Employing an underutilized product to protect borrowers and combat loan losses.
A recent article by the Federal Reserve Bank of New York’s Research and Statistics Group discusses the delinquency shifts in 2018 auto loan originations. The good news is that since beginning to collect data in 2000, 2018 represented the largest total dollars in origination. The vast majority of this loan growth was among prime borrowers, as high volumes of subprime originations appear to be leveling off. Even with these positive results, approximately 14% of credit union and community bank loans in 2018 were represented by borrowers who had a credit score of less than 620.
The challenge in today’s environment is not only the uncertainty of how long these trends will continue, but also the fact that the total volume of subprime loans in the market is greater than ever; and those loans are seeing a steady rise in delinquency. According to the data, the national average of all loans that went from current/early delinquency to serious delinquency rose to 2.4% in the fourth quarter of 2018. This is up from 1.5% in 2012 — and the highest numbers we’ve seen since the recovery after the financial crisis in 2008-2009. More importantly, subprime loans have now reached over 8% in the 90+ delinquency range.
How does insurance play a part in protecting you and your borrowers?
The first and most important step is having procedures in place to track primary insurance coverage and allow for force-placed protection; however, the likelihood that someone is going to keep paying their insurance when they can’t make their car payment is close to zero. One thing that lenders can do to make a difference in protecting their collateral is offering their borrowers a competitively-priced, robust extended warranty at the time of the loan. If your lower-income borrowers are living paycheck-to-paycheck or experiencing financial hardships, it becomes very difficult to pay for unexpected repairs to YOUR collateral. With an extended warranty, they have the ability to keep their car in working condition with little to no money out-of-pocket. This means the collateral will maintain value and continue to provide your borrower with a means to travel to and from work (and therefore the ability to make their loan payments in a timely fashion).
How do I get more of my borrowers to buy an extended warranty?
Loan originators say that warranties are the “toughest sale” and that it’s easier to sell payment protection (life & disability) or GAP. While those products may have a reputation for being simpler to present, the likelihood that a borrower will benefit from an extended warranty is significantly greater. In addition, some of these products offer additional benefits that could save your borrower money on their primary insurance, such as roadside assistance and windshield repair. Extended warranties aren’t the solution for all borrowers and vehicle types, but it’s critical to let the consumer make that educated decision at the time of the loan — not to mention that virtually all extended warranties are transferable and refundable (pro-rata basis). The market for these products is inundated with providers who contact your borrowers by phone and by mail after they finance their loan; so credit unions have the opportunity to be the trusted source for this coverage that protects the borrower, the collateral, and your loan portfolio performance.