|I remember during our early years in Buy Here Pay Here (BHPH), I hadn’t heard the term “static pool analysis”. I obviously knew about swimming pools though I’ve never analyzed one. I’ve certainly met people whom I suspect snuck into the gene pool when the lifeguard wasn’t looking. You know these people too — if you offered them a penny for their thoughts, you’d walk away feeling you had paid too much! I was not however familiar with a static pool and the wealth of information available from reviewing our portfolio using static pool analysis.|
So, just in case some reading this might be in the dark as to what static pool analysis is, let’s start with a brief explanation. In a nutshell, static pool analysis takes the loans written for a set period and track the results of those loans to their conclusion —payout or charge-off.
Legal disclaimer: Tom Hudson correctly points out that these are actually finance agreements purchased, not loans written. For the sake of simplicity, allow me to use the more common term.
For example, if your loans written in January 2003 had a total beginning balance of one million dollars, and after the all the loans were off the books, you had charged off two hundred thousand, your static pool loss rate was twenty percent for that month. How can this type of analysis help you understand your portfolio? There are several applications. One of the first ways to review your portfolio is to divide it by notes written per year or even better, per month in dollars. You should quickly be able to identify certain monthly pools that paid out better than others.
Look for patterns. For example, many BHPH dealers find that their static pool losses are higher during February. This could mean they are buying a more marginal customer based on a larger down payment, which likely was inflated due to tax return money.
Also, look for changes that correlate with any changes you made to your business practices or lending model. You might observe your pools started performing better after implementing a scoring model in your underwriting process. Maybe you will be pleased to see your static pool losses staying flat, even though you decided to start selling a lower ACV vehicle. Conversely, you may notice that your pools started performing worse after you hired a new loan officer.
Actually, you could also analyze your portfolio by loan officer, rather than by month to determine which of your staff is approving the better deals. If Joe’s pool is paying out at 90 percent and Jane’s is only 70 percent then you know Jane needs more training or Joe needs to buy deeper, depending on your model. Another way to review the static pool losses is by sales location to determine if one of your lots is not closing deals properly.
Dividing your portfolio into pools based on their score in your scoring model if you had one in place when you approved the loan can be another method for analysis. This method can validate that your model is accurate, and help determine if you should buy deeper or tighter.
It’s even possible to glean some insights into monthly pools that are not yet completed. By looking at the data in a month-by-month basis, you will see what percentage of charged off loans you should expect during month 6 (meaning the 6th month after the loan was written). If loans written in a specific month are already charging off at a rate twice as high as your historical average, you are more likely to have a troubled pool if not watched VERY closely by the collections department.
Now performing a static pool analysis manually can be a laborious project that you probably wouldn’t want to undertake. Check with your Dealer Management Software (DMS) provider to see if they offer this extremely valuable feature with their system. If not, they can probably at least provide the ability to export the necessary information for you to send it to some of the professionals in our industry that specialize in static pool analysis.
Using static pool analysis is the most accurate way I have seen to evaluate the quality of your portfolio. Will you like what you find? Maybe not, but like mystery shopping your sales calls, a whole other article, you need to first identify the problem areas before you can fix them. So, if you are ready to make the leap to evaluate your portfolio using static pool analysis, cinch up that swimsuit, climb up to the high dive board and like the Steven Curtis Chapman song says, “…so sink or swim, I’m diving in!”
Vol 3, Issue 6
In a move billed as an industry first, DealerPolicy will showcase an all-inclusive dealer auto insurance solution at NADA 2019.