What is the Impact of Repossessions on a Borrower's Credit Score?
A PayNet client operating in the US and Canada asked about the impact of repossessions of a single or several trucks on a large borrower’s credit profile. The situation was presented as follows:
- 5 Lenders reported - Oldest contract from February 2001 with score of 671 (below average)
- Previous payments included 2 x 31-60 days (most recent delinquent as of 4/2013); 2 x 61-90 days (4/2013); 11 x 91+ (4/2013)
- This lender repossessed three trucks in 2014, incurring a
PayNet conducted an analysis on new deals originated from 2003 to 2013Q1, grouped into the two origination types below:
A = deals originated within 24 months of when a borrower was first Repo’ed and originated by a lender other than the lender who reported the first repo
B = deals with borrowers who had no prior repos
PayNet MasterScore® was calculated as of the beginning of the quarter of each origination. Next the bad rate by PayNet MasterScore tier was analyzed for Groups A and B.
Borrowers with Repos have higher default rates (about 2.5 times higher for Class 8 Truck).
These higher default rates are captured by the PayNet MasterScore, as the score is more predictive than the borrower’s repo status with one particular lender.
This occurs because PayNet MasterScore gives much lower scores, on average, to borrowers with repos (648 for all equipment, and 630 for Class 8 Truck) than for those without repos (688 for all equipment and 685 for Class 8 Truck).