Think back to a time of normalcy in the business world here in the United States – let’s say 30 days ago. The Dow Jones Industrial Average has declined over 9,000 points since February 19, 2020. According to KAR Global Analytical Services’ monthly analysis of wholesale used vehicle prices by vehicle model class, wholesale prices in February averaged $11,339 – up 2.2 percent compared to January and up 5.2 percent relative to February 2019. Given the fact that this article is being written on March 20, and Los Angeles, San Francisco and New York City have moved to ‘shelter in place’ scenarios and many of the auto manufacturers have ceased production and moved to zero interest rate and rebate scenarios, all we know is that March is going to be abysmal and April will most likely be no different. On the consumer front, with reduced hours and layoffs, the last thing that consumers that live month-to-month are going to do is pay their auto loan, especially given the government’s moratorium on foreclosures and by lending institutions on repossessions. So here we are at the beginning, or maybe in the middle, of an unfathomable event that impacts all of us on a worldwide scale. So, what is a lender to do?
It is a given that loan originations are going to be minimal – the consumer, no matter how good the incentives and rebates on vehicles are, really are not going to be out financing vehicles given the job instability in these unprecedented times. The real challenge that lenders and lessors are going to have, over the next couple of months, is in the area of portfolio management and whether the organization is able to withstand reduced revenue. Since the crux of the problem in this evolving scenario is the inability for consumers to work, the real question becomes ‘to what extent should a finance company or lessor work with its consumers?’
At this time, we are approximately two weeks into the crisis in the United States and states are changing their guidance/restrictions by the hour. As of today, most states have placed restrictions on how many people are allowed in close settings – such as customer service centers. In addition, with schools closing, many parents in the work force are having to stay home with their children – both having a negative impact on office staffing. So, what is a customer service center to do? By now, banks, finance company or lessor should have invested in contact center technology that allows for text, e-mail and chat – in addition to calls. If this is the case, scenarios can be devised to manage consumer communications with reduced requirements on physical staff. In an environment such as the one we are currently experiencing, increased emphasis should be placed on utilizing text and e-mail campaigns directing customers to your websites in order to self-serve their own accounts.
One of the challenges that comes into play is balancing the amount of effort required to work with customers that have no money. State and local government have placed restrictions on public locations such as theaters, restaurants, bars, churches and such which means most customers of these employers and those that are having to stay home with their children, will not have money to make their car payments. If you do have communication with these customers, it probably will not result in cash collected. Instead of reaching out to these customers day after day, knowing what the answer is going to be, a solution is to set up programs that allow the customer to communicate their status on a bi-weekly basis, setting out follow-up dates, thereby segregating the low-risk accounts and allowing for sole focus on high-risk accounts.
There has been a lot of discussion about how to assist the customers that are unable to pay. Given the fact that no one has any real idea as to how long the situation is going to last, the conversation around the use of deferments is a hot topic. If a customer cannot make a payment because they have been furloughed, yet has good intentions, do you carry them in delinquency or extend the account not knowing when this is going to end? For finance companies that sell their loans after a couple of months of aging, the ‘extension scenario’ will bring its own set of challenges. Buyers probably won’t buy loans or a portfolio of loans just coming off an extension. They will want to see the customer reestablish a timely payment pattern after this crisis is over, thereby creating a ‘hangover’ type period after things get back to normal.
At this point, there is no right answer as to the ‘extension’ question other than give the customer the benefit of the doubt. It’s way too early in this cycle to even try and fathom when the end will occur. The key to managing the portfolio in times like this is to manage good will with the consumer so that they will stay in contact with you in some shape, form or fashion.
When it comes to the ancillary functions of portfolio management such as bankruptcy, titles, total loss and impounds and even vehicle sales, all are being significantly slowed down which will also impact revenue. As of this writing, at least one of the large auction chains has ceased daily operations until the end of the month. Many of the bankruptcy courts have delayed hearing and adversarial proceedings indefinitely, while allowing plan payers to petition the court for payment relief. Many of the state Department of Motor Vehicles have shut down. Insurance companies and adjustors are running at partial or reduced staff, therefore prolonging claim periods and delaying settlements. All are going to impact consumer relationships as well as impact cash flows.
From a fiscal standpoint, with reduced revenue, how are organizations without deep pockets going to survive? Tough decisions are going to have to be made, from reduced hours to furloughs and layoffs, to shutting the doors. If these things happen, how is the loan portfolio to be maintained or liquidated? Decisions have to be made on how to best manage an existing portfolio at the least cost to the business. One option is to look at outsourcing.
Gone are the days when finance and leasing companies had to be experts in all things related. There are servicers that have made the investment in technology and resources that support the portfolio management process, some specific to auto loans and leases. Over the last decades, companies have been created that focus solely on specific pieces of portfolio management. Given that these businesses focus on one aspect of portfolio management, all of their focus and resources are stacked against being the best at the function. There are loan and lease servicers who focus on nothing but customer relationship and ensuring that the loans perform to the best of their ability. There are companies that focus on even more granular areas of the operation such as bankruptcy management, title management, insurance tracking, repo and recovery, remarketing, total loss settlements and electronic payments. Companies that focus on these and other areas of portfolio management, are ready to assist finance companies either on a temporary or permanent basis.
When we come out of this, the auto finance/lease world will have again evolved. It’s part of our evolution. We went through the lease residual challenges of the ‘90s, the mini-recession of 2001 and the macro-recession of 2009 – each time, we came out battered and bruised; however, our models and processes became that much better. Noone could have foreseen a financial crisis such as this and I am sure that all will put plans in place when this is over to better handle such a scenario in the future. In the meantime, we have to focus, most importantly on our loved ones and secondly, on our businesses. In our business, we have to do the balance between our shareholders, our customers and our team members. The best way to do this is to talk with each other, as an industry. We are all in this together.