For a long time, Crescent Bank & Trust was like a lot of its banking brethren when it came to independent auto dealers, staying far away for fear of winding up holding onto a financial lemon.
But that's changing because of new technology that helps unaffiliated dealers remain compliant with financial regulations and provides banks with a more sophisticated means to decide whether to do business with a dealer. The move is part of a wider trend among auto finance firms to improve risk management technology in an attempt to win wider adoption by banks. Just like their mortgage brethren, many auto lenders and financial institutions see an opportunity in the credit levels just below the top tier.
In many cases, these borrowers carry more or less the same risk as prime borrowers, and present an opportunity to increase revenue in the auto finance game. And in the case of auto lending, there are also a number of unaffiliated dealers that offer a lucrative base of customers, but heretofore have been considered high risk for a variety of reasons, mostly a reliable regulatory compliance track record that would make for easier risk management on behalf of the dealerships' financial partners.
In Crescent's case, the bank has integrated MOSES, AppOne's Web-based origination platform with Crescent's loan processing system, SuperSolution's Daybreak Lending Suite. This integration has helped Crescent automate the origination of auto loans through independent dealers, or those dealers that aren't connected with major auto companies like Ford or GM.
"We're now able to enter a segment of the business that we had ignored because of the risk," says Eric Wallis, svp of consumer lending for Crescent Bank, which has 22 banking centers, mostly in the Southeast and Northeast.
Loan applications originate at the dealer via the MOSES platform, with the loan data transmitted to the bank. The bank uses Daybreak to complete the application. The integration hastens loan processing and makes it more accurate, since there's less rekeying and passing information back and forth.
Another improvement of perhaps greater importance is the increased assurance of compliance that's inherent in the automation. Since independent dealers aren't affiliated with global auto companies, credit and regulatory risk can be higher because the personnel at the dealers often aren't fully aware of the wide range of risks and the ramifications for their firm, the bank and the consumer.
"The dealer is the lender," says Lee Domingue, CEO of AppOne. "If he assigns or sells the retail installment contract to the approving bank, he has to go by the same rules and regulations as the financing company. Most dealers don't know that."
And since the dealers have the same compliance issues, without the kind of vast industry chatter that's accompanied the sea of recent regulations in the banking industry that's partially responsible for keeping banks informed, the door is wide open to exposure to the dealer and the bank.
"From the independent dealer's perspective, they might be great at selling cars...but if you try to invest money in educating them in understanding the lending laws and rules and regulations regarding auto finance, that's where the industry's gone wrong to me. With (dealers), it goes in one ear and out the other," Domingue says.
There are about 55,000 independent dealers, which sell mostly used cars. In the six months since the integration, Wallis says his bank's auto loan business has jumped about 10 percent because of the extra source of dealers. He says that's certain to increase even more as AppOne's base of participating dealers increases from its current level of just south of 1,000 to its goal of 15,000 over the next five years.
Domingue says that falling out of compliance, even by mistake, can have major legal ramifications. "Imagine if a dealer has made mistakes on every contract, and the bank has 1,000 contracts that are non compliant. Who's going to get sued here? Both the bank and dealer are on the hook."
In managing the risks associated with independent dealers, AppOne analyzes the past behavior patterns of independent dealers, along with the risk inherent in the industry. That goes into an empirical scoring model, which produces what Domingue calls a recon score.
"That score is one of the key factors in underwriting that dealership on behalf of the lender," says Domingue, adding that his firm's platform serves as a single point of compliance risk management, so banks don't have to do all of that work themselves-a time-consuming process that's likely not economically feasible considering the volume of loans that come from a single dealer.
Controlling risk for banks is also on the brain at DealerTrack, which recently completed an integration of its own. It's APPRO eContracting product has been combined with Equifax's automated credit risk management technology. The interface will shorten the time loan contracts spend "in transit" between dealers and financial institutions.
That will serve to increase cash flow and reduce the amount of time that's necessary to fund loans. The interface also leverages APPRO's LoanCenter Consumer, a loan automation and credit risk decisioning system designed specifically for consumer lending. That reduces a paper-based processing timeframe of five days to less than a single day.
Richard McLeer, vp of DealerTrack - which at present has a network of 21,000 dealers and 80 percent of franchised dealers, says the move automates every step of the indirect auto lending process-from data entry to signing funding documents.
