Banks and credit unions have enjoyed strong and steady growth in the auto lending space for the past few years. For credit unions in particular, new and used auto loans have accounted for 44.1% of growth in the total loan portfolio over the past 12 months - bringing credit union auto balances to a new high of $282.9 billion as of the second quarter 2016 ("Industry Performance By The Numbers (2Q 2016)").
With this growth has come some risk, and a recent article by Rachel Koning Beals on MarketWatch.com highlights a troubling trend of delinquency in the auto loan market. ("Some 6 million Americans are delinquent with auto loans and it's going to get worse") The article, citing data from researchers Federal Reserve Bank of New York, indicates that as of the third quarter roughly 6 million Americans were at least 90 days late on subprime auto loan payments. The troubling trend is tempered by the fact that, "The majority of auto loans are still performing well - it's the subprime loans, those with associated credit scores below 620, that heavily influence the delinquency rates."
That there is delinquency risk on subprime auto loans is certainly not a shocking revelation. So, my focus here is not to examine this issue, but rather focus in on some thoughts of how to move forward most effectively in this market. As somebody working in the financial services technology space, my attention first turns to what solutions can help address an issue - and there are two areas that come the forefront in this situation.
The first is the efficient management of collection activities.
Many financial institutions have affected significant change in their collections processes since the subprime mortgage fallout of nearly a decade ago. However, many financial institutions are still burdened with collections practices comprised of disparate systems and processes. While the impact of subprime auto loans should be much less than that of the mortgage debacle, financial institutions are also faced with increased challenges posed by regulators and consumers. With that in mind, a significant uptick in collections activity could hit hard for the unprepared financial institution.
To get prepared, a financial institution should have good insight into current collections practices and metrics. From there, look to understand how you can leverage process improvement, potentially facilitated by technology, to become more efficient. Having a centralized system in place to manage collections activities can provide a streamlined process, visibility across the organization, and intelligent automation related to collection tasks, queues, and communications. Those account holders with subprime credit, for instance, can be automatically directed to a specific queue and flagged to receive a unique treatment strategy. Such strategies can mitigate delinquency while also providing the personalized service consumers are demanding.
The second area of focus is support for greater sophistication of underwriting - better managing the risk on the front-end of the process.
The troubling trend of delinquency discussed in the article will naturally lead to re-evaluation - and most likely a tightening - of credit policy at many financial institutions. Some may find that they're comfortable with their risk exposure, and others may even identify greater opportunity as competition retracts. Regardless, financial institutions reliant on more manual underwriting processes will struggle to balance achievement of loan growth and service goals while effectively managing risk in portfolios.
To get prepared, your financial institution should consider implementing or expanding its use of an automated underwriting solution within its loan origination process. A sophisticated decision engine to automate eligibility and pricing guidelines provides myriad benefits. Complex credit policy rules can be defined to quickly and accurately evaluate a large number of data points, determine the appropriate risk tier for the applicant and loan, and apply a risk-adjusted price and applicable stipulations on the loan. This provides consistent, compliant underwriting while still meeting the need of immediate responses at the time of application. Better management of incoming loans can reduce the future burden of managing collections.
The pressures from worrisome news such as growing delinquency rates can expose weaknesses - and also opportunities. To enjoy continued success and even capitalize on those opportunities, you must be prepared. There's no better time than now to evaluate your current processes and systems to determine if you're as prepared as you need to be for the new year and everything it may bring.