New car sales are finally on a rising trend line. Despite production delays at some automakers – in some cases Tsunami-related – year-over-year sales figures are heading upward, in some cases by double digits.
Along with the growth in sales comes an increase in auto financing and with that the undesirable reality of delinquencies on repayment of those loans, a natural consequence of growing competition among lenders who typically dig deeper into the credit pool to maintain and build market share.
According to Experian, the share of loans to credit-challenged new-car buyers jumped 11.1% in the first quarter from the same period in 2010. The share of loans to non-prime customers rose to 10.57% from 9.81%, and subprime’s share rose to 6.16% from 5.68%.
Financing to borrowers with credit scores of less than 680 accounted for more than 42% of all financings in the first quarter. The average credit score for a new-vehicle borrower fell to 766, the lowest average for a new-vehicle loan since the fourth quarter of 2008.
While this trend will not necessarily lead to a higher percentage of delinquencies, it will almost certainly lead to a greater number of delinquent loans.
That inevitable challenge puts servicing in the driver’s seat, even as banks and finance companies focus on new originations. As loan portfolios swell, so will servicing issues, including inevitable delinquencies and defaults on those financial transactions. Active engagement with millions of borrowers needs to start now and will continue for years to come.
The days of a cavalier approach to servicing are gone. You must have a robust, pragmatic servicing strategy at the outset. Economic setbacks and government intervention have created an environment where it is crucial to stay on top, and “in touch”’ with borrowers.
Nothing works better to ensure a communications flow with troubled borrowers than going out in the field and meeting them face-to-face. It also provides valuable visibility into the condition of a vehicle, which can be utilized to conduct alternative retention or loss mitigation options, if necessary.
Such “on the ground” information is not accessible from behind a desk or from inside an office. It gives insight not only into the situations of each and every borrower met, but it is critical to maintaining a positive relationship with the borrower.
Eyes on the vehicle
Getting somebody out in the field quickly to contact borrowers is an absolute must. You must have your “eyes on the vehicle” as soon as the first payment is missed, because the condition of a moveable asset like a motor vehicle can change quickly.
And it’s still true that time is money, so the faster you can get a representative out in the field and the quicker the servicer gets a report, the more money they can save.
The information you gather and the empathetic message you deliver are the one-two punch of a successful borrower outreach solution. That can help limit delinquencies and get nonperforming accounts back to performing status quickly.
On this front, auto loan servicers can take a lesson from the modification efforts that have been ongoing in the mortgage business. The goal there is to keep people in their homes and paying their mortgages.
Likewise, the goal of any borrower outreach program in the auto finance business should be to keep people in their cars and paying their loans. Auto loan servicers don’t want to be in the used-car business any more than mortgage lenders want to own homes.
Borrower-friendly initiatives ensure that servicing efforts hold up under scrutiny. With a watchful eye on policies and procedures, it is of the utmost importance that all borrower outreach efforts are conducted by safe, secure and compliant organizations.
Many servicers ask their repossession agents to double as their borrower-outreach representatives. But that is a myopic and ultimately self-defeating strategy.
Firstly, it sends the wrong message. It doesn’t tell the borrower, “We want to work with you.” Rather, it creates an adversarial situation, not one that creates positive feelings between borrower and lender.
Using a repo agent as a borrower-contact rep doesn’t work for another reason. Repo agents are usually financially incented to tow the car, not offer a workout solution to the borrower. After all, if you got $300 to tow the car and $50 to try to convince the borrower to keep paying, which would you choose?
A strategy like that just isn’t very successful. Few repo agents, even when they try, get the borrower to keep paying.
For lenders and servicers, a successfully performing loan is the only goal. The expense of repossessing, reconditioning and reselling a car is just too high. By contrast, getting a troubled loan back to performing status with a successful borrower-outreach program, while not priceless, can be done at a fraction of the cost.
Joe Weber is director of sales at National Creditors Connection Inc., which offers field contact, loss mitigation and pre/post funding onsite inspection services to financial institutions.
