How concerned should you be about 2018 auto loan delinquency rates? The answer depends on your credit policies, their effect on your portfolio performance, and your ability to make adjustments based on market trends. You could compare your delinquency rates against national averages. KCFed: Main Street Views, using data from the Federal Reserve Bank of New York Consumer Credit Panel/Equifax and NBER, reports that delinquency rates among subprime borrowers reached 16.3 percent as of Q2 2018. How do you compare? The report attributes the rise in delinquency rates primarily to subprime borrowers, who constitute approximately a quarter of total outstanding auto debt.
Every lender has different ideas about what constitutes “acceptable” or “manageable” delinquency rates. The clearest differences are between banks and credit unions (whose credit policies are usually more conservative) and fincos (who typically take on greater risk). Subprime lenders have begun to tighten credit, and their 2018 auto loan delinquency rates are expected to drop and continue this trend into 2019.
Auto Loan Delinquency Rates: Tracking Vintages
Credit policies are the greatest influence on delinquencies, Daniel Parry provides great guidance in his “The Anatomy of A Turnaround”: You can’t just “set it and forget it.”
It takes at least six months into a loan cycle before you begin to see the effects of credit policies. You gain an even clearer picture of vintages and their overall trends 12 to 18 months out.
Parry says lenders fail because they don’t act quickly enough in identifying early indicators of price, loss, or expenses that are unsustainable. Poor financial controls, misguided incentives that encourage exceptions, and lowering credit standards to gain volume are factors that lead to auto loan delinquencies.
The impact of each of these factors, however, can be reduced. Fintech capabilities of modern lending solutions give lenders the tools to reduce their auto loan delinquency rates.
Workflow and Decision Rules Establish Consistent Controls
Once upon a time, credit policies and controls might have been sent to an in-house expert with innate market knowledge and careful process oversight from origination through payoff. Someone who took a combination of good market sense, manageable portfolio size, and diligent authorized hands-on adjustments to policies in response to market dynamics. In a larger lending organization, the CFO might have the discipline and the accounting tools to closely monitor and adjust credit policies to optimize portfolio performance personally. Success in both instances depends on the expertise and experience of an individual.
Lending organizations without an experienced lending guru directing long-term success have a tough time establishing controls to guide lending decisions. Without consistent credit policy and decisioning controls, lending processes are subject to variations and inconsistencies.
Modern lending systems, however, offer lenders a rich set of controls that let them establish and enforce consistent policies and processes. These capabilities—workflow and decision rules—make it easy for lenders to translate credit policies into consistently repeatable processes, controlling risk and minimizing delinquencies.
- Workflows guide underwriters through the specific steps, tasks, and decisions to evaluate applicant creditworthiness, structure deals by matching applicant attributes to credit policies, manage communications, and handle funding.
- Decision rules provide the detailed controls throughout the workflows to ensure that decisions are made in accord with current credit policies. Decision rules verify that ratios like PTI, DTI and LTV are within bounds. They also ensure overrides and exceptions are made only with the review and approval of senior loan officers, and that rates offered reflect a risk-based pricing strategy.
Workflows and decision rules are easily configured to include credit policies and lending processes that minimize risk and delinquencies. As market conditions change, it’s easy to make modifications to workflows and decision rules that reflect new policies and procedures.
Analytics For Insight Into Delinquency Trends
There’s no more powerful tool to help minimize delinquencies than analytics. Loan portfolio performance is greatly influenced by the decisions you make at loan origination. Analytics allows you to correlate loan performance with the credit policies at loan origination. Let’s consider three ways that analytics provides insight regarding delinquencies.
- Provide early warning for delinquencies that may become defaults. If the analysis indicates a small number of loans becoming 30+ DPD, conduct further analysis to determine if there are common loan characteristics. Were they all sourced from a specific dealer? Were LTV ratios unduly generous? Do delinquencies correlate with geography and recent layoffs at a major employer? Use the results of the findings to modify credit policies as well as proactively offer plans to avoid defaults.
- Analyze roll rates to determine characteristics of loans that roll past due but then return to current. Apply this analysis to develop a more accurate prediction of loans in your portfolio that are current and those that will likely become chargeoffs. Use the predictive model to improve your portfolio strategy and access to additional funding.
- Analyze defaults for common characteristics. Conduct further analysis to uncover early predictors of defaults and apply this insight to underwriting policies (using workflows and decision rules) to reduce the risk of delinquencies leading to defaults.
To gain the maximum benefit from analytics lenders need a disciplined approach, regularly noting signs of risk. Once identified, lenders can then continually adjust credit policies and procedures to reduce their delinquency rates.
2018 Auto Loan Delinquency Rates On The Decline
After a period of post-recession loosen of credit policies that resulted in increased subprime delinquencies, lenders are beginning to tighten policies. We’re starting to see a decline in 2018 auto loan delinquency rates and this trend is expected to continue into 2019. Savvy lenders can improve delinquency rates not only by tightening credit policies, but also by using workflow, decision rules, and analytics to implement and enforce credit policies and provide early identification of negative trends.
defi SOLUTIONS loan origination and analytics software experts welcome the opportunity to discuss how we can help you be significantly more effective in managing delinquencies. Take the first step toward reducing the risk of delinquency by contacting our team today or registering for a demo of defi LOS and defi Analytics.
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