4 ways lenders can prepare for a looming recession

The Federal Reserve continues to raise interest rates to combat rising inflation and dampen the likelihood of a recession, and auto lenders are reevaluating their risk management strategies in preparation for a possible economic downturn.

“We’re always concerned about the macroeconomic impact,” Chris Mitcham, Santander Consumer USA (SCUSA) senior vice president of corporate development, said at the recent Auto Finance Risk Summit in San Diego. SCUSA is monitoring inflation and its impact on what has otherwise been strong consumer credit performance during the past two years, Mitcham noted.

To mitigate the risk in case of recession, lenders can leverage current strong credit performance and prepare for a time when delinquencies tick up and the economy declines by implementing the following four practices:

1. Leverage strong portfolios: In today’s environment, lenders “should be in a reasonably okay place with their portfolio,” Mitcham said. Lenders can take advantage of their strong portfolios and prepare their strategies in terms of collections, tightening credit standards and closely monitoring delinquencies in the event of a recession.

Right now, “everything’s so good,” Hyundai Capital America Chief Risk Officer Jennifer Kim said at the Summit, but cautioned that lenders “can’t sit back and not do anything … we need to be ready.”

2. Start customer communication early: “Communicate with customers, and start now,” Mitcham said. Lenders can prepare their customers early on with open communication about what indicators they will be watching for once collections ramp back up.

3. Lean on previous recession strategies: Learning from performance during past recessions. Lenders should ask themselves what worked best for them in the past, Mitcham said. For example, going back to pre-pandemic collection strategies may not be the best plan; instead, lenders should utilize already proven strategies.

4. Think about collection opportunities: “Take the opportunity, while you have sure footing, to say, ‘What are the things we need to do as delinquencies [normalize]?’” Mitcham said. Figuring out the collection strategy while the portfolio is strong will provide lenders with a plan to navigate collection as delinquencies climb back up to normal levels, he said.

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