With more and more borrowers falling behind on their auto payments, the industry is starting to see a noticeable increase in repossessions. Even among prime borrowers who represent the lowest default risk, repossessions have doubled according to Lisa Beilfuss Popeo, a senior writer for Barron’s.
In light of these increased delinquencies, some lenders have chosen to accelerate their repossession timelines. I am seeing some subprime lenders repossess after just one missed payment, and some prime lenders repossess after just two missed payments. This is an aggressive increase compared to typical industry norms.
Not surprisingly, the question about whether to accelerate repossession timelines is one that we have received from our clients. It’s an understandable question during these uncertain times, and I can appreciate the desire to capitalize on current inflated automobile pricing.
Our answer to this question starts with a reminder not to overreact in the short term due to abnormal market conditions. Our philosophy has and always will be that while you may have an overall repossession policy for your portfolio, the ultimate decision to repossesses should be based on the individual’s desire and ability to pay. This is especially true in the market conditions we are experiencing today.
As a result, we have not advocated changing policy based on current abnormal used car vehicle pricing trends. We believe this would be a short-sighted and reactionary decision that would ultimately lead to higher losses by picking up vehicles unnecessarily.
So just what are we currently recommending?
First of all, a robust loss mitigation strategy to help borrowers overcome one-time events and keep them in the habit of paying monthly is paramount. Our loss mitigation strategy is based on early and proactive communication as soon as a borrower is showing signs of delinquencies. We work to keep the lines of respectful communication open, trying to understand the real reason for delinquency, and utilizing the appropriate tool to help the borrower overcome their short or long-term issues.
The bottom line is that our repossession strategy will always vary by our clients’ unique borrower base. Our goal is to find the balance between not letting the asset get away by assigning it too late, and repossessing too early which can create an unnecessary extra expense that will be hard for the borrower to overcome.
Other factors to consider when developing a repossession strategy:
- The instances of subprime borrowers defaulting or walking away from an auto loan decrease dramatically as they pay more into the note. Not surprisingly, they are invested and more inclined to work hard to keep the vehicle when more payments have been made. Our repossession strategy reflects this consideration for those customers further along in the loan lifecycle.
- Alternatively, when we see first payment defaults (30 days), this is a much more concerning indicator. In these situations, we will implement our loss mitigation strategies sooner and more aggressively and will be more likely to shorten the timeline to assign repossession.
- Subprime borrowers tend to have lower discretionary income and are more negatively affected by “one-time” unplanned expensive events. In our experience, this typically happens once to twice annually for these customers. Understanding and expecting this reality allows us to work with borrowers during these times and activate a plan to get them current as soon as reasonably possible.
- Many subprime borrowers are fully aware of the fact that 90-day delinquency will undoubtedly lead to a repossession. As that timeframe approaches, it is common for them to hide the vehicle, making repossession far more difficult and costly. With any of the scenarios above, we never let delinquencies get close to the 90-day mark for those reasons.
Ready to Invest In Real Experience and put a team of experienced auto loan servicers to work during these uncertain times? Reach out to us at email@example.com.