A Few Suggestions For Auto Lenders In This Challenging Market

Implications: With auto makers struggling in what could be the worst sales year in a decade, they are facing another challenge: Auto lenders that are getting out of the market. Here are my thoughts on the subject.

Analysis: First the bad news. Car loan delinquency rates are up, repossessions are up, losses from those repossessions are up, many customers are buried in car loans that are in a negative equity "upside down" (in car dealer terms) position. And, to make matters worse, the dreaded subprime and below subprime loans made up 28 percent of new loan origination in the fourth quarter of 2007.

All of the above has led the captive lenders, bank and credit union segments to begin tightening approval conditions, raising down payment requirements and in some cases, getting out of some markets altogether.

I would like to suggest that they not move too quickly. Here are some ideas I picked up from a auto lender client.

One thing to keep in mind, is that auto loans are not similar to mortgages, so a delinquent auto loan payment is not the direct result of an increasing rate or payment on that specific loan, but a sign of trouble in other aspects of the customer's financial health.

Auto lenders must take care not to ignore obvious trouble signs, but instead dive in and address delinquency problems on a number of fronts immediately. Waiting to take action will yield delinquency rates matching those of the mortgage industry.

So how can a lender react? The simple solution is to be constantly be evolving collection and approval methods rather than maintaining the status quo.

The three basic steps to change are people, processes and technology.

One example, younger customers require younger collectors and new personal technology.

One lender I'm familiar with noted that its best collectors are college students. Also, while it used to the norm to avoid collectors with prior credit problems, this has evolved, today, its seen as beneficial to have a collector who understands the customers' situation.

Other key focus areas include constant training and a trick from car dealers, strong incentives for the collectors and their managers.

When all else fails, some lenders are finding success with field trips to the borrowers last known address, something BHPH used car dealers have always done. While this isn't a repossession, it should be done with caution and training.

When it comes to process, many lenders find success if they are willing to rewrite the loan terms. Another page from the BHPH dealers, make sure contact information is constantly updated.

Another key aspect is utilizing the evolution of technology and the various services and programs offered now.

They range from collection platforms serving multiple channels to technologies supporting home-based employees.

In conclusion, with delinquencies growing in every segment of consumer lending, lenders are becoming overwhelmed by the volume of collections.

Institutions must move swiftly and on many fronts, constantly challenging old practices, testing new strategies and taking advantage of new technologies. Benchmarking is at the center of discovering what works, what doesn't and what needs to be improved.