HOW AUTO STRUCTURING CAPTURES MORE AUTO LOANS

In a competitive auto lending market, what gives you the greatest advantage in capturing more auto loans and growing your portfolio? Experienced auto lenders will offer a range of answers: Marketing strategy, credit policies, process efficiency, technology, and more. Each is valid. Shortcomings in one or more areas are certain to negatively impact performance.

In this blog we focus on two of the factors: process efficiency and enabling technology that allows lenders to replace manual application reviews and decisioning with auto structuring. The result is faster lending decisions, lower processing costs, and most importantly, improved ability to capture more auto loans.

Of all the steps in the auto lending cycle, auto loan origination offers the best opportunity to employ fintech capabilities to improve process efficiency and capture more loans. A modern loan origination solution (LOS) captures loan applications digitally, eliminating any and all vestiges of paper and its inherent inefficiency. Then, applying automation and decision rules, the LOS facilitates consistent, faster lending decisions that help lenders capture a greater volume of auto loans.

Automation and decision rules enable these improvements in two ways. First, by quickly declining applications that do not match any credit policies. Second, by significantly reducing the time to respond to an application using auto structuring.

How Auto Structuring Captures More Auto Loans

Applications that don’t match your credit policies are processed without wasting valuable underwriter time. Credit policies, translated into decision rules, immediately disqualify applications with poor credit scores, insufficient down payments, high-risk LTV, or any other red flags that represent an unacceptable risk. Workflow and automation then coordinate the creation of the adverse action and sending the response (email or postal) to the applicant.  

Near-Instantaneous Decisions for Qualified Applicants

When applications fall within the parameters (or slightly outside) of a lender’s credit policies, auto structuring accelerates the decision and responds with an offer. In essence, auto structuring attempts to structure the best deal, working within the constraints of the applicant’s attributes and the lender’s credit policies. In the best cases, this is accomplished in seconds, giving the lender a tremendous competitive advantage in response time and capturing loans. Two scenarios help illustrate the capabilities and value of auto structuring.

Auto-Approvals

Applications with exceptional and very good credit scores can receive a near-immediate response and offer. Credit policies are mapped to workflow and business rules that evaluate the loan amount, vehicle, LTV, and other relevant attributes to structure a competitive deal. This is accomplished without requiring manual review by an underwriter. Workflow then ensures the deal is packaged and sent electronically within seconds to the applicant. Note that exceptional credit scores greatly simplify auto structuring process. There are far fewer attributes and steps involved in the decision process, in comparison to the next scenario.

Other Lending Tiers

For lenders who focus on the good, fair, or very poor tiers, auto structuring saves time evaluating applicant attributes and structuring a deal that both appeals to the applicant and minimizes lender risk. When the applicant is not an auto-decline, but one or more attributes fall outside of established credit policies, then auto structuring attempts to find a deal structure that is mutually acceptable to the applicant and lender. For example, alternatives proposed by auto structuring could be:

• Extend the loan term length from 60 months to 72 months to reduce the monthly payment;
• Increase the downpayment from $1,500 to $2,500 and lower the interest rate by 50 points; or
• Decrease the monthly payment by $100 and extend the payments to 60 months to meet the PTI requirement.

Auto structuring is flexible and powerful. Auto structuring makes iterative attempts to arrive at a deal structure, and can be configured to offer multiple deals. It can also offer conditional approvals to further increase the probability of loan capture.

Auto structuring isn’t guaranteed to find a deal for every application. If it can’t make an offer, it will then initiate an auto-decline workflow. Alternatively, the workflow could be set to have an experienced underwriter review the application and attempt to structure a suitable deal.

Auto Structuring: a Significant Competitive Advantage

Auto structuring accelerates decision time, so that lenders can respond to applications in seconds. Dealers favor lenders who respond quickly and help to close sales. Shorter time in the dealership improves the customer experience. Individuals who initiate auto loan applications on their mobile devices have come to expect instantaneous responses. Lenders who can’t respond to offers in seconds are at a disadvantage.

Auto Structuring: A Real World Success

Nothing illustrates the benefit and value of new technology or new approaches to lending than an actual client’s success. An east-coast bank with a substantial auto lending practice implemented auto structuring in their loan origination process and reports the following benefits:

• 15% to 20% improvement in loan processing productivity

• 25% increase in capture applications as a result of faster responses to loan applications

• $5 million first-year increase in their auto lending business  

In a competitive auto lending market decision, speed is a big help in capturing more auto loans. Auto structuring enables process improvements with fast, consistent decisioning, lower overall processing costs, and the ability to focus underwriter time and skills where they are most needed.