Competition in the auto finance space has some financial institutions looking down the credit spectrum for fresh volume.
“The challenge with this marketplace is that there is so much competition, that even though the auto purchase market is improving, there are still not enough loans to go around to satisfy everyone’s appetite,” says Tony Boutelle, president and chief executive of CU Direct Corp. “That’s forcing many lenders who want to grow or even maintain their marketshare to dig deeper in the credit pool.”
Maintaining share in this environment is particularly challenging for credit unions, which have historically stuck with prime and super-prime borrowers. But credit unions are in fact “reaching a little deeper,” Boutelle says.
CUs are seeking borrowers with spottier credit histories for two primary reasons: to gain marketshare and to get more yield. “Because the A-plus paper has such a low interest rate, it’s hard to make much money,” Boutelle says. “So they need a more diverse portfolio.”
Making more nonprime loans isn’t a bad thing, but lenders must be prepared to handle the additional risk. For credit unions ― or other lenders ― looking to move down the credit spectrum, here are a few pointers:
• Analyze static pool data to monitor the performance of loans originated under the same underwriting criteria during the same time period.
• Keep an eye on credit score migration to discover changes in borrower credit scores over time in order to identify borrowers whose scores have improved or deteriorated.
• Mitigate the risk of future loss by reevaluating open credit lines for borrowers with deteriorating credit, and developing opportunities to offer new loan products to borrowers with improving scores.
• Be prepared to dispose of repossessions in an efficient and effective way.
• Understand all costs required through the life of the loan to ensure a profitable portfolio.
It’s important for lenders to be “really good” at every part of the loan equation, from underwriting and servicing, to booking loans and completing paperwork, Boutelle says.
“You have to be good at all of them because it’s a very thin margin business,” he says. “If you’re bad at even one area, you can face some big losses.”
―George Yacik
