In late 2019 many industry publications highlighted the expected auto lending trends for 2020 anticipated by J.D. Powers, Fitch, and other industry analysts. Conservative, yet optimistic, those predictions have been undermined by COVID-19. Now, lenders need to cope with one of the most severe market declines in the history of auto financing.
Captives, banks, credit unions, and fincos ask: How long will this last? How will our portfolio perform? What resources do we need to effectively deal with a climate of uncertainty? Lenders focused on subprime auto financing face even greater risks. With this unprecedented shock, we’re seeing three unanticipated auto lending trends in 2020. There’s a common theme across these three—software and system agility and flexibility in responding to these trends.
|Unanticipated Auto Lending Trends in 2020|
|Unexpected increase in loan servicing volumes stresses systems and resources.|
|Mobile auto loan applications become an essential capability of a digital lending process.|
|Increased demand for vehicle remarketing services.|
#1 Increased Volumes Highlight the Need for Extreme Servicing Flexibility
Servicing has never been a more important part of auto lending. Servicing departments have always managed deferred payments, loan modifications, lease extensions, delinquencies, repossession moratoriums, and defaults. However, the unexpected increase in the volume of requests for accommodations has stressed most loan servicing organizations.
Understanding and implementing federal and state regulations that give borrowers short-term relief requires staff training and servicing system modifications. Lenders have never had to respond so quickly to industry changes. Lenders are sprinting to make these changes, all the while wondering what additional federal and state mandates may be enacted as COVID 19 plays out.
Servicing agents need to understand and consistently apply the criteria that qualify a borrower to seek relief. Agents then need to work with the borrower to make appropriate loan modifications. To support these accommodations, servicing systems need to record the qualifying reason for relief, capture any required documentation to confirm the qualification, and provide means for the agent to modify loan terms—lower interest rate, reduced payments, deferred payments, waiver of late fees, adjustment of finance charges. Depending on state regulations, lenders may need to send a confirmation and explanation of the specific accommodations to the borrower.
To effectively respond to the unprecedented need for loan forbearance, servicing solutions need the ability to:
- Provide multi-channel—phone, email, web, text, postal—support to engage and resolve borrowers’ requests;
- Maintain a single source of borrower information and history of communications, regardless of the interaction channel;
- Easily make changes to processes and policies in response to evolving regulatory requirements; and
- Support an entirely digital loan servicing process.
For many lenders, their existing loan servicing capabilities are inadequate to meet the current volumes of forbearance requests. They’ll compensate with additional staffing and/or longer hours. Any part of servicing involving paper or manual processes will further impede efficiency.
Going forward, lenders must move rapidly to an entirely digital servicing environment, allowing borrowers to engage across popular digital channels and agents to field servicing requests remotely. As an alternative to updating or replacing current servicing software, lenders may also consider outsourcing loan servicing as the most efficient means to achieve these goals.
#2 Mobile Loan Origination Is a Must
Social distancing is one more reason why face-to-face, paper-based loan origination processes are no longer the preferred solution for either the short term or the long run. As more and more of the vehicle purchase process goes digital, the same holds for the loan or lease application process. Prospective borrowers should be able to initiate an application via mobile devices, including capturing digital images of any required documents, such as pay stub, driver’s license, or income statement, in minutes. The user experience must be designed to efficiently capture essential applicant information, minimize errors that could delay processing, and confirm that the application has been successfully submitted. Lenders without a mobile loan origination solution will be foregoing lending opportunities that are vital to maintaining business viability in 2020.
#3 Vehicle Remarketing: Be Prepared
An additional accommodation in the time of COVID-19 is a delay in vehicle repossessions, imposed by state guidance or mandate, as in Pennsylvania, Illinois, or Maryland, or through lender benevolence. Lenders rely on repossessions to limit losses when borrowers default. But the repossession freeze, whether temporary or long-term, will either pinch lenders’ portfolio or significantly impact profitability because of smaller recoveries due to declining used car demand and prices.
For the moment, servicing software needs to be reconfigured to accommodate a hold on repossessions, with lenders working closely with borrowers to find some way to restructure loans to avoid repossessions. In the worst case, lenders need to prepare for a possible increase in repossessions, potentially working with vehicle remarketing service providers to handle volumes efficiently and maximize recovery.
Lending Solutions: Extremely Flexible, Completely Digital
COVID-19 brings a harsh lesson for lenders whose software lacks the flexibility to quickly make modifications in processes and policies to accommodate the current economic challenges. Modifications dictated by federal guidelines, as well as varying state guidelines, will be a continuing aspect of dealing with the financial impact of COVID-19.
Lenders should expect to make additional modifications to their lending programs as the US attempts to return to a redefined state of “normal” over the next few months. Lenders whose lending solutions provide extreme flexibility in making modifications and support a completely digital lending experience are better prepared to deal with unanticipated auto lending trends in 2020 and beyond.
defi SOLUTIONS provides configurable loan origination systems, loan servicing, analytics and reporting, and a wide range of technology-enabled BPO services. If the unexpected trends brought on by COVID 19 are severely challenging your lending systems, learn how we can help you achieve greater lending flexibility and agility. Contact our team today or register for a demo.