Top Auto Finance Industry Trends in 2021 You Need to Pay Attention to
Perhaps we are finally at the home stretch of the long-awaited return to normalcy. It’s an understatement to say the past year has challenged everyone involved in auto finance. From the dealerships and lenders to the borrowers and lessees, every participant in the auto finance chain has been stressed. Lenders contended with a tidal wave of requests for forbearance while meeting the varying federal and state regulations that governed credit reporting; and dealers and lenders sought ways to conduct contactless transactions to help sustain some level of business viability.
Entities whose systems already supported a high degree of digitization fared much better than those who relied on manual, paper-based processes. The challenges of 2020 have set the direction for several auto finance industry trends in 2021. Moving forward, here’s what lenders are facing and how many are responding.
The Extended Tax Return Deadline Is Likely to Impact the Seasonal Sales Peak
In a normal year, dealers and lenders expect a seasonal jump in sales in early Q2 as a result of consumers purchasing new vehicles based on the projections of their tax returns. With tax deadlines extended yet again, that jump might have been delayed until later in the year. However, in comparison to sales peaks in normal years, we can expect this year’s peak is somewhat on track although the peak was a bit lower and is lasting longer.
We Don’t Yet Have an Accurate Picture of Payments
As a result of the CARES Act regulating how lenders report information, it’s been difficult to accurately determine how well borrowers actually kept up with existing loan and lease payments. Certainly, each lending institution with the right analytics tools can assess the current performance of its own auto loan portfolio, but as payment relief or forbearance programs come to an end, the results may reveal a more pessimistic assessment of risk. If that’s the case, it’s possible we’ll see a significant jump in defaults, especially for lenders focusing on the subprime market. As a result, lenders may be torn between offering rates that encourage more leases and loans and more conservative rates to avoid added risk while recovering from 2020.
There Will be a Continued Aggressive Digitization of the Lending Process
As we mentioned earlier, entities in the auto lending industry that had already implemented highly digitized processes fared better than those who relied on manual processes. Digitized processes facilitated contactless interactions and transitions among dealers, lenders, and borrowers. Along with these benefits, processes were completed faster and at lower costs.
As a result of the lessons learned in 2020, we expect lenders to aggressively adopt lending systems that offer extensive automation capabilities for loan originations. In particular, these systems:
- Enable dealers to arrange financing online, using programs and rates specifically tailored to the dealership’s market segments.
- Allow borrowers to apply for loans online, including mobile devices.
- Eliminate paper from the loan origination process by:
- Capturing documentation digitally, such as driver’s licenses, pay stubs, and proof of residence.
- Delivering loan offers as e-contracts.
- Supporting e-signatures for easy confirmation and acceptance of the contract.
- Integrate lending information services, such as alternative data sources, vehicle valuations, and employment and income verification to accelerate lending decisions while simultaneously reducing risk.
Similarly, lenders with servicing departments will look to improve the efficiency of these operations, especially after struggling with the servicing demands of 2020. Greater efficiency is achieved through:
- A tightened integration with the loan origination system to ensure borrower information automatically and accurately moves to the servicing system.
- Rule-based workflows and scripts that allow lenders to define processes that eliminate manual handoffs between functions.
- Customizable workflows for frequent yet potentially complicated servicing tasks, such as complaint resolution, collateral management, and default management, including collections, repossession, and bankruptcy.
- Secure access to account information online—including mobile—applications that allow borrowers to set up payments, make one-time payments, confirm a payment has been made, download statements, and calculate pay-off amounts.
Increased digitization of loan and lease originations and servicing benefits both borrowers and lenders. Borrowers experience greater convenience in interacting with the lender throughout the lending cycle, and lenders experience lower operating costs as a result of increased efficiency.
Growth in Fraud Will Continue to Parallel Growth in Vehicle Sales
With the continued recovery in auto sales throughout 2021, expect an increase in auto loan fraud, specifically synthetic identity fraud. High-value vehicles and the subprime segment are the most likely areas to suspect fraud. Cartels are skilled in creating a synthetic identity for a borrower requesting a loan for a high-end vehicle. Shortly after the vehicle leaves the lot, it’s usually headed to an off-shore buyer and the loan is headed toward default. Lenders who focus on subprime markets may see an increase in fraudulent auto loan or lease applications from borrowers intent on acquiring a vehicle.
Lenders who do indirect lending may be more likely to experience this fraud. And as much as we cheer the benefits of digital loan originations, digital makes it easier to commit fraud. An in-person loan origination process provides a degree of borrower verification and the ability to ask for clarification if there appear to be discrepancies. While in-person is a slower process, it inherently involves less risk.
Some estimates indicate that as many as one in seven auto loan applications may contain misinformation intended to boost a borrower’s chances of obtaining a loan, get a better rate, or pave the way for vehicle theft. At a minimum, lenders need to incorporate information verification sources for identity, employment, and income into the loan and lease origination process to minimize fraud. Lenders who find fraud to be particularly problematic will want to consider fraud solutions that use machine learning techniques to quickly identify applications suspected of fraud, indicate the specific type of fraud, and provide a confidence factor for the decision.
Many Will Evaluate the Option to Outsource
Many lenders were forced to rethink their loan and lease servicing strategy in 2020, as those with in-house servicing systems struggled to handle the volume and complexity of borrower requests as the economy shut down. The problem was exacerbated by requirements to work remotely. As a result, many lenders are now evaluating the benefits of loan and lease servicing outsourcing, some of which are significant:
- Decreased worries about staffing, office space, and software licenses as servicing demands fluctuate with market conditions.
- Improved call center hours, including weekends, holidays, and 24/7 support, if needed.
- Optimized title management processes, including vehicle, lienholder, and registered owner validation; follow-up with delayed titles; and efficient title sign offs.
- Streamlined cash management, including lockbox, reconciliation and cash disbursements, payment processing, and payment research for rejected items.
For lenders who are saddled with outdated servicing software that would require a significant upgrade or replacement with a new system in order to provide the required level of service, outsourcing can be the quickest and most cost-effective way to improve servicing. Economies of scale, latest technologies, and the depth of lending experience available from an outsourcing provider allow them to handle loan and lease servicing far more efficiently and at a lower overall cost in comparison to a lender’s in-house servicing operations.
Will You Adopt the Top Auto Finance Industry Trends for 2021?
Learning from 2020, lenders want to be prepared to handle disruption and become far more efficient in managing key processes throughout the lending cycle. As a result, auto finance industry trends for 2021 will likely focus on initiatives and solutions that enable greater flexibility and speed in responding to economic changes; support well-informed lending decisions to minimize risk as the economy recovers; simplify the loan or lease origination process; and reduce loan servicing costs.
Lenders seeking the fast track to better handle loan and lease servicing will begin to evaluate established business process outsourcing providers. Following the disruption of 2020, the auto finance industry trends in 2021 should establish a foundation for resilience.
defi SOLUTIONS provides configurable lease or loan origination systems, loan management and servicing, analytics and reporting, and a wide range of technology enabled BPO services. If you’ve struggled through 2020 due to the limitations of your current lending technology solutions, take the first step in realizing the benefits of 2021 auto finance industry trends with modern technology. Contact our team today or register for a demo.