My first real job out of college was with a consumer finance company where I backed financing plans for furniture stores, carpet dealers, and other retailers that required “X Days Same as Cash” financing. In addition to collection work, I approved or declined the credit applications that came through. It was not uncommon for me to make decisions on 20 to 30 applications every day. It was by far the best loan training I could have had at that stage of my career. We looked at such things debt to income ratios, amount the customer was putting down, payment history, and depth of credit. The one glaring omission from our underwriting process…Credit Score!
I remember the scene in the Tom Cruise movie “Top Gun” where the instructor laments the fact that fighter pilots had become too reliant on missiles and, as a result, they had lost their dog-fighting skills. The same is true with Credit Scoring. Loan underwriters have become completely reliant on flawed credit scoring models and they have lost their ability to make common-sense decisions based on good, old-fashioned credit skills. Indeed, Credit Scoring is the most misused, overrated element of loan underwriting.
Most Private Lenders don’t have my nearly 30 years of credit underwriting background. They lack the experience and formal training to spot the pitfalls in a loan application. Unfortunately, so have most loan underwriters. Using credit score as your sole, or even primary, criteria for approving or denying a credit application is a terrible mistake that will cost you in the long run. Spotting credit gaps, understanding how to truly read between the lines of a credit history, and getting a clear picture of who your borrower is and what ability they have to repay the loan are the skills you’ll need to develop if you truly want to create an optimized loan portfolio.