New FICO Score to be More UnderstandingDec 26, 2007 Consumers caught in the subprime mortgage crisis may find some relief with Fair Isaac’s new FICO 08. Aside from providing a more accurate risk assessment of consumer credit, the new formula also aims to reward customers for keep other credit accounts up to date.
“The main thing we tried to do with the score was to make sure it was in tune with current consumer behaviors,” said Fair Isaac’s Craig Watts. “We changed the formula to improve the predictiveness.”
The new formula takes into account consumer credit behaviors in all credit areas rather than focusing on accounts that have gone delinquent. Now, consumers who’ve fallen behind on one account could be rewarded for remaining in good standing with other credit accounts.
“If a person has a repossession or foreclosure on their credit score today, that casts a shadow over everything else. They are scored along with other people with serious delinquencies,” explained Watts. “But this new formula looks at not just serious delinquencies, but also at whether consumers have other accounts with positive credit histories. The consumer’s score is not penalized as much for serious delinquencies that are uncommon to his or her credit behavior.”
Although a consumer’s credit standing will vary from lender to lender, the new formula may present more opportunities for F&I managers to get consumer loans bought.
“Our expectation is that lenders will reduce the amounts of defaults on loans by 5 to 15 percent in certain demographic groups. It really helps with consumers who already have serious credit problems, those who are new to credit and those who are seeking credit.”
Thursday, December 27, 2007
Wednesday, December 26, 2007
The Tax Man Cometh…Only He Might Be A Little Late This Year
Late changes to the alternative minimum tax (AMT) provision of the IRS Rules could leave refunds delayed or worse. The AMT was originally intended for the wealthy few when it was created nearly 40 years ago. But because Congress never indexed for inflation the amount of income exempt from AMT and because it disallows a lot of popular tax breaks, tens of millions of middle-class taxpayers could get hit.
Early filers may be forced to submit amended returns in order to comply with any changes. The IRS needs at least seven weeks to analyze any changes in the tax laws, write the necessary software codes and test it. In addition, the IRS needs time to notify all tax professional and others affected. As such, IRS deputy commissioner Richard Spires has warned of a significant backlog in processing returns, as well as the ensuing confusion for taxpayers.
“There are a lot of people that file early and a lot of people that rely on getting those refund checks in that early February time frame,” Mr. Spires said in an interview. “If we’re not able to process those returns for them, we believe it will have a significant impact on them.”
New 1040 and 1040A tax booklets and instructions have already been printed. But 12 related tax forms, including one for the AMT and others for a variety of tax credits, must be revised and put through a new printing cycle if Congress approves new legislation. The credits include those for education expenses and for child and dependent care expenses.
What does this mean for auto dealers? Typically, taxpayers who expect refunds tend to file earlier than others. For tax year 2006, 103 million filers out of 135 million got refunds averaging $2,259 Consumers who traditionally rely on their tax return money for down payments may be forced to wait for their returns longer than usual. The rush of customers who file early to receive quick refunds may be delayed until the IRS sorts this all out.
Early filers may be forced to submit amended returns in order to comply with any changes. The IRS needs at least seven weeks to analyze any changes in the tax laws, write the necessary software codes and test it. In addition, the IRS needs time to notify all tax professional and others affected. As such, IRS deputy commissioner Richard Spires has warned of a significant backlog in processing returns, as well as the ensuing confusion for taxpayers.
“There are a lot of people that file early and a lot of people that rely on getting those refund checks in that early February time frame,” Mr. Spires said in an interview. “If we’re not able to process those returns for them, we believe it will have a significant impact on them.”
New 1040 and 1040A tax booklets and instructions have already been printed. But 12 related tax forms, including one for the AMT and others for a variety of tax credits, must be revised and put through a new printing cycle if Congress approves new legislation. The credits include those for education expenses and for child and dependent care expenses.
What does this mean for auto dealers? Typically, taxpayers who expect refunds tend to file earlier than others. For tax year 2006, 103 million filers out of 135 million got refunds averaging $2,259 Consumers who traditionally rely on their tax return money for down payments may be forced to wait for their returns longer than usual. The rush of customers who file early to receive quick refunds may be delayed until the IRS sorts this all out.
Friday, December 21, 2007
Appropriate Subprime Inventory
A far too common objection heard when discussing Special Finance is, “We just don’t have any Subprime inventory!” or “All our used cars are out of the book!” By far the most difficult part of special finance can be to get the “right vehicles”. The list seems to change daily.
Obviously, any vehicle that can be obtained “behind book” is the right vehicle. Current year program cars, which can be sold from like invoice, are good units to have. Typically, the best vehicles are trade-ins, since these are the units you tend to own best. Keep in mind that SFI vehicles don’t have to be movie stars. If they run good, this can overcome some objections to minor imperfections (a dent or a ding) and if done correctly, Special Finance is about selling the loan, not selling the vehicle, Sell the concept of rebuilding credit. Qualify for a loan and then get a car!
The ideal vehicle is 3-4 years old, with less than 50,000 miles. Look for family type vehicles, i.e. 4 door sedans, SUV’s and minivans. Base pickups are good units as well. Stay away from the high lines and sports cars. These have limited appeal and tend to be tough to insure. Remember that the cost of insurance can make or break a deal – and the down payment for full coverage may have to come out of the gross. Don’t necessarily overlook the need to have some older, higher mileage units on the lot. These units don’t need the full reconditioning but need to be safe and functional. They are perfect for those deeper lenders as well as customers who simply need basic transportation. Create a “Credit Corral” to supplement standard Sub prime inventory. These are units that might typically be wholesaled but, with a minimal shop investment, can be made saleable and turn what might be a wholesale loss into retail profit. This can result in a few extra units sold each month.
Be flexible. Having a wide spectrum of used cars is a safe bet. The worst scenario is to have an approval without a vehicle to show. Make sure there is an adequate amount of used car inventory on the lot. As a general of thumb is a sales-to-inventory ratio of 2:1. For example having 60 vehicles available for sale is typically what is needed to sell 30 subprime units. Keep a good mix of vehicles on the lot to have the ability to land the right cars on customers.
Make sure the Used Car Manager knows what’s hot and what’s not with lenders. Certain vehicles may be restricted (limited advance) or ineligible (unable to finance) with a particular lender. Keep the used car manager up to date on model year change-over as well (when the lender considers current year models to be 1 year old and so on down the line.) The Used Car Manager is the inventory lifeline. Take a short deal on a 60+ day old unit every now and then, especially on a short deal, to help level out the used car inventory.
Check the lot everyday for new arrivals. Used Car Managers should lets the Special Finance department know what was bought or traded for in the last few days. Book out every retail unit to determine which ones have the best loan to value. (Loan to value or LTV is the cost of the unit versus the book value.) A unit with a strong book has a loan value significantly higher than its cost, which generates higher profit or allows the absorption of negative equity or high discount fees. Remember that, while most lenders use NADA trade for their book values, some lenders use Kelly Blue Book for their valuations.. Be careful not to “power book” a vehicle (add options that are not on the vehicle). Lenders may verify the equipment with the customer during their interview, and will seek to chargeback any over-booking they find.
Many dealerships have software to book out your inventory. Dealer Track and Route One both have modules available for this purpose. Keep a binder on your desk, with a sheet for each vehicle on the lot that is “retail ready”; these sheets can be used as part of the funding packages. Update this book daily, removing sold or wholesaled units and adding in fresh trade-ins or purchased units. There’s nothing worse than structuring a deal on a unit that is no longer on the lot. In addition, by having the inventory booked out in advance, it is easy to find which units have the greatest markup potential which helps overcome major negative equity for a customer as well as turn substantial profits.
Don’t be afraid of new vehicles in a franchised dealership. Vehicles with substantial dealer cash (not consumer rebates, but money paid by the manufacturer directly to the dealership if it meets sales objectives on a particular model) may allow a structure on a new car deal which makes it very attractive to a lender. Use any manufacture’s rebate as part of the down payment. Often, with a minimal customer down payment, a deal can be structured at 80% loan-to-value (the amount of the loan versus the invoice of the vehicle), which is that magic number which gets a lender’s attention. Keep up to date on incentives, as they may get better as the month goes on.
Obviously, any vehicle that can be obtained “behind book” is the right vehicle. Current year program cars, which can be sold from like invoice, are good units to have. Typically, the best vehicles are trade-ins, since these are the units you tend to own best. Keep in mind that SFI vehicles don’t have to be movie stars. If they run good, this can overcome some objections to minor imperfections (a dent or a ding) and if done correctly, Special Finance is about selling the loan, not selling the vehicle, Sell the concept of rebuilding credit. Qualify for a loan and then get a car!
The ideal vehicle is 3-4 years old, with less than 50,000 miles. Look for family type vehicles, i.e. 4 door sedans, SUV’s and minivans. Base pickups are good units as well. Stay away from the high lines and sports cars. These have limited appeal and tend to be tough to insure. Remember that the cost of insurance can make or break a deal – and the down payment for full coverage may have to come out of the gross. Don’t necessarily overlook the need to have some older, higher mileage units on the lot. These units don’t need the full reconditioning but need to be safe and functional. They are perfect for those deeper lenders as well as customers who simply need basic transportation. Create a “Credit Corral” to supplement standard Sub prime inventory. These are units that might typically be wholesaled but, with a minimal shop investment, can be made saleable and turn what might be a wholesale loss into retail profit. This can result in a few extra units sold each month.
Be flexible. Having a wide spectrum of used cars is a safe bet. The worst scenario is to have an approval without a vehicle to show. Make sure there is an adequate amount of used car inventory on the lot. As a general of thumb is a sales-to-inventory ratio of 2:1. For example having 60 vehicles available for sale is typically what is needed to sell 30 subprime units. Keep a good mix of vehicles on the lot to have the ability to land the right cars on customers.
Make sure the Used Car Manager knows what’s hot and what’s not with lenders. Certain vehicles may be restricted (limited advance) or ineligible (unable to finance) with a particular lender. Keep the used car manager up to date on model year change-over as well (when the lender considers current year models to be 1 year old and so on down the line.) The Used Car Manager is the inventory lifeline. Take a short deal on a 60+ day old unit every now and then, especially on a short deal, to help level out the used car inventory.
Check the lot everyday for new arrivals. Used Car Managers should lets the Special Finance department know what was bought or traded for in the last few days. Book out every retail unit to determine which ones have the best loan to value. (Loan to value or LTV is the cost of the unit versus the book value.) A unit with a strong book has a loan value significantly higher than its cost, which generates higher profit or allows the absorption of negative equity or high discount fees. Remember that, while most lenders use NADA trade for their book values, some lenders use Kelly Blue Book for their valuations.. Be careful not to “power book” a vehicle (add options that are not on the vehicle). Lenders may verify the equipment with the customer during their interview, and will seek to chargeback any over-booking they find.
Many dealerships have software to book out your inventory. Dealer Track and Route One both have modules available for this purpose. Keep a binder on your desk, with a sheet for each vehicle on the lot that is “retail ready”; these sheets can be used as part of the funding packages. Update this book daily, removing sold or wholesaled units and adding in fresh trade-ins or purchased units. There’s nothing worse than structuring a deal on a unit that is no longer on the lot. In addition, by having the inventory booked out in advance, it is easy to find which units have the greatest markup potential which helps overcome major negative equity for a customer as well as turn substantial profits.
Don’t be afraid of new vehicles in a franchised dealership. Vehicles with substantial dealer cash (not consumer rebates, but money paid by the manufacturer directly to the dealership if it meets sales objectives on a particular model) may allow a structure on a new car deal which makes it very attractive to a lender. Use any manufacture’s rebate as part of the down payment. Often, with a minimal customer down payment, a deal can be structured at 80% loan-to-value (the amount of the loan versus the invoice of the vehicle), which is that magic number which gets a lender’s attention. Keep up to date on incentives, as they may get better as the month goes on.
Monday, December 10, 2007
Mailing Lists and Pre-approved Credit
In the days of direct marketing, businesses prepared a single mail piece, sent it to virtually everyone, then waited for consumers to buy. Today, most companies develop a description of their ideal customers and then tailor unique sales offers to fit those customers’ needs. This approach is called target marketing.
The right mailing list helps a business reach only those consumers who are likely to be most interested in its products and services. Target marketing reduces “junk” mail – advertising mail that does not relate to their interests or needs.
The right mailing list helps a business reach only those consumers who are likely to be most interested in its products and services. Target marketing reduces “junk” mail – advertising mail that does not relate to their interests or needs.
By eliminating consumers who don’t fit a specific description, a company can mail fewer but more effective offers.
How consumers get on a mailing list
There are three main ways a name might get on a mailing list:
Magazines, credit card companies, clubs and organizations, charities, manufacturers, and retailers make lists of their subscribers, customers, members, and donors available to other businesses for a rental fee.
Companies purchase information from various public and private sources to develop consumer databases for specific marketing purposes. These companies are called list compilers. Nearly everyone’s name appears on compiled lists.
Credit reporting agencies (including Experian), under legally specified conditions, provide lists of creditworthy consumers for companies to offer credit. These are called prescreened lists.
Why consumers receive pre-selected credit offers
From a credit grantor’s perspective, prescreening is a cost-effective way to secure new customers who are most likely to use credit wisely and repay their debts on time. It allows a credit grantor to define an “ideal” consumer, decide how much credit to give that potential customer, and then send a pre-selected offer to thousands or even millions of consumers who match this description.
If a consumer receives a pre-selected credit offer, all that has to be done to accept it is sign and provide a few other limited pieces of information. The responding consumer will be given a line of credit provided they still meet the predetermined criteria. However, the federal Fair Credit Reporting Act allows creditors to review credit history when a consumer accepts the offer. If the consumer no longer meets the criteria, the application may be denied.
Protecting consumer rights
The entire process of ordering lists, generating mailing labels and sending offers to consumers is automated by the use of computer tapes and computer processing. Large numbers of names – from a few thousand to many million – are processed at one time.
Marketers don’t review individual records. In fact, they rarely even see consumer names. Third-party companies generally print mailing labels, attach them to the advertising mail and take the mail to the Post OfficeTM.
The prescreening process contains additional consumer protections:
Consumer credit information is summarized and coded for confidentiality.
Federal guidelines require that consumers who are selected by the prescreening process receive a “firm offer” of credit or insurance.
Federal law requires credit grantors to extend credit in a fair and consistent manner. They cannot consider such factors as your sex, marital status, race or religion.
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