An estimated 15% of U.S. consumers have FICO scores of less than 550 (a good FICO is 700), presenting a growing opportunity for credit unions in a subprime market that is expanding because of the recession, says Tony Boutelle, president/CEO of CU Direct Corp.
“To do it right, credit unions need to hire experienced people to work with them on entering the subprime market,” Boutelle says. “You can’t just transition from prime lending to subprime lending without setting up a different service and collections approach. It’s a unique and specialized market. Credit unions need to be very careful with it.”
Boutelle cites a recent Automotive News article on subprime lending that says the segment is growing rapidly. It reports that 15% of auto loans were made to subprime borrowers during the first half of 2012, and that the percentage is now estimated to be as high as 25%.
Joe Miller cites an interesting new twist to consumers’ traditional attitudes toward debt: Many will default on a mortgage before they’ll default on an auto loan.
This has surprised many big lenders, says Miller, director of customer service at AutoIMS.
“Keeping a job becomes the most important thing for people whose mortgages are underwater. They need a car to get to work. A mortgage might take six months to foreclose on while an auto can be repossessed within 30 days,” says Miller.
Boutelle notes many credit unions believe their members’ top priority is being able to get to their jobs. Besides, it’s easier to pay $400 per month on a car loan than it is to pay $4,000 on an underwater mortgage.
“Credit unions are getting more aggressive about making auto loans to their current members regardless of their home loan status,” he says. “Low interest rates, a willingness to take risks, and lots of available cash combine to make the market attractive. They’re also betting that the catastrophic things that can kill subprime lending, such as an economic meltdown, are much less likely to occur within the foreseeable future.”
Also, many people have low FICO scores solely because of the housing market collapse. “They’re good risks otherwise,” Boutelle says.
Still, to enter the subprime market, credit unions must take service to a whole new level, says Miller.
“That means lots of phone calls, monitoring, and follow-up. It’s more of an art than a science: Are you dealing with somebody you trust to pay you back and who may become a member for life—or are you opening yourself to a liability?”
A credit union, for example, might wait up to 30 days to contact a 700 FICO borrower who’s late on a loan payment.
“But a 600 FICO borrower is somebody you should call within five days of a missed payment,” Boutelle says. “Better yet, call before the payment is due to remind the member or, best of all, set up automatic payments.”
He cautions credit unions to make subprime loans only to members with whom they’re familiar.
“Your relationship with them increases the likelihood that they’ll pay you back. But when you pick up subprime borrowers, say from a dealer, you don’t have a relationship with them. They’re less likely to pay back the loan.”
NEXT: How vendors help
How vendors help
Well before matters reach the need for repossession, Boutelle says software such as CU Direct’s Lending Insights is necessary for setting up a subprime lending program.
“The software monitors and maintains every kind of loan, from subprime to prime, from auto to personal to home,” he says.
CU Direct also works with another company that provides partial default insurance for subprime loans.
Miller agrees that credit unions’ ability to safely provide auto loans to people with impaired credit largely depends on their member base.
“It should be a customized decision and you should be prepared to have recourse,” he advises. “Get a sense for how and where the car will be used, and begin to evaluate repossession and recovery vendors who can help you recover your assets quickly and professionally should something go wrong.”
AutoIMS provides a technology platform that makes it easy to manage repossession agents, vehicles assigned for repossession, and vehicles assigned for auction sale.
“So many decisions have to be made about each vehicle during these processes that depending on faxes, emails, and phone calls would make it prohibitive to make subprime loans,” Miller says. “Our system replaces an unmanageable amount of communications and spreadsheets with a system that in many cases allows a credit union to run a one-person auto lending and repossession show.”
To find a repo agent, for example, lenders log into AutoIMS and find who’s close, who’s available, their up-to-date insurance bond information, their performance record, and a side-by-side comparison with other agents in their area.
“Once you use the system to assign an agent, it prompts the agent to send you updates and status reports,” Miller says. “The same thing applies to auction assignments and disposal. The systems finds the closest auction, arranges transport, accesses the auction-provided condition report, makes intelligent repair and pricing decisions, and tracks and reports on performance.”
AutoIMS, an affiliate of the auto auction industry, lists 500 auctions nationwide in its system.
“A credit union picks which auction it wants to send a car to and then electronically submits all pertinent data to the auctioneer including legal compliance requirements for that auction’s particular state, and other preferences related to selling at auction,” Miller explains. “The credit union can add special requests, such as putting a hold on selling a vehicle until a particular date.”
Even though most repossessed vehicles aren’t of the highest quality, there has been a strong seller’s market over the past two years, he adds.
“New car sales have dropped as people kept their old cars longer. A low supply of used cars, which now appears to be easing, has allowed auctions to bring high prices on many cars. We’ve even had cases where the sale of a repossessed car not only paid off the debt owed but allowed for a profit.”
Whatever software credit unions use to enter the subprime auto loan market, Boutelle says it’s worth repeating one important rule: “Look to your existing member base for your subprime borrowers.”
NEXT: Collateral Management Systems: The Next Generation
Collateral Management Systems: The Next Generation
The latest collateral management systems reduce time and eliminate roadblocks for collectors by incorporating global positioning and cellular technologies, according to a Spireon white paper, “Collateral Management Systems: The Benefits of Deploying for Vehicle Finance.”
These technologies allow users to get information in real time and find the location and movement of assets 24/7. Plus, lenders can use these systems to remind customers that their payments are past due via a warning signal located in the vehicle or with automated text alerts.
Other elements for a state-of-the art collateral management system include:
Spireon’s LoanPlus collateral management system helps auto lenders improve loan portfolio performance, price loans more competitively, and improve collections efforts. Visit spireon.com for more information.