Over the past year, credit unions have seen an increasing trend in used vehicle loan delinquencies. In a December 2016 article, S&P Global explained that at the end of the third quarter of 2016, used vehicle loans were the largest delinquent category for credit unions and accounted for $3.70 billion, or 28.41 percent of total delinquencies. As a result of increased delinquencies, charge-offs and vehicle repossessions tend to go hand in hand.
It’s no secret that member vehicle repossessions are a difficult situation for credit unions in many ways. It’s time-consuming, risky in terms of compliance and employees are left to play “auctioneer” to recover lost assets. And in many cases, credit unions take a substantial loss on the loan. These issues have guided many credit unions to seek the solution of Auto Loan Protection to offset the risks of lending competitively.
Auto Loan Protection
Auto Loan Protection is a risk management program that helps credit unions to reduce losses on defaulted loans. The coverage is typically applied by lenders on C, D and E tier loans. The program purchases repossessed vehicles from lenders at higher values than auctions or bids. The program also provides a principal reduction payment to further reduce deficiency balances. In this way, Auto Loan Protection can increase the profitability and yield of your auto loan portfolio.
How It Works
Loan Protection enables credit unions to protect loans by ensuring a predetermined depreciation amount that never changes due to market fluctuation or other factors. The vendor will purchase repossessed vehicles based on guaranteed vehicle values less collision damage, mechanical defects, or excess mileage. Purchase offers are consistently higher than auctions or re-marketers. Credit unions benefit from a 60% to 80% reduction of deficiency balances on repossessed vehicles. The credit union simply defines the member group they wish to apply Auto Loan Protection to while continuing to make all underwriting decisions.
Helping More Members While Protecting Your Portfolio
Finding a solution to help offset costly charge-offs is something that our agency would recommend that all credit unions take advantage of. Regulators and examiners commend credit unions for finding ways to proactively offset charge-offs while approving more loans. The “buy here pay here” and “payday lenders” are steering your members toward high-interest auto loans every day! It’s important to have the ability to offer members with challenged credit a reasonable solution. However, it’s also important to protect your assets and the profitably of your auto loan portfolio to ensure the continued success of your credit union.
To learn more about Auto Loan Protection, please complete the contact form below: