Lenders battle recovery woes with collections, servicing strategies

Auto lenders must creatively prioritize servicing and collections initiatives as recovery rates fall to historically low levels across the industry, driven by decreased used-vehicle values, longer asset pickup times and fewer recovery agencies due to squeezed margins. [caption id="attachment_58338710" align="aligncenter" width="1600"] (Photo/Canva) [/caption] Credit performance on auto loans has been deteriorating since 2022 as consumers are pressured by inflation and record high interest rate increases, leading to more asset-recovery assignments, Mike Gustafson , chief financial officer at subprime lender Arivo Acceptance , told Auto Finance News . “The consumer has found themselves in an affordability crunch [due to inflation],” he said. “Groceries are more expensive, it’s hard to fill up the car with gas.” These are some of “the underlying pressures that have impacted performance and have been driving the rise in delinquency and charge-offs across the industry,” he added. In the fourth quarter, industrywide 30-day delinquencies stood at 2.47%, up 16 basis points (bps) year over year, according to Experian ’s Q4 2023 state of automotive finance market report. Accounts 60-plus days delinquent rose 9 bps YoY and 13 bps compared with 2019 at 0.96%, according to Experian. “Where originations are and with higher monthly payments, it's more likely to have higher rates of delinquency,” Melinda Zabritski , senior director of automotive financial solutions at Experian, told AFN . We'll continue to see delinquencies increase this year. -- Melinda Zabritski, senior director of automotive financial solutions, Experian Recovery rates fall as used-vehicle values decline As delinquencies are rising, recovery levels are falling, creating a challenging environment for lenders and prompting a strong focus on collection efforts. In the auto asset-backed securities market, recoveries are near historic lows due to decreased used-vehicle prices, Brian Ford , managing director and head of structured finance research at Kroll Bond Rating Agency (KBRA), told AFN . Recoveries for securitized prime loans landed at 45.7% in January, down 4.5 percentage points month over month and 2.5 percentage points YoY, according to KBRA. Securitized nonprime recoveries came in at 35.1% in January, a decline of 1 percentage point sequentially and 5.1 percentage points YoY. The biggest headwind to recoveries is declining used-vehicle values. The vehicles that are being liquidated today were from loans originated when used-vehicle values were at or around the peak that we saw during the pandemic. -- Brian Ford, managing director and head of structured finance, KBRA Used-vehicle values at wholesale continued to decline in February , according to the Manheim Used Vehicle Value Index, which ticked down 0.1% MoM and 13.1% YoY on a seasonally adjusted basis to 203.8, according to Cox Automotive . Arivo transfers to in-house LMS Lower recoveries have prompted auto lenders to take steps to improve collections. Arivo is improving its in-house servicing and collections processes to mitigate losses as recoveries have fallen, Gustafson said. The lender moved to an in-house loan management system (LMS) in the past year, he said. “We were seeing what I think everyone would consider unsustainable recovery values and recovery rates in the 60% to 70% range,” he said. “Since that peak, we certainly have seen a steady normalization to more long-run sustainable recovery rates around the 40% range.” Arivo has seen an increase in delinquencies but also slight improvement over recent months, Gustafson said. “We have seen similar increases in loss rates and delinquencies to market benchmarks,” he said, noting that it is “starting to see some improvement in loss and delinquency rates … but it's something we're watching carefully as we move into 2024 and beyond.” Switching to an in-house LMS allows Arivo “to build for the future and provide a competitive advantage on the servicing side to help facilitate better scalability as we grow the portfolio and improve overall efficiency on the servicing and collection side,” Gustafson said. Arivo’s LMS allows its collectors to customize workflow; the framework tells collectors when the optimal time of day is to contact a borrower to have the highest probability of reaching them and completing payment, Gustafson said. The lender is also exploring the use of generative AI to ensure effective dialogue with the consumer. Helping consumers make payment Third-party servicer Servicing Solutions has also seen performance deteriorate on the portfolios it services over the past year, Andrew Coffey , chief revenue officer, told AFN . The company services five auto portfolios along with three powersports portfolios and a recreational vehicle, marine and trailer portfolio. The company provides repossession forwarding for Harley Davidson as well, he said. Although it was delayed, the company is starting to see delinquencies rise in the prime and the near prime segments,” Coffey said. Over the past 12 to 18 months, one of the company’s auto portfolios has seen a more than a 2% increase in delinquencies while the rate of past-due accounts on another portfolio increased about 75 bps, Coffey said, without providing further information. Servicing Solutions emphasizes engaging with consumers to find the best path to payment, he said. “We are seeing an increase in delinquency, which is increasing the number of contacts and conversations that we're having, especially in subprime,” Coffey said. When the company contacts a consumer, it is crucial to help them set up a payment plan and create rapport to increase the likelihood of successful payments, he said. “When a customer says, ‘I don't have the money,’ we ask when their next pay date is, can we set up a debit card payment, and we try and get him current as quickly as possible,” Coffey said. “If they can't pay in full, we can split it into two payments or work with them over four months to get a payment, for example.” Some recoveries run a four-month lag It’s also taking longer to find and pick up cars that have been marked for repossession, negatively impacting recovery rates. “One of the debt dynamics that we certainly are feeling is the liquidation timelines to get vehicles, transfer vehicles, pick up vehicles, transport into auction and flip the titles in a meaningful way at the state level has been longer by about a month or two,” Arivo’s Gustafson said. Some recoveries are coming in at a four- to five-month lag, he said. “It's certainly in our best interest to liquidate the vehicle as quickly as possible,” Gustafson said. “You get further depreciation on the vehicle in the environment that we're in, so we like to get it moved as quickly as we can, and that's something we're sensitive to.” Recovery rates will likely remain low throughout 2024 as the pool of loans that are maturing were originated when vehicle values were at their peak, KBRA’s Ford said. “We expect [consistent recovery levels] at least for the first half of this year, for the next six months,” he said. “Recovery rates will likely stay low for most of the year.” Fewer completed repossession assignments Vehicle repossession times have increased as there are fewer agents and more assignments , with vehicles sitting in repossession agencies’ lots longer than in the past, Vaughn Clemmons , president of the Automobile Recovery Association and recovery agency Automobile Recovery Bureau , told AFN . Extended times are contributing to lower recoveries. We have a lot of agents that have gone out of business in 2023, and we’re rolling at about a 25% to 35% decrease in number of agents [since the pandemic] while repossession volume has increased. -- Vaughn Clemmons, president, Automobile Recovery Association The number of active repossession agencies is measured by the amount of agencies with a software subscription to the Recovery Database Network (RDN), which is used by more than 95% of agencies across the industry, Clemmons said. [caption id="attachment_58338711" align="alignnone" width="1600"] (Photo/Canva) [/caption] Nationally, repossession assignments and the number of vehicles recovered increased from 2022 to 2023, he said. Repossession assignments from lenders totaled 4.45 million in 2023, an increase of 13.2% YoY, according to data from the RDN. The number of repossessed vehicles from those assignments came in at 2.39 million in 2023, up 20% YoY. Given these numbers, 53.7% of assignments ended in a recovered vehicle in 2023 and 50.6% in 2022, according to an AFN analysis. So far in 2024, assignments total 1.44 million as of March 8, with 36.2%, or 520,000 vehicles , ending in a successful recovery, according to an AFN analysis of RDN data. Slow transfer times to auction after the vehicle is recovered are also pressuring returns as the vehicles lose value while they sit on the repossession lot, Arivo’s Gustafson said. Lenders are trying to speed up the process by allowing repossession agents to transport the vehicle to auction, Clemmons said. “Some lenders are allowing agents to handle the transport to local auctions and have seen their vehicles move off the lot in three to nine days as a result,” he said. “On average, lenders who haven’t transitioned to this method are still leaving their vehicles on the lot for 12 to 15 days.” Registration is now available for the annual Auto Finance Summit East 2024 , May 1-3 in Nashville, Tenn., which gathers lenders, dealers and fintech innovators in an event designed to bring the power of technology to a cross section of industry players. Visit AutoFinance.Live to learn more.

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