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.
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.