Adherence to industry best practices is essential to establishing an auto refinance program that works. By doing so, credit unions will find that they are able to bring in more borrowers while running a profitable program. Best practices for an auto refinance program include defining desired volume and risk tolerance, as well as establishing refinance-specific lending guidelines, all of which work to ensure the continued success of an auto refinance program.
DEFINING VOLUME AND RISK TOLERANCE
Credit unions looking to grow their auto refinance program should first define their institution's overall desired volume and risk tolerance. Defining risk tolerance involves establishing the delinquency rate that a credit union can reasonably manage-a typical refinance portfolio will have a delinquency rate equal to approximately one-third of an indirect portfolio. If a credit union's indirect portfolio has a delinquency rate of 1.5%, they should expect the delinquency rate of their auto refinance program to be around 50 basis points. Industry best practices show that an auto refinance program with a delinquency rate less than 75 basis points qualifies as a high-performing program, which allows the institution to take on more risk with the appropriate pricing. Having the best rate card is not necessary when running an auto refinance program. Rate cards should be within 25 to 50 basis points of competitors, which will allow a good sales team to close at a profitable rate.
Establishing risk tolerance and volume expectations gives credit unions a framework for their auto refinance program, allowing them to scale it to maximum profitability if the proper guidelines are in place.
ESTABLISHING GUIDELINES
When it comes to lending guidelines, a credit union should not be too conservative, as they will miss out on additional opportunities that will benefit their institution. Ways in which lenders can open up guidelines include relaxing credit minimums and allowing higher loan-to-value. The key is to manage to the predetermined performance metrics-delinquency, charge-offs and yield.
Traditionally, credit unions want to see two years of credit history and prefer to take on borrowers in higher credit tiers. However, reviewing the most recent four to six months of auto loan payment history will give loan officers an accurate depiction of the potential borrower's ability to make payments regardless of their credit score. Credit unions should also be more lenient about debt-to-income requirements if the potential borrower has good payment history. An important nuance to remember is that credit unions are putting borrowers in a better position when refinancing their loans.
Credit unions must provide more allowances for a higher loan-to-value (LTV). A refinanced auto loan functions differently than a purchase loan either because the vehicle depreciated in value upon purchase or the borrower may have purchased a refundable GAP policy, both of which can result in higher LTVs. Additionally, borrowers who owe more on their loans are less likely to pay off their loans early, and that means those loans will stay on the books longer, positively affecting profitability.
By opening up their guidelines, credit unions can bring in new members to whom they can sell additional products while ensuring that the program reaches maximum profitability-the ultimate goal of an auto refinance program.
IMPLEMENTING BEST PRACTICES
It may seem daunting to introduce these practices into your program, but doing so is essential for future growth! IKmplementing these best practices is one important way credit unions can grow their auto refinance programs while ensuring it remains profitable.
And you don't have to do it alone. Turning to a qualified partner to help navigate this process is one way to get started. A qualified partner can help credit unions build a profitable program that adheres to industry best practices.
If a credit union decides to seek such a partner, the CU should do its due dilligence first, looking for one that has a full range of programs that will help with the effective management of the balance between yield, delinquency and revenue. And it's not just about the numbers: a strong auto refinance program helps members while also helping the credit union improve profitability and attract new members. When vetting a potential partner, be sure to also look at the vendor's other strategic partnerships that might bring more value to the table, as well.
One of our partners, Allied Solutions, has noted that a solid auto refinance program can achieve higher yielding loans and lower delinquencies than indirect lending programs. The value of building an auto refinance program with partners that have experience balancing risk and reward canot be underestimated.
Scott Markland is director of marketing at rateGenius, a nationwide
web-based vehicle refinance loan broker. For info:
