Delinquencies and losses continue to climb across the industry, and while many lenders are pulling back their volume of originations, others turn to refining their collections and repossession practices to stymie increasing losses.
The percentage of borrowers 30 days or more past due grew 4 basis points year over year in the third quarter to 7.39% of new originations, according to the latest data from the New York Federal Reserve.
Industry-wide numbers for losses are harder to come by, but hardly any auto lender reported lower year-over-year net losses during third-quarter earnings, or any quarter this year for that matter.
Here are six issues lenders are tackling in collections and repossessions:
Due to increased regulatory scrutiny, many lenders are choosing to wait longer in the delinquency cycle before repossessing the car. Pelican Auto Finance LLC instituted that policy earlier this year.
“What you have is people saying, ‘There is a new way I have to do business. I can’t call as much, I can’t shut off the car, and I can’t do X, Y, or Z so early. I have to let [the delinquent loan] go out to 90, 120, or 180 days,’” Joel Kennedy, Pelican’s chief performance and compliance officer, told Auto Finance News in April. “Because of that, you are going to carry more in the later [delinquency] buckets.”
The New York Fed data proves that. The percentage of delinquent borrowers at least 90 days past due grew to 2.36% of new originations in the third quarter — a 15 basis point jump compared to the same period the year prior.
Captives such as Hyundai Capital America are choosing to charge off later on certain applicable accounts on a customer service basis, Bill Miller, HCA’s senior director of collections and recoveries, said during a presentation at the 2017 Auto Finance Summit.
“Just because a customer is delinquent doesn’t make them a bad customer, anyone can fall into a difficult patch,” Miller said. We want a long-term relationship with that customer, we have a very consultative collections approach. … We may delay the repo assignment process later than some, but it’s a view towards the endgame.”
2. Charging Off Earlier
Hyundai Capital will also use analytics to determine particular accounts it should advance into repossession sooner. For example, accounts that don’t have good contact information should receive more intense treatment sooner, Miller said.
“If you don’t have good contact numbers, why are you rolling those accounts through a dialer system? Why are you rolling those accounts to collectors who are only making phone calls?” Miller said. “You have to roll those accounts out and put them into a skip or no-file [treatment].”
Many lenders will delay more intense treatment until the industry standard 75 or 90 days past delinquency, but new analytical tools can help identify high-risk accounts based on right party contacts (RPCs) or promise to pay in a specified number of days, he added.
“When you have an account that is ready to move into more intense treatment, delaying the inevitable is a waste of time,” Miller said. “Just because an account is not 75 days past due — if that’s when you want to go ahead and issue a repo assignment — to wait that long when you already know the account is going to go down that path, what are you waiting on?”
At the same time, he warns that lenders have to be careful not to get overly aggressive and face regulatory backlash.
3. Reassess Reinstatement Rates
When looking to charge off accounts earlier, Miller said it’s important to pay attention to reinstatement rates — the number of borrowers who were able to get their vehicle out of repossession.
“Let’s say your reinstatement rates are north of 30%,” Miller said. “That means of every 10 vehicles you repossess, three of them had the ability to secure the funds and bring that account not only current, but one payment ahead, plus repo fees. It’s generally a fairly significant amount of money. So the question is, why weren’t you able to collect that before the vehicle went to repossession?”
Many in the industry would say the realized impact of having the vehicle repossessed caused the borrower to get their finances together.
“I don’t disagree with that, but the funds were there and available,” Miller said. “Looking at the right collections activity earlier on might allow you to delay the repo activity, still pick up those cures, and not have to go through that repo process overall.”
4. Implementing New Technology
Toyota Financial Services underwent a large change in its CRM system, which aggregates all the information about its borrowers, and began rolling that out to its collections team about a year and a half ago.
“We started with our mid-stage collections department … and after that it took about nine months to roll out to the rest of the team members,” Gordon McGrath, TFS’ division information officer, told AFN. “We sunsetted our legacy platform in under a year and rolled out the new system to 4,000 team members, and not just in our customer service centers but across our entire organization.”
The biggest change from that effort is that the tech department is able to roll out faster improvements to the system and employees, such as those in collections, and are able to make suggested enhancements that are actually enacted.
“Now that we’re doing monthly releases, they are way more engaged and submitting suggestions in terms of how to make the platform better and service our customers better,” McGrath said. “We’re turning around those enhancements into production within two to three months at the longest.”
5. Lower Recoveries Lead to Higher Losses
Lenders have enjoyed an increased volume of recoveries due to new technology and strategies, but that may have reached a peak, Peter Winter, an analyst at Wedbush Securities, told AFN.
In fact, several regional banks are reporting that recoveries could start to run-off and result in higher losses, he said.
“There are two parts to net charge-offs: gross charge-offs and recoveries,” Winter said. “[Regional banks] are saying net charge-offs could go up even as gross charge-offs remain stable because the amount of recoveries is starting to run off. Recoveries are starting to run its course and most banks are expecting credit costs to move up to more normal levels than credit concerns.”
6. Securitization Market Is Less Concerned
Subprime annualized net charge-offs are actually slightly down year over year at 9.24% in September, compared with 9.29% during the same period the year prior, according to Fitch Ratings’ Auto ABS Index.
On the securitization market, what matters more is a lender’s expectation for losses, Robert McDonald, vice president at Goldman Sachs, said during a presentation at the Auto Finance Summit.
“Clearly if you originated loans with lower Fico scores, performance will get worse over time but relative to your expectations, and I don’t think anyone has performed worse than they expected,” he said. “The auto finance asset is such a short duration asset, so when things go worse than you expect that’s usually fixed in three to six months. So you usually see a self-correction. I don’t expect losses to go as high as they were [during the Great Recession] without some sort of event.”1 - Reader Likes This Post