It’s that time of year again when companies embark on their mid-year reviews – a time to evaluate what is working and what is not, a time to make adjustments and take on new initiatives in an effort to end the year on a strong positive note. The mid-year check-up provides a useful yardstick for auto lenders as well.
What’s the market telling us right now and what lessons can lenders take into the last half of the year? Just this last week, we learned that auto default rates hit a 10-year low in June, dipping to .82 percent according to the S&P Experian Consumer Credit Default Indices. While those numbers show cause for cheer, we also learned if you are a subprime lender you may not be raising a glass just yet. S&P Global Ratings showed that in May 2017, losses recoveries and delinquencies worsened month-over-month and year-over-year. Some would argue that those losses are not reflective of the subprime market overall and should be attributed to the composition of the index. At the same time, the subprime lenders we serve continue to shore up risk mitigation strategies.
Implications of Subprime Originations Pullback
By now, it’s no secret that some larger subprime lenders faced with increased risk opt to pull back on originations in an effort to stem the tide of losses. Here’s where smaller lenders see an opportunity to claim some of that subprime space. One lender’s “loss” may be another lender’s gain – we are not here to pick sides, but rather to see the opportunities that both sides may miss.
When larger subprime lenders pull back on originations to mitigate risk, they ultimately also risk cutting back on what makes them money. And with a mere six months left in 2017, these lenders may not have enough time left this year to reap the benefits of those cuts. An alternative at mid-year is to shore up risk management strategies, evaluate days-past-due strategies, find ways to take action earlier to cure loans and avoid charge-offs.
For smaller lenders, looking to capitalize on opportunities in the subprime space, now is the perfect time to invest in strategies to protect against delinquencies and evaluate opportunities to gain a competitive edge. Lessons from “the big guys” apply here and often the smaller lenders have a built-in advantage – the ability to move quickly, innovate and disrupt. Small lenders can quickly deploy technology to help make contact sooner and recover faster. They can integrate scoring data that alerts them to possible risk on accounts so that they can accelerate collections or recovery activity.
Summer Slowdown Looms
If history proves right, evidence of a summer slow-down may soon materialize. People often allocate funds for things other than auto payments like vacations, back-to-school purchases or college expenses. As a result, we tend to see delinquencies rise all the way through December.
Will that trend surface this year? We don’t know but now is a good time to take action before those delinquencies grow. And if the trend fails to materialize you have made improvements that will have a positive impact on your portfolio anyway.
Lenders are in competition, at the same time, there is a shared “protectiveness” within the industry. As a whole, we want to succeed, we want the industry to be viewed in a positive light and avoid unfounded negative perceptions of lending or collections practices. We want people to know that we are helping to move our economy and contribute to society by helping people to get the transportation they need to get to their jobs and care for their families.
Shared industry goals have contributed to more idea sharing among lenders. Whether it’s industry events and tradeshows like AutoFinCon where lenders come together to network, and share ideas and best practices, or lenders putting their successes out in press releases and articles, everyone benefits.
Making the Most of the Mid-Year
What do your mid-year plans call for? What changes are you making to mitigate risk and end the year on a high note? We look forward to continuing the conversation through the end of the year.
Jeremiah Wheeler is the VP of Financial Services for DRN, the presenting sponsor of Auto Fin Con 2017.
Early bird registration for this year’s event is now open. Click here to register today and save $300.