---
title: "Reading the dealer channel"
url: https://lendriskanalytics.com/dealers.html
publisher: LendRisk Analytics
kind: Page
description: "A method note on scoring dealer channels in an indirect auto book: loss rate, severe lates, early payment default, and a volume-weighted composite health score, with the full weights, stress caps, and banding published and a worked synthetic example."
html: https://lendriskanalytics.com/dealers.html
---

# Reading the dealer channel

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Methods · Note 03
Method note · 6 min read

Method note · Dealer channel

# Reading the dealer channel.

LendRisk Analytics · Method note · 2026

Every indirect auto book eventually asks the same question: which dealers are sending the bad paper? The portfolio-level loss number cannot answer it, because an aggregate is an average, and averages launder concentration. This note publishes the full method behind a dealer scorecard, three signals, exact weights and stress caps, a volume adjustment, and a three-band reading, then walks it through a synthetic twelve-channel book to show why a handful of channels usually carry most of the deterioration.

40/30/30

Signal weights: loss rate / severe lates / early payment default

≥ 70

High-risk line on the 0-100 composite score

48%

Of losses from the 3 worst channels in the worked book (synthetic)

1.8x

Worst channel's loss share vs. its volume share (synthetic)

## Three signals, read together

A dealer channel is scored on three numbers, each doing a different job. **Net charge-off rate (NCO)** is the realised loss number, settled fact, entirely backward-looking. **90+ days past due** is the severe-lates share, the leading indicator: most accounts that reach ninety days roll forward into charge-off, so this is next quarter's loss number arriving early. **Early payment default (EPD)** is the share of loans that went 60+ days delinquent within their first six months on book. It is the cleanest dealer-level underwriting signal in the set, because a loan that fails almost immediately was usually never good to begin with, and origination is where the dealer sits.

The same arithmetic runs on any grouping key. An indirect lender cuts the book by dealer channel. A buy-here-pay-here operator can run the identical score by sales rep or by vehicle class. A multi-lot group can run it by location. The method does not change; only the grouping does.

## The score: weights, caps, and the volume adjustment

The composite health score runs 0 to 100, higher meaning worse. Each signal is first normalised against a stress cap, divide the channel's rate by the cap, truncate at 1.0, so no single blown-out metric can dominate beyond its weight. The caps are 15% for NCO, 12% for 90+ DPD, and 10% for EPD, levels set against published subprime auto benchmark families (Fitch, S&P Global, TransUnion). The three normalised signals are then weighted 40 / 30 / 30 and multiplied by a volume weight.

The volume weight uses a log scale on the channel's trailing-90-day loan count: **min(1.2, 0.7 + 0.3 · log₁₀(loans ÷ 60))**. A channel with 60 loans or fewer is damped to 0.70; roughly 190 loans earns about 0.85; 600 loans reaches 1.00; the weight caps at 1.20 near 2,800 loans. The full specification:

| Component | Definition | Rule |
|---|---|---|
| NCO rate | Realised net charge-offs, trailing | 40% weight · stress cap 15% |
| 90+ DPD | Severe lates; leading loss indicator | 30% weight · stress cap 12% |
| EPD | 60+ DPD within first 6 months on book | 30% weight · stress cap 10% |
| Volume weight | Log scale on 90-day loan count | min(1.2, 0.7 + 0.3·log₁₀(loans÷60)) |
| Composite | 100 × (0.4·nNCO + 0.3·nDPD + 0.3·nEPD) × vol. weight | capped at 100 |
| Bands | High risk / watch / healthy | ≥70 · 50-69 · The scoring specification in full. Standard screens on top of the ranking: high-risk only (score ≥ 70) and top-five channels by volume.

**Inference**The volume weight is doing two quiet jobs. Damping small channels to 0.70 keeps a 40-loan lot with one bad quarter from topping the ranking on noise. And because the weight only reaches 1.0 at around 600 loans, the high-risk band is deliberately hard to enter: a mid-sized channel has to be running near the stress caps on all three signals at once before it crosses 70. The band is built to flag conviction, not variance.

## Three bands, three different reads

**High risk (score ≥ 70).** The channel is harming the book more than it helps. The standard read: cap or restrict new originations from the channel, look at dealer recourse on the existing paper, and pull a set of representative loans for underwriting review.

**Watch (50-69).** The deterioration is visible but not yet conclusive. The standard read: pull a recent vintage sample and look for underwriting drift, and tighten stip verification or down-payment requirements before the channel migrates into the top band.

**Healthy (below 50).** A channel to grow into. The useful move is diagnostic in the other direction: study what its stip stack and deal structure look like, and check whether the weaker channels differ in ways that explain the gap.

## A worked book: twelve synthetic channels

Here is the method applied to a synthetic twelve-channel portfolio built to mirror a typical mid-sized subprime book: 1,388 loans, $17.9M of unpaid balance. Weighted by balance, the book runs 7.5% NCO, 5.1% 90+ DPD, 4.3% EPD. Every name and number below is synthetic and illustrative.

| Channel | Loans (90d) | UPB | NCO | 90+ DPD | EPD | Score | Band |
|---|---|---|---|---|---|---|---|
| Auto Barn Motors · TX | 142 | $1.85M | 13.2% | 9.4% | 8.5% | 68 | Watch |
| Pilot Point Motors · OK | 96 | $1.24M | 11.7% | 8.1% | 7.2% | 56 | Watch |
| Coastal Drive · FL | 188 | $2.46M | 10.4% | 7.2% | 6.4% | 55 | Watch |
| Lonestar Cars · TX | 74 | $0.92M | 9.9% | 6.8% | 5.9% | 44 | Healthy |
| Sunrise Auto Group · CA | 121 | $1.58M | 8.1% | 5.4% | 4.6% | 39 | Healthy |
| Phoenix Auto Plaza · AZ | 88 | $1.12M | 7.4% | 5.0% | 4.2% | 34 | Healthy |
| Heritage Motors · NC | 156 | $1.98M | 5.8% | 3.9% | 3.1% | 28 | Healthy |
| Northstar Auto · MN | 64 | $0.85M | 5.2% | 3.5% | 2.8% | 22 | Healthy |
| Cascade Auto Sales · OR | 92 | $1.18M | 4.6% | 3.1% | 2.4% | 21 | Healthy |
| Sterling Motorcars · WA | 108 | $1.42M | 4.1% | 2.8% | 2.0% | 19 | Healthy |
| Riverside Auto · CA | 135 | $1.72M | 3.8% | 2.5% | 1.8% | 18 | Healthy |
| Atlantic Auto Group · NJ | 124 | $1.58M | 3.4% | 2.2% | 1.5% | 15 | Healthy |

Synthetic and illustrative. Scores computed exactly per the specification above. Note the strictness: even a 13.2% NCO channel lands at 68, inside the watch band, not high risk, because its 142-loan count damps the composite to 0.81 of its raw value.

Loss attribution, worked book

The three worst-scoring channels produce nearly half the book's net losses on less than a third of its volume.

Synthetic twelve-channel book; shares computed from the worked table above.

The read
A book running **7.5% weighted NCO** sounds like one number. It is not. Inside the worked book, channels run from 3.4% to 13.2%, and the three worst channels carry **47.8% of the losses on 30.7% of the volume**. The portfolio average is not where the risk lives. The spread is.

## Why a handful of dealers carry the deterioration

Deterioration in an indirect book rarely arrives evenly. Dealers differ in how disciplined their finance office is, in the customer base their lot attracts, and in how hard marginal deals get pushed through at month-end. Those differences compound: the channel with the loosest structure attracts the applications the tighter channels decline. The honest concentration measure is loss share against volume share. In the worked book, the worst channel produces 18.1% of the losses on 10.2% of the volume, a 1.8x ratio, and runs 1.8x the book's weighted-average NCO. Its six-month trend line is also the steepest in the book, up 3.4 points over the last three months of the series.

**Inference**The forward-looking claim embedded in this method: because loss production is concentrated, volume decisions at two or three channels move the whole book. On the worked numbers, halving originations from the worst channel would remove roughly 9% of forward loss production while giving up about 5% of volume, an asymmetric trade. That projection assumes the channel's rates persist, which is exactly what the trend line exists to check.

## Limits

What this method cannot see. **The stress caps are fixed choices.** 15 / 12 / 10 are defensible against published subprime benchmarks, but a deep-subprime book and a near-prime book should not share caps; a real deployment recalibrates them to the book's own vintage history. **EPD depends on honest data.** Deferrals, re-ages, and due-date changes silently repair early payment default; a channel whose paper gets serviced generously will score better than its underwriting deserves. **Small channels stay jumpy.** The log damping softens small-sample noise but cannot fix it, a 20-loan channel's score is an anecdote, not a statistic. **The score is descriptive, not causal.** It cannot distinguish a dealer problem from a geography or collateral problem that happens to share a lot. And **channel labels can hide common ownership**, two clean-scoring lots run by the same finance office are one exposure wearing two names. The score ranks where to look. It does not explain what you will find.

**Sources & notes**
Stress-cap levels are set with reference to published subprime auto benchmark families from Fitch Ratings, S&P Global, and TransUnion. All twelve channels in the worked example, names, states, and every number, are **synthetic and illustrative**; the dealer names are fictional and any resemblance to real businesses is coincidental. Composite scores, loss-attribution shares, and weighted averages are computed exactly per the published specification. LendRisk Analytics is an independent research publication with no position in, and no affiliation with, any company mentioned. Not investment, legal, or accounting advice.

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LR

LendRisk Analytics

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