The automotive industry is keeping a close eye on several metrics in 2023 aside from just number of sales. With higher interest rates and a slowing economy, rising delinquencies and repossessions could also pose a growing threat to the health of the industry.
During the pandemic years, a rise in used car prices forced buyers to take out larger loans for their vehicle purchases. While this resulted in higher monthly payments, many consumers could digest this because of stimulus checks. Today, the changing economic tide has made these payments harder for a growing number of Americans. In December, the percentage of subprime auto borrowers who were at least 60 days late on their bills rose to 5.67%, up from a seven-year low of 2.58% in April 2021, according to Fitch Ratings¹. Furthermore, approximately 9.3% of auto loans were represented by people with low credit scores and who are 30 or more days behind on payments at the end of 2022, the highest share since 2010 according to Moody’s Analytics².
More repossessions means more lien title changes
This means more subprime lenders are likely to face an increase in repossession activity beginning in 2023. In an era where it’s important to migrate this process from paper to a more digital format, they are facing great procedural and compliance pressures combined with staffing challenges to handle the increased expected volume.
However, there are several key best practices subprime lenders can consider right now to ease the pains associated with more repossession activity, and how it could affect their bottom lines.
Best practices in an era of staffing challenges
It’s important for auto lenders to strategize now for the coming increase in delinquencies and repossession activity. Thoroughly understanding the many diverse jurisdictional requirements is essential to ensure compliance. Transactions are still likely to be under a microscope, especially with economically stressed borrowers. Those lenders who can track the progress of necessary paperwork will have an advantage, but a digital process can streamline and automate transactions to minimize errors and costs. It’s also important for lenders to pay close attention to how they are managing their default portfolio. As such, it’s wise to document the right approach to handling motor vehicle repossessions to ensure that best practices are compliant across jurisdictions and implemented in a consistent manner.
Lenders should perform quality control assessments to ensure their Compliance Management System (CMS) matches what is communicated to customers. All consumer-facing documentation, as well as the interplay between what the CMS and default servicing systems report must be in sync to avoid improper repossessions. Remember, any action taken, whether part of the repossession or deferral process, is going to be under a microscope from regulators because it has a direct impact on economically disadvantaged consumers during this extremely challenging time.
Other considerations for lenders during these challenging times include:
Review portfolios for exceptions – Be ready for the anticipated influx of defaults and repossessions by making sure titles are properly secured to avoid adding time and complexity to the process. Doing this ahead of the repossession will save from any hassles and also save time and money.
Adjust timelines – Take into account existing delays at the Department of Motor Vehicles and begin title requests earlier to accommodate delays.
Consider automation or outsourcing – It can be challenging to manage the volume of repossession with existing staff. A third-party provider can help streamline the repossession titling process, reduce pain points, and provide transparency.
The right automation program is critical
Lenders typically need help evaluating and understanding the latest state requirements, forms, and fees to decrease the number of rejections and increase overall transaction speed, and they also need help with estimates on their titling in real time. Automation is now helping with continuous monitoring and updating jurisdictional turnaround times, giving lenders accurate estimates and better visibility into completion times. They are also leveraging tools to help view all steps of the transaction, including document images from jurisdictions, as well as end-to-end document tracking.
There is a good chance that more lenders will be faced with this increase in volume of repossession this year. Along with the increased regulatory pressures and staffing challenges, lenders are certain to rely on the right trusted partner to help them transition from paper to digital and leverage these new tools to help ensure all proper procedures are met and processing criteria satisfied.
1: https://www.bloomberg.com/news/articles/2023-01-27/car-repossessions-grow-as-inflation-slams-consumers
2: https://www.wsj.com/articles/more-auto-payments-are-late-exposing-cracks-in-consumer-credit-3cbc2382