By John Flynn, CEO, Open Lending
Auto lending in 2018 dipped slightly below 2017 numbers but remains very strong heading into 2019. Credit unions and community banks have been reaping much of the benefits as captives and banks are backing away. However, as rates rise and the US is looking at a possible recession as the yield curve flattens, and possibly even inverts, nonprime loans may become a more appealing option.
According to Automotive News, prime consumers were buying more used vehicles as interest rates and vehicle prices increase. Experian reported that more than half of used car loans went to prime and superprime borrowers for the first time since Q3 2010. This scenario drove down subprime borrowers’ share of the used auto loan market, but as prime borrowers hunker down, subprime lending opportunities will continue to grow. The payment gap between new and used, which is the primary focus of many car buyers, also increased $149 based on an average monthly payment of $530 for new cars and $381 for used vehicles, driving more to used cars. And nonprime loans represented just 22.86% of the used vehicle market, a separate report from Automotive News read. Overall, nonprime loans increased in volume across all lending, indicating pent up demand may exist here. In fact, despite the decrease in share of loans, nonprime auto loan originations were up 10%.
Some steer clear of nonprime lending because of the inherent risk, however, Transunion found the delinquencies among all borrowers are holding steady. The credit bureau’s prediction for year-end 2018 was 1.43% for car loan delinquencies 60+ days past due versus a projection of 1.44% by Q4 2019.
Credit unions and community banks can take steps to protect themselves against the riskier business of nonprime lending, while also serving more consumers in need. A recent blog post from Ser Tech, an OpenLending business partner, interviewed Mark Lynch, co-founder of CU Difference and former senior program manager at the National Credit Union Foundation. Lynch’s sound advice regarding best practices in nonprime auto lending started with establishing a risk-based pricing loan platform if you haven’t already.
Second, adapt your financial institution’s underwriting practices to nonprime loans. Debt-to-income and loan-to-value ratios are critical but look beyond to how the borrower plans to use the vehicle. Explore their full situation, like if they experienced a job loss that affected their ability to pay debts in the recent past, but they’re back on their feet now. Also note the trajectory of the credit score, which can be more important than the actual score. Ensure the vehicle is in decent working order. If you’re making a purchase loan, negotiate with the member on the vehicle they’re buying, which can also help cross-sell and set the member up for success. Insurance, vehicle warranty or repair policies, life, disability, and GAP all help protect the member and the credit union. Build it into the repayment costs.
Your ‘close’ is a critical piece, according to Lynch. During your appointment with the borrower, remind them that your institution is setting them up for success and that the financial institution is lending them other people’s money that the institution is responsible for making good decisions with it. This helps stir stronger feelings in the borrower about their obligation to pay the loan back. Acknowledge that bad things happen to good people, and they should be proactive if problems arise. These loans should have no grace period and the lender should call the first day it’s late. Perfect your collections process. Follow up and do what you say you will within the law. Ultimately, if they can’t pay, then repossess the vehicle within your local laws.
Offering repayment incentives will hopefully avoid this scenario, improve members’ credit and build lifelong customers/members who promote your financial institution to friends and family. A repayment incentive could be something like a rate reduction after on-time payments have been made for a certain period of time.
Finally, whether you’re making direct or indirect auto loans, OpenLending offers peace of mind with our flagship Lenders Protection default insurance. Lenders generally earn a 300% to 400% ROA with Lenders Protection. Contact us today to learn more about protecting your financial institution.