepaid debit cards, rent-to-own, etc.

4) Employment verification information.

5) Other valuable decision-making information.

One of my dealer consulting clients recently used a sample of past BHPH sales transactions to identify the additional customer information which was available inside alternative credit data. Using the benefit of hindsight, this client found that the alternative credit data contained information that would have been invaluable in making a better and more informed credit decision at time of origination. Further, such information probably would have helped avoid several subsequent repossessions.

At the 2012 NABD BHPH Dealer Academy in Las Vegas on May 14-16 the president of a national, alternative credit bureau data provider will explain how BHPH operators can use this information, cost effectively, in their own underwriting and bridge the information gap.

Why is this important? There are an estimated 45 million Americans with limited or no traditional credit file information, which represent excellent potential BHPH customers!

Therefore, whether a BHPH dealer is trying to expand their customer base or just make better, more informed underwriting decisions, they should use alternative credit data when traditional bureau data does not exist. Once dealers understand what’s available it’s a “no-brainer”. Check it out! If you don’t know what you don’t know, it is difficult to understand what you are missing and how it may help you. Good luck!