Maintaining Momentum: Outsourcing Could Be Key to Profitability as Subprime Lenders Exit the Field | Auto Finance News | Auto Finance News

Maintaining Momentum: Outsourcing Could Be Key to Profitability as Subprime Lenders Exit the Field

Rising interest rates, a growing swell of delinquencies, and loose lending standards are conspiring against small subprime auto lenders. According to the New York Fed, 4.3 percent of auto loan balances were 90 or more days delinquent as of March 31, 2018. And as noted in Bloomberg, nonbank lenders’ subprime auto loans are going bad at the highest rate since 2010.

As economic signs point towards a contraction of the subprime auto market, smaller subprime lenders are starting to go under. Whether these companies sell off their portfolios or runoff their accounts, the fact remains that servicing must go on. For portfolios of this nature, which require a higher level of diligence, business process outsourcing (BPO) may be the most viable option to maintain profitability.

Hazardous Conditions Ahead

To be sure, some reports suggest that investors are not shying away from subprime auto bonds. But subprime portfolios are fraught with risk – and that makes servicing them resource-intensive. Borrowers at risk of default require close monitoring, especially when aggressive payment plans enter the mix. Accounts in default introduce a slew of federal and state regulations along with extensive monitoring requirements. And asset recovery is in a category of its own, requiring coordination with repo agencies and liquidators.

When lenders downsize operations or investors purchase subprime portfolios, they may lack the staff –and even the infrastructure – to meet the high-touch demands of these portfolios. And when that happens, accounts can slip through the cracks, collateral can disappear, and lenders can find themselves on the hook for compliance-related missteps.

This is where BPO can relieve pressure — and improve the chances of recovery. An experienced outsourcing provider can help safeguard against loss by not only filling a resource gap but by also streamlining portfolio management. Just as important, a BPO provider can introduce strategies for cost savings that provide some breathing room for tight margins.

For Best Results

For an outsourcing strategy to make sense, it must be tailorable, scalable and automated. Here’s why:

  • Tailorable: When it comes to servicing subprime portfolios, a one-size-fits-all solution is not practical. Borrowers may be on payment plans that range from monthly to weekly. Other borrowers may be on the cusp of sliding into default and require extensive outreach. Still, other accounts may be in default, when federal rules dictate how and when lenders can communicate with borrowers. For outsourcing to be cost-effective, the provider must have the experience and means to match all of these situations with the right processes and staff to hold down costs, improve recovery and maintain compliance.
  • Scalable: The resources needed to service a subprime portfolio will fluctuate. If the portfolio has been neglected, more resources will be needed on the front end to get it turned around and generating a return. Likewise, if the economy takes a turn for the worse, more borrowers will slip into default – and the portfolio will require a higher level of servicing. A BPO provider should have the ability to expand or contract staffing as needed.
  • Automated: Automation is a key driver to maintaining profitability – and not just because it reduces headcount. Automated processes are far more efficient at monitoring for red flags in borrower activity. Likewise, automation can help ensure staff maintains compliance with federal regulations, especially when it comes to interactions with borrowers who are in bankruptcy or who are active duty members of the armed forces. And chances for recovery go up with automated monitoring of demographics and borrower events.

Experience Matters

Above all, a BPO provider needs to understand what is at stake. It’s not a matter of simply processing payments or making collections calls. Federal and state regulations are woven throughout the delinquency and repossession processes. Compliance is key to avoiding crippling fees and penalties.

An outsourcing provider that understands this and drives innovative solutions can make the difference between smooth roads and a very bumpy ride, indeed.

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0 thoughts on “Maintaining Momentum: Outsourcing Could Be Key to Profitability as Subprime Lenders Exit the Field

  1. The capital markets will recover although pinpointing a time frame is difficult. I believe of greater concern is the pending legislation in both the House and the Senate. If approved, the bills will change the landscape of subprime financing as we know it. Here are some of the bills in question:

    HR 1640/S 582 – Interest Rate Reduction Act-Amends TILA to prohibit the APR applicable to any consumer credit transaction from exceeding 15% on unpaid balances, inclusive of all finance charges.

    HR 2309– The FTC must “consider” adopting rules that would:
    • restrict post-sale changes in financing terms;
    • give consumers the right to rescind a sales contract within a specified period after receiving the final information regarding the terms of the sale or financing; and
    • limit the ability of dealers to receive compensation for arranging financing or assigning a credit contract based on the interest rate, the APR, or the amount financed.

    S 255 – Empowering States’ Right To Protect Consumers Act of 2009
    – Amends TILA to limit the APR applicable to any consumer credit transaction (other than a residential mortgage transaction), including any associated fees, to the maximum rate permitted by the laws of the state in which the consumer resides.
    – Would empower the states to set the maximum annual percentage rates applicable to consumer credit transactions.

    S 257 – Consumer Credit Fairness Act
    – Amends federal bankruptcy law to require the bankruptcy court to disallow any claim arising from a “high cost consumer credit transaction.”
    – For secured creditors, the disallowance of the claim will extinguish their lien on the collateral securing the transaction, leaving such creditors with no claim against the bankruptcy estate or
    the collateral.

    High cost consumer credit transaction: • An extension of credit resulting in a consumer debt with an applicable APR, including related costs and fees, that exceeds, at any time while the credit is outstanding, the lesser of: – the sum of 15% and the yield on U.S. Treasury
    securities having a 30-year period of maturity; or – 36%

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