Auto News Article on Soft Credit Pulls

I was quoted in this article in the latest Automotive News but I did want to clear up a few of the items that appear to be somewhat left to question. First of all, Prescreens are certainly permissible in the Service Drive for determining whether or not someone is credit worthy to purchase a vehicle in spite of what my friend Jim Maxfield thinks. Credit Miner supplies this information to most of the equity companies performing in this space. Our partner John Giamalvo at Equifax backs us up on this in the article and the other two bureaus have the same consensus as do our compliance attorney’s, Hudson & Cook. This is not a new practice and is very common in the credit card industry i.e. Capital One etc.

Also, our research shows very few dealerships have a Prequalification process on their website that does not ask for a Social Security Number. They all have applications that do ask for the SSN thus only generating a few leads from those folks that have poor credit and are so desperate that they will give out their SSN online. This is a risky process that our industry needs to take a hard look at eliminating. 

Good article that dealers should seriously research.

Do you know the rules on credit pulls?

How dealerships can stay compliant and speed customer vehicle purchases

March 13, 2017 @ 12:01 am

Hannah Lutz

Photo credit: AUTOMOTIVE NEWS ILLUSTRATION

As much of the car-buying process -- including F&I -- moves online, soft credit pulls can help determine an appropriate monthly payment, but compliance and flexibility are key, experts say.

Dealerships typically use one of two types of soft pulls: a prescreen or a prequalification. Neither affects the customer's credit score. A prequalification is consumer-initiated, while a prescreen is initiated by a third party, such as the dealership or credit bureau.

When dealerships prescreen a customer, they are legally required to send the customer a firm offer of credit. Dealerships are typically sensitive to the potential legal issues around soft pulls, said John Giamalvo, vice president of dealer services at Equifax.

Equifax tells its dealership clients to be sure the firm offer of credit is appropriate for the customer and vehicle of interest. For example, if the offer says the customer has been approved for up to $2,000 on a Mercedes-Benz, the offer likely is inappropriate because it wouldn't make a dent in the payment.

Dealer Voodoo founder Jim Maxfield's concern lies with prescreens in the service drive. Because service customers are not visiting the dealership to buy a vehicle, he questions whether dealerships have the right to pull those customers' credit files. 

"The law has a carve-out for permissible use," he said. "You can argue that there's a permissible use for a soft pull on a test drive on a $40,000 car." 

"The question becomes if you come in for an oil change, [does the dealer] have the right to run that under a permissible use clause?" 

His solution, via Dealer Voodoo's Conquest Equity product, is to examine public record data points to determine creditworthiness. Conquest Equity models individual customers for creditworthiness and household cash flow based on 7,000 publicly obtained data points and removes the need for a soft pull, Maxfield said. 

Ken Luna, vice president of corporate affairs at CreditMiner, guessed that a number of dealers are likely violating the Fair Credit Reporting Act every day by neglecting to mail customers firm offers of credit. 

"Dealerships are just now getting to where they know what a soft pull is," he said. The prescreen vs. prequalification distinction throws them off even more, he added. 

Equifax's Giamalvo said that even if some dealers are in the dark now, they are striving to learn. "I can't begin to tell you how many calls I've been on with dealers who have their legal counsel on the phone with them. They really want to understand it on a deep level," he said. 

Giamalvo also sees no legal concern regarding prescreens in the service lane. "If you can help make a customer make a decision based on their creditworthiness while they're sitting in the service lane, I think it's a net win." 

John Palmer, CEO of ProMax Unlimited, said his company has done more than 3 million prescreens in the seven years it has offered them and has "not had a single compliance or customer complaint." 

The dealership can print the firm offer of credit from the ProMax system. But if ProMax sees that it hasn't been printed within 48 hours, ProMax prints the document and mails it to the customer.

Enabling online credit checks through the dealership's website is essential for beginning-to-end online car-buying, but dealerships should be flexible with their use of the checks, experts say. That's because there is not yet a one-size-fits-all solution.

Most dealership websites have some sort of prescreen or prequalification functionality, said Giamalvo. "Some are using it to shop by payment; some are using it to qualify for a specific APR. They are all used for different purposes" but with an end goal of determining what a customer could qualify for.

In any case, dealerships should not ask for a Social Security number, Luna warned. Doing so will likely eliminate 75 percent of the dealership's prospects, he said. Online credit checks could give customers an exact payment offer, said Luna, but there are variables.

"Obviously the biggest thing would be the trade-in, but if you don't have a trade-in and you have a full file return, a system could be built to get to the penny," he said. "I don't know of anyone who has got it built where it's dead-on accurate from a payment standpoint."

The credit score is significant in determining the interest rate, which is a necessary component to calculating a monthly payment. But, ProMax's Palmer said, having the exact credit score "would be a whole lot more accurate than assuming everybody has excellent credit."

Some companies ask customers to rank their credit as poor, fair, good or excellent, which can lead to errors without an actual score. A monthly payment calculated online could be accurate "as long as the customer had the income to justify that payment and as long as the customer wasn't $10,000 upside down," Palmer said.

Human element

The human element to F&I is still important, he added. "The vast majority of people are not the people that make $250,000 a year and have excellent credit."

Because F&I managers have relationships with their lenders, they may be able to share the story behind a customer's low credit score, Palmer said. That might be the difference in getting the customer better loan terms.

Still, handling more of the process ahead of visiting the dealership helps, said Pete MacInnis, CEO of eLend Solutions.

When the customer walks into the store after filling out at least some of the forms online, "dealers now know as much about the consumer as the consumer knows about what they want to buy," said MacInnis. "It speeds up the process and levels the playing field. [F&I managers can] negotiate a deal with that consumer based on what they really qualify for."

In an eLend case study of Huntington Beach Chrysler-Dodge-Jeep-Ram in Huntington Beach, Calif., more than half of customers chose to prequalify before the test drive. Those customers were 43 percent more likely to buy than customers without prequalification during the test drive, MacInnis said.

Most of them were very creditworthy; the average credit score was 702, he said.

"The credit-qualified people bought into that [prequalification] would improve transparency and speed the process."

You can reach Hannah Lutz at [email protected]

Tags: Dealers Credit Retail Finance & Insurance Credit Rating