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Audit-Ready Best Practices for Lenders
Suzi Straffon, Director, Finance Company Markets | Allied Solutions

While the Fed is attempting to ward off a full-blown recession, borrowers and lenders alike are still facing delinquency headwinds.

More than three and a half years removed from the pandemic, the backlog of delinquencies is now catching up to balance sheets across the country. Interest rates, higher-than-ever vehicle prices, inflation, a tough jobs market, and deteriorating credit quality are all key drivers of increasing past-due auto loans.

Let’s take a look at default rates:

Default rates sat at a staggering 6.1% going into 2023 , even higher than the historic 2008-2009 5.6% delinquency rate. Lenders are facing even more challenges now:

• Larger losses: loan balances are higher than in 2010. The average loan balance was $14,973 in 2010, compared to $22,612 Not only is the default rate higher, but the hit to the bottom line is bigger.
• Less resources: There are approximately 30% less repo agents now than prior to the pandemic. The lack of available agents is resulting in volume being denied and jobs not getting worked. The completion timeline for existing jobs is lengthening.
• Younger borrowers: A majority of Generation Z came to borrowing age during the pandemic and subsequent economic difficulties, and this demographic is contributing most to the surmounting defaults. These borrowers are starting off their credit life with past-due accounts.

These are all important factors to maintain perspective of the severity of rising delinquencies. It’s not all bad news though.

Repossessions are high, but borrowers continue to make an effort to keep their accounts current- even in the face of inflation and rising costs. A rise in repossession volume has prompted regulatory scrutiny and reviews of lender recovery processes and there are steps your organization can take to simplify the recovery process.

Here are three strategies to boost recoveries in both an efficient and compliant manner:

Strategy #1: Aggregate repo volume with other lenders

The remaining repo agents are struggling to keep up with the backlog of repossessions and many pending assignments are being denied. It’s crucial to assign repo jobs as early in the process as possible. Provide agents with all the necessary information including timestamped, geolocation data from license plate recognition software. Consider paying agents bonuses for prioritizing your assignments.

Another repossession tactic is to aggregate volume with other lenders  for preferential treatment from agents. Risk management partners, like Allied, can provide aggregated volume with many lenders and fairly pay repo agents for compliant, effective recovery. Aggregated volume makes your assignments worthwhile for agents.

Strategy #2: Monitor and track insurance statuses

As repossessions rise, insurance monitoring and tracking on your portfolio can work proactively to lower charge-offs and overall bolstering risk management. Tracking insurance highlights areas of exposure, prior to the recovery stage.

Insurance tracking can provide a significant increase in recoveries. Without insurance tracking insights, it is difficult to reduce liabilities and improve recoveries. Insurance tracking also protects your business by providing contextual data that aids in audits.

Strategy #3: Be audit ready

The CFPB is keeping an eye on lenders and remains firm in its compliance guidance issued last February  on vehicle recovery best practices, particularly “wrongful repossessions”.

The CFPB explicitly states that it “intends to hold loan holders and servicers accountable for UDAAPs related to the repossession of consumers’ vehicles.”

Larger auto lenders face litigation and million – and billion – dollar fines for mismanagement of repossessions, auto loans, discriminatory pricing of add-on products.

Even if your loan portfolio hasn’t experienced a high volume of repossessions in the past, don’t be caught off guard by this increased regulatory scrutiny.

Do you currently maintain these best practices?

• Review call scripts and fees charged to consumers to ensure alignment with UDAAP
• Review consumer complaints related to repossessions
• Review canceled orders to ensure a correct process for canceling repossessions when a borrower has corrected the deficiency
• Retain proof of all vehicles sold for fair-market prices
• Identify and save record of damage and file insurance claims to optimize recoveries
• Maintain document processes for handling refunds on ancillary products attached to a repossessed vehicle

Compliant repos processes are paramount. Lenders don’t need to sidestep efficiency in the name of compliance. Solutions like REPO Plus and Track ®  allow lenders to uncomplicate and outsource the recovery process.

The Bottom Line

The market is more resilient than we give it credit for, and lenders are in an opportune position to bring positive change to the industry.

But don’t go it alone.

Leverage the power of your partnerships to protect your bottom line and uncomplicate risk management.

At Allied Solutions, we remain optimistic that the lending will rebound and that lenders will be more prepared than ever to hold up under regulatory scrutiny.

Stay confident.

Stay connected to your industry partners.

Did you catch Suzi’s recent AFSA podcast? Tune in here: afsaonline.org/stay-informed/podcasts/

Allied Solutions is a Platinum sponsor for AFSA’s 2023 Annual Meeting.

About Allied Solutions

Allied Solutions is one of the largest providers of insurance, lending, risk management, and data-driven solutions to auto finance companies and financial institutions in the US. With their consultative approach and commitment to the market, Allied Solutions uses technology-based solutions customized to meet the needs of 4,000 organizations. Allied Solutions is headquartered in Carmel, Indiana and maintains several offices strategically located across the country. Allied Solutions is a wholly owned and independently operated subsidiary of Securian Financial Group. Together, Allied and Securian boast 100+ years of industry experience.

Link: https://www.axios.com/2023/03/01/low-income-households-are-falling-behind-on-car-bills

Link: https://www.statista.com/statistics/1281682/average-auto-loan-debt-usa/

Link: https://www.autofinancenews.net/allposts/risk-management/30-of-repo-agencies-shut-down-due-to-unprofitability/

Link: https://www.nbcnews.com/business/consumer/gen-z-millennials-default-auto-loans-far-greater-rates-pandemic-rcna31479

Link: https://www.alliedsolutions.net/solutions/manage-risk/Repossession-and-Remarketing/

Link: https://www.consumerfinance.gov/about-us/newsroom/cfpb-moves-to-thwart-illegal-auto-repossessions/

Link: https://www.alliedsolutions.net/solutions/manage-risk/REPO-Plus-and-Track/