With 17 million vehicles sold in 2018 and 16.8 million new cars and light trucks predicted in 2019 by NADA (now J.D. Power), the upward trend of recent years seems to have ended. However, according to the latest Quarterly Report on Household Debt and Credit, auto loans have been climbing since 2011, propelled by growth in newly-originated loans. With $584 billion in new auto loans and leases, 2018 reached a peak in the nineteen years of tracking loan origination data. That seems to contradict sales trends, but high vehicle prices and inflation factor in the increase. Fewer sales, higher vehicle values. Regardless, for many auto lenders, “downturn” more aptly characterizes the current market.
Auto Lenders Downturns: How To Prosper
Depending on your market segment focus and current loan origination software, 2019 may be business as usual or wake up call to reevaluate your lending strategy. In a downturn, auto lenders experience even greater competition. To prosper, lenders need to engage borrowers across all channels—dealers, online, and mobile; respond quickly to applications, and confidently make lending decisions. Let’s explore how these practices can help lenders prosper in a downturn.
Engage Borrowers Across All Channels
Lenders need to engage borrowers across every channel—dealers, online, and mobile. Baby boomers are comfortable with purchase and finance at the dealer. Millennials live mobile/online, spend time researching vehicles and financing prior to purchasing, and contrary to notions of reduced car ownership, millennials account for a significant market segment.
Modern loan origination solutions support all of these channels. Pre-integration with leading dealer management systems (DMS) such as RouteOne, Dealertrack, CU Direct, and Corelane Technologies gives lenders a presence in thousands of dealerships. With the convenience of mobile devices, borrowers can initiate an auto loan application, anywhere, anytime, opening new lending opportunities you’d otherwise miss.
Respond Quickly to Applications
E-commerce has created expectations of instant transactions, yet the auto financing process is often protracted. Three capabilities of a modern loan origination solution can help lenders reduce application response time: digital origination, auto-structuring, and decision rules. Each of these reduces time-consuming manual processes.
- Digital auto loan origination eliminates paper documents whose handling complicates the process and delays decisions. In a completely digital application, information such as drivers license, income statement, proof of residence (POR) is captured via scanner or mobile device. This information, along with all other applicant details, is digitally packaged and securely sent to the lender for processing. Upon receipt by the loan origination solution that application can immediately be reviewed.
- Decision rules replace many of the manual underwriting decisions. A lender’s credit policies are translated into sets of decision rules that evaluate applicant attributes and drive the next steps in the underwriting process. As an example, if FICO score is 740 or greater then automatically move the application to the superprime queue, verify employment via Equifax’s TheWorkNumber, and offer a deal for superprime borrowers.
- Auto structuring eliminates delays in responding to applications that initially fail credit policies. Using goal-oriented decision rules, auto-structuring adjusts loan terms until it creates a suitable deal structure matching your credit policies. If auto-structuring fails to match your credit policies, an auto-decline is issued. In many instances, auto-structuring can return a conditional deal in seconds, without needing an underwriter.
The common thread of these capabilities is automation. It’s the key to improving loan origination efficiency and consistency, and essential to responding to lending opportunities quickly.
Make Confident Lending Decisions
Lenders face a growing threat of fraudulent loan applications. Fraudulent applications strongly correlate with defaults that become delinquencies. Individuals with poor credit scores, fraud rings, and even dealers perpetrate loan fraud.
Fintech capabilities of machine learning and analytics now let lenders identify potentially fraudulent applications the moment they enter the LOS. By reviewing applicant attributes and looking for inconsistencies both obvious and subtle, fraud analysis can identify the type of fraud:
- Identity theft;
- Income misrepresentation;
- Employment representation;
- Straw buyer;
- Collateral inflation; or
- Any combination thereof.
Based on the type of suspected fraud, lenders can determine the appropriate underwriting step—further review for confirmation or resolution by an experienced underwriter, conditional approval with stipulations, or decline. In a market downturn, you need to be confident in every lending decision.
Auto Lenders: Downturn Doesn’t Mean Decline in Opportunity
Savvy auto lenders can prosper in a market downturn by using a modern LOS. Integration with leading DMS, support for mobile auto loan application submissions, automation, and fraud analytics let lenders respond to a greater number of lending applications, faster and more consistently, while minimizing the risk of fraud. With these capabilities, you’ll not prosper during any downturn—you’ll shine when the upturn arrives.
defi SOLUTIONS‘ loan origination and analytics software experts welcome the opportunity to discuss the challenges of today’s auto lending market. Our cloud-based solution supports the latest fintech capabilities that lenders need to prosper in a downturn by contacting our team today or registering for a demo of defi LOS.
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