Powersports financing is historically more challenging than traditional vehicle loans. One of the reasons why financing is more difficult to obtain is the challenge in repossessing watercraft, ATV’s, snowmobiles, and motorcycles. As a result, powersports financing requires tighter credit criteria and more conservative debt-to-income ratios than traditional vehicle requirements.
Powersports lending generally has higher interest rates due to the increased risk for the lender. Watercraft, for example, depreciate significantly faster than automobiles, making repossessing in the event of default a challenge. They can become too expensive to maintain and repair. Other types of powersport purchases such jet skis and ATV’s are ridden hard on purpose, resulting in steep depreciation curves as well.
Let’s focus on three interrelated risk areas to meet the rigorous requirements of diverse powersports lenders with the objective of strengthening customer and dealer relationships, mitigating risk, and streamlining day-to-day operations.
- Robust Documentation
- Dynamic Credit Scoring, Debt to Income Calculations, and Auto-Decisioning
- Augmented Fraud Platform Capabilities
1. Robust Documentation – It is fair to assume that powersports lending will inevitably be subject to regulatory and disclosure requirements similar to the auto industry. The good news is that lenders and dealers have a window to acclimate themselves with any impending regulation, but proactively they should contemplate software solutions that assure documentation compliance. Origination software in combination with effective processes should assist in storing copies of key documentation unique to each type of powersport transaction including disclosures, titles, and contracts. Where applicable, all documents should be in compliance with the Electronic Fund Transfer Act including payment pre-authorization, disclosure documents, transaction history, application denials, adverse action notices, procedures of less favorable terms, and loans subject to risk-based pricing regulations. Additional software capabilities should include generating appropriate notices to customers and single electronic fund transfer transactions in compliance with EFTA Regulation E.
2. Dynamic Credit Scoring, Debt to Income Calculations (DIC), and Auto-Decisioning – As mentioned previously, the riskier nature of these purchases requires additional checks and balances with regards to credit risk and asset valuations. Since many powersports purchases exhibit a steeper depreciation curve, a state of the art platform should replace any cumbersome manual processes requesting and analyzing credit bureaus and debt to income calculations. Platform capabilities should include automatic parsing of credit reports and inclusion of the DIC valuations into an automated decision-making tool. The platform should support any manual re-scoring and refreshed debt to income estimates. Ideally, the platform would provide a highly configurable model that can be established for each powersport product offering and a scoring engine built into the application utilizing attributes from the loan application, credit bureau report, and debt to income calculation.
3. Fraud – This aspect of lending poses one of the biggest challenges faced by lenders of all sizes. It is imperative that the following analytical capabilities be considered in order to reduce institutional risk:
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- “Velocity check” which compares recent activity with the customer’s own past behavior to identify outlying transactions.
- “Linkage analysis” which identifies other behaviors associated with known types of fraud such as social networking, phishing, etc. – and develops strategies to counter these practices.
- “Fraud scoring tools and detailed statistical analytics” which provide quantitative insight into possible fraud activity.
- “Business rules development” applies rules for basic business activities to spot unusual trends, as well as specialized rules for specific motorsports transactions.