Unemployment reached historic highs in the first months of the coronavirus pandemic and remained in double digits for most of the summer, prompting auto lenders to ramp up scrutiny on employment and income verification before approving loans.
Misrepresented employment or income information on credit applications could lead lenders to unwittingly approve auto loans. The misinformation also could cause lenders to extend more favorable loan-to-value terms than fit the risk that loan presents to their portfolios. With such high levels of unemployment, more consumers could be looking to fudge the details of their situation to be approved.
Many people were put on furlough at the onset of the pandemic in states on the hard-hit East Coast. According to Ruben Arcila, general sales manager at DCH Kay Honda in Eatontown, N.J., lenders responded swiftly, tightening lending requirements and requesting more documents to validate employment.
“You could be a 700 FICO and they were asking for your most recent pay stub,” he said. “A lot of people were trying to purchase cars, but they were still on furlough.”
Ally Financial CFO Jenn LaClair told Automotive News in July that unemployment among customers is the bank’s leading fraud concern. “We’ve shifted to more manual underwriting because we’re doing much more extensive employment verification,” she said. “We haven’t seen any huge spikes in [fraud]. But we take a lot of measures through dealer audits to make sure that we’re managing fraud. The real risk here is around credit, and that’s related to unemployment.”
Income misrepresentation was among the most common type of fraud discovered at Local Finance Co., a small Florida lender that works with nonprime franchised dealership customers and those who don’t have histories with the credit bureaus.
Credit unions also are tightening standards on lending criteria. Credit union portfolios typically favor used vehicles, said Bob Child, COO at CU Direct, with an average spread of 75 percent used-vehicle loans and 25 percent new.
“The majority of our credit unions, when it comes to validating that you’re employed, they’re taking that a lot more seriously, much more than they did before,” he said.
Automaker incentives targeted at job losses also are growing in popularity, he said.
Hyundai relaunched its Assurance job-loss protection program this spring for new vehicles, offering to make up to six months of payments for customers who bought or leased when the crisis started. Ford Motor Co. deployed Ford Promise, which allows buyers of a new, used or certified pre-owned vehicle financed through the automaker’s lending arm to return it if they lose their job within a year.
“We have about a dozen credit unions right now that are using that exact same job-loss protection product,” Child said.
“A couple of our credit unions are giving it for free if you finance with them. You just have to be employed for the two months prior to purchasing the car.”