Are Repossessions The Best Market Strategy?

The costs associated with repossessing vehicles is rising sharply, even as consumers are much more inclined to pay their auto loans over their other debts, including their mortgages. That would seem to behoove loan servicers to explore more “borrower-friendly” tactics, including loan modifications, to keep customers in their vehicles and avoid repos except as a last resort.

Yet that doesn’t seem to be the case.

If anything, according to one Los Angeles attorney, servicers are getting even more aggressive about repos.

“We are seeing quite the opposite,” says Pauliana N. Lara, the head attorney of the auto fraud department at the Consumer Action Law Group PC in Los Angeles. “The bulk of the calls I have been getting from prospective clients are asking for help with repossessed cars. I have even heard of repossessions just a few days after the payment was due and was not received.

“Repossessions are actively happening, at least in California,” she says.

But is that the right strategy in today’s market?

According to Experian, the average auto loan chargeoff amount jumped 17% in 2013 to $8,520.

At the same time, according to a new study from TransUnion, consumers place a greater emphasis on paying their auto loans before their mortgages and credit card payments, and “by a wide margin,” and have so for the past 10 years. The 30-day delinquency rate on auto loans was just 0.87% in December 2013, compared to 1.71% on mortgages and 1.83% on credit cards for consumers with all three credit products.

Jay A. Loeb, vice president of strategic business development at National Creditors Connection Inc. in Lake Forest, CA, says many lenders say they understand the need to embrace an anti-repo philosophy but are reluctant to actually put it into practice.

In particular, he says, captive lenders have been slow to change their thinking even though repos cost them more compared to other lenders, such as subprime and smaller lenders like credit unions. According to Experian, the average chargeoff at captive lenders was $9,526, 12%, or more than $1,000, higher than the industry average, and more than $2,200 higher than at credit unions.

“There’s a lot of emphasis on ‘let’s go get the car’ as opposed to ‘let’s try to avoid getting the car,’” Loeb says.

Instead, he argues, loss-mitigation strategies should become more like those in the residential mortgage business, where there are more steps involved in the process the longer the borrower is delinquent.

“In mortgages, there’s a strategy based on delinquency stages,” he says. “Everything is done so the loan doesn’t roll into the next delinquency bucket. There are different strategies for different delinquency stages.”

Of course, mortgage lenders have the advantage of time, since they don’t have to worry about the homeowner hiding the house or driving away with it. Plus, cars usually lose value every day, while homes – until recently, that is – don’t.

However, as the average loss per chargeoff escalates, Loeb argues that auto loan servicers need to adopt some of these strategies as their own.

“In autos, it’s pretty simple now: phone calls, letters, skip tracing, repossession,” he says. “We are trying to urge a philosophy with steps in between those.”

“You have to have a strategy to avoid repossession,” he says, including loan modifications where appropriate. “We have many subprime auto lenders today that grasp this philosophy, that you can’t repossess every car all the time. That’s where we see the future in the auto business.”

It starts with a change in philosophy at the highest executive level, he says. But in order for that to happen, companies have to be shown that this strategy can be done efficiently and cost-effectively and have a return on the investment.

For their part, captive lenders say they don’t want to repossess cars if they don’t have to.

Ally Financial, for example, says it “always tries to avoid repossessions by working directly with customers to resolve delinquencies.”

“We have not changed our approach in collections,” says Steve Parrett, manager of corporate communications at Nissan North America Inc. “Our decision to repossess is based on the consumer’s ability and willingness to pay.”

For most, it starts with underwriting a safe and secure loan in the showroom.

“Our intent is to put customers in contracts they can afford so that they can pay us back, keep the car and stay healthy financially,” says Vincent Bray, national manager of corporate communications at Toyota Financial Services. “We want to help the customer avoid becoming overextended and to return to the brand again in the future.”

– George Yacik