Difficult times on the horizon…..
Auto lenders are experiencing increased risks as delinquencies grow and net losses appear non-seasonal in nature. The root cause is attributed to heavy competition among lenders for market share during previous years which weakened underwriting standards. Some lenders have substantially layered portfolio risks by targeting customers with lower FICO scores and offering longer terms combined with higher rates. These practices have adversely impacted auto loan portfolios and in some cases, have created potential fair lending and consumer compliance issues. This aggressive lending behavior places additional pressures on risk management and eventually weakens lender capabilities to sustain portfolio growth and profitability. This article summaries my three previous blogs concerning how you as a lender can be best prepared for an expected increase in auto loan delinquencies and charge offs. You may recall that my previous articles focused on the following actions to reduce risk and loan losses:
- Comprehensive New and Existing Account History
- Active Credit File Updates
- Collection Strategies
Comprehensive New and Existing Account History
Systematically capturing all pertinent account history should be your first consideration. It becomes extremely challenging to analyze; let alone monitor and anticipate, potential credit quality issues on the horizon if your lending platform suffers from the inadequate account history malady. An astute lender’s database should dynamically reflect every type of financial and operational behavioral statistic initiated by the borrower or your operational support areas. Other pertinent transaction level data should include changes to payment status, bankruptcy dispositions, and real time commentary.
Active Credit File Updates:
Maintaining a comprehensive and dynamic customer credit file requires a highly interactive credit reporting system supporting both new and existing account strategies. A full-file refresh concerning account level behavioral data will significantly improve your risk based pricing capabilities and potentially reduce lending refinance risks. Utilizing Metro 2 credit data standards with the specifications established by the Consumer Data Industry Association for credit reporting will certainly assure a consistent and accurate assessment of your prospective and existing customer base.
Collection Strategies:
The reality of auto lending is the inevitability of debt collecting on bad loans. It’s a tough job requiring superior execution skills; but more importantly your collection platform needs to be both dynamic and comprehensive. So what are some key systematic steps you should consider in order to improve your lending business chances of success should customers default?
| Systemize | Refresh | Integrate | Report |
| Assign and route accounts for collection based on functionally defined work queues | Checklists, account statuses, and follow-up dates | Integrate follow-up activity for customers with multiple accounts in collection status | Extensive reporting capabilities: collections, bankruptcy, repossession activity for variance information, repossession assignments by vendor |
| Assign delinquency ratings using lookup tables and download to credit bureaus | Flexible commentary capabilities including pull down actions and statuses, remarks, automatic time/date and user stamp | Interface with General Ledger | Financial Reporting and Planning |
| Multiple promise-to-pay dates and systematic capability to move into the collector’s queue if certain conditions are not achieved | Delinquency refresh capabilities including backdated postings | Collection Operating Statistics for planning staffing needs | |
| Create bankruptcy sub-statuses (disposition codes) from which to track the process and build work queues | Capture “referred-party” information, current, and prior vendor assignments | ||
| Maintain repossession data, charge-offs, deficiencies | Calculate estimated and actual loss on repossession/sale of asset |
In concluding this discussion, developing and sustaining a comprehensive database of account history, credit, and most critical of all collection strategies may not eliminate but will certainly help reduce losses and improve future lending strategies.
DecisivEdge™ is a certified Oracle Financial Services Gold Partner specializing in their flagship lending and leasing platform called Oracle Financial Services Lending and Leasing (OFSLL). OFSLL is an end-to-end state of the art lending and leasing platform built to suit any finance company that originates, services, and collects on loans or leases.
