The Government Finds Its Tough to Play Lender

The Cash for Clunkers program is in the home stretch today — applications can be submitted only until 8 p.m. ET — and it merits pointing out that the experience should have prevailed on the federal government this fact: it’s not easy playing lender.

Rest assured, there will be nightmare stories of dealers waiting six or eight months for their cash. That’s because C4C effectively requires the federal government to play lender by underwriting each voucher application. And as every lender on this site knows, non-automating underwriting has its challenges.

Last Thursday, I sat in on a telephone briefing by a senior White House official. (You can find the live blog here.) What I came away with was a realization that the federal government bit off more than it could chew with the Cash for Clunkers program. As of last Thursday, less than 40% of all voucher applications have been reviewed by the federal government, and that translates into just $145 million of reimbursements distributed, not even 5% of the total funds allocated for the C4C program.

So how is the federal government going to catch up on the pending applications? It will throw more people at the problem, which to me means that it doesn’t have a scalable automated review system in place. Applications are being stymied because documentation is missing, so the government is going out and saying to dealers, “make sure your voucher applications are in top shape.” That does not really work. There will still be errant applications.

So the federal government is left with an operational process that is inefficient at best, and a logistical nightmare at worst. We’ll find out how the C4C program will end up in short order. The lesson here is that application review at scale for a permanent venture requires significant investment. When the federal government and legislatures start to complain about too-high, risk-based pricing on loans to subprime borrowers, for example, the Cash for Clunkers program should be cited as Exhibit A of the costs required to run an efficient lending program. After Cash for Clunkers, just maybe the compliance-types will listen.