Alternative Data and Buy-Here, Pay-Here

by Scott Brackin

Transportation is a key factor in upward mobility in the U.S. In

many parts of the country, it is nearly impossible to work

without a vehicle. However, in order to buy a vehicle, one

must have credit.

For the owner and operator of a buy-here, pay-here store

(BHPH), the operator is in the unique position of not only

building a financial bridge upward, but to shape the way the

industry and regulators view this segment. The buy-here, pay-

here operator is not only the dealer, but the finance company

as well. Being in this position comes with additional

responsibilities and a vast array of challenges. Recently, the

FTC penalized a Texas BHPH operation regarding credit

reporting. The FTC's complaint alleges that Tricolor Auto

Acceptance (TAA), violated the Furnisher Rule, which was

implemented under the Fair Credit Reporting Act. The rule

requires companies that report information about consumers

to consumer reporting agencies (CRAs) to maintain policies and procedures designed to ensure

that the information they report to CRAs is accurate and to allow consumers to dispute

information they believe is inaccurate directly with the company that furnished the information.

BHPH, Credit and Regulators

Unlike the large automotive finance companies, the lack of

sophistication in the deployment of "traditional" credit

information can lead an operator who is more focused on

selling cars and less on being a finance company right into the

courtroom versus "working" the showroom. Now add in the

notion of the "credit invisible," and an operator can easily be

derailed into a sea of compliance issues that can drown the

typical operator. The reality is the BHPH operator has the

greatest opportunity to service those deemed "invisible."

There are 26 million Americans (11 percent of U.S. adults)

who are "credit invisible," or who do not have a credit file

with any of the traditional credit reporting agencies (CRAs) -

Equifax, Experian and Trans Union. Additionally, 8 percent of

U.S. consumers have "unscored credit records, which means

they have insufficient credit history to generate a credit

score. CRAs use tradeline data to score consumers. This data

includes information about the account, the type of account and payment information. It is

essential for accurately evaluating and predicting a consumer's future behavior, but it does not

capture a holistic view of a consumer's overall financial standing. And although traditional CRAs

use alternative data for scoring, this data only includes public records information, such as court

records from bankruptcies and liens or judgments.

The majority of underbanked consumers, the "credit

invisible," are not adequately scored through traditional

CRAs. The missing link for traditional CRAs is that they don't

have pertinent information from alternative lenders, which

many underbanked consumers use for access to loans

because they don't have a mortgage or credit card. Many of

these alternative lenders report data only to alternative CRAs.

Without data from alternative CRAs, a BHPH operator will

miss out on the opportunity to better serve a consumer that

already does business with them!

A BHPH dealer who integrates credit tradeline data from

alternative lenders can offer consumers more flexibly-priced

loans, while at the same time mitigate losses. Alternative

credit tradeline data helps dealers capture the highest-risk

consumers in lower score bands, while promoting the lowest-

risk consumers into higher score bands. This allows BHPH

operators who work with consumers who would have identical profiles within the CRAs to be

assessed for risk more accurately and access to a more suitable automobile.

Necessity is the Mother of Invention for a BHPH Operator

Many of the consumers a BHPH operator serves today have the potential to become a more loyal

repeat customer for the operator. The operator who learns to incorporate a better view of who

that consumer is will gain an advantage in developing a better relationship, more effectively

negotiate with "would-be" buyers of their paper and increase its production of a compliant

lending environment necessitated by the regulators.

Alternative credit data, provided by companies like FactorTrust, not only provides BHPH

operators with a more holistic view of borrowers, but it is also an essential factor in ensuring

consumers who are below or at the prime level gain upward mobility, improving their credit and

overall economic status.

Scott Brackin is the automotive practice segment leader for FactorTrust. Scott

has more than 24 years of experience in financial services, credit risk data, and

technology. Since joining FactorTrust in 2013, he's overseen the company's

rapid growth in the automotive segment as part of his vision to become the

premier alternative credit reporting agency (CRA) and analytics business for the

automotive finance industry.