Lenders Focus on Collections, as Delinquencies Tick Up

Although delinquencies benefited from tax refund season, according to S&P Global’s March U.S. Auto Loan ABS Tracker, 60-day subprime delinquencies in February — at 4.28% — were up from 3.75% during the same month a year prior.

Meanwhile, the subprime recovery rate in February was 37.6%, down from 40.6% in February 2016, and 45.8% in 2015. To put it in perspective, the subprime recovery rate has been trending downward on a year-over-year basis since it hit 53.1% in February 2013, according to S&P.

What that means, is that the industry is currently experiencing higher overdue payments and lower vehicle values. So, lenders are going to have to start focusing on collections, said Daniel Parry, chief executive and co-founder of Praxis Finance Corp.

Lenders Focus on Collections, As Delinquencies “If you’re in an environment where delinquencies are going up, losses are going up, and you’re trying to make sure you’re controlling that, you can’t do anything about the paper that you’ve already put on your books, except manage it as effectively as possible,” Parry said.

Most importantly, with collections, lenders need to get in front of the customer early, and get in front of them often to make sure they don’t get into a worse state, Parry said.

“Some lenders don’t begin calling until five days past due, some don’t begin calling until 10 days past due — it’s called a delayed treatment strategy,” he said. “You can save some money doing that, but for us, the earlier you can get in front of the customer, [the better], and help them realize you’re not there to beat on them, you’re there to help them resolve the problem.”

Praxis now calls customers after payments are three days past due, where in the past the company reached out between five and 10 days.

“It’s generally courteous to give them a few days, but for us, being more in the nonprime area, not every phone call is catching the customer every time,” Parry said. “They may be at work, or you get the answering machine or a relative, so you just have to start earlier in the process.”

Communicating with consumers in the way they want to communicate has been a focus for Ford Motor Credit Co., the captive’s Communications Manager Margaret Mellott told AFN.

“As part of this, we have ramped up digital capabilities in recent years, including online account management and online chat, as well as continuing to use email, telephone, and other more traditional forms of communication” she said. “We continuously work to respond to the way customers want to work with us, because that is important to making sure they have a great overall vehicle financing experience.”

Ally Financial Inc., a full-spectrum lender, saw first quarter retail auto delinquencies rise to $1.5 billion — or 2.36% of the company’s total auto portfolio — compared with 2.20% in 1Q16. Similarly, retail net charge-offs were up 45% year over year in 1Q, to $251 million, the company reported in April.

The company was keeping an eye on the “progression of delinquencies,” and expected them to come down as a result of tax refunds, Dave Shevsky, the company’s chief risk officer, said during a financial outlook call in late March.

“We’re seeing it seasonally come down, as well,” he said on the call. “Not quite to where we would expect it, it’s a little bit out there, but we’re seeing good movement there.”

Ally also adjusted its collection strategy “to be able to attack some of our riskier segments,” Shevsky said on the call. The company declined to comment in further detail about the adjustment.

Consumer Portfolio Services Inc. is also focused on collection improvement this year.

Collections at CPS improved in the first quarter, but not to the extent the company would like to have seen, Chief Executive Charles Bradley said on an April 20 earnings call.

“We have now sort of been able to recognize that our customers change,” Bradley said. “I used to get a call at home, the phone will ring on the wall, [but] today, everybody has an iPhone or some kind of smartphone, and they can see the calls. So, what we’ve seen more is an ongoing trend of customers being able to sort of put off making the payment.”

The “new dynamic,” he clarified, is that consumers pay when you threaten to repossess the car, as opposed to when you start calling. CPS was no exception to the rising delinquency trend, as delinquencies — including repossessions — rose to 19.74% in the first quarter, compared with 8.97% in the year prior.

In response, CPS is calling “a lot,” and communicating when the consumer must pay or lose his vehicle. Reinstatements are up “significantly” over time, he added. “When we have their car, obviously, they’re much more interested in getting it back,” Bradley said. “In the past, that wasn’t so true. If we repossessed a car, most times the customer wasn’t in a position to buy it back.

“The lender usually has tools to help the customer out: ‘Can you do this type of payment plan to get caught up, or maybe you can qualify for an extension.’ Or maybe you take the delinquent payments and you put them on the end of the loan and if catches the customer up, it just extends that loan out a little more,” Praxis’s Parry said. “The old-school perception is: It’s just harassing people for money, but what you really want to do is help them not get into a situation where they get so far behind that they can’t catch up.”