NAFCU Services Blog

By: Anne Holtzman, Senior VP of Risk Management | Allied Solutions

In a recent CU Lab discussion with President of NAFCU Services Randy Salser, we discussed the state of auto loan collateral. We discussed some of the intense challenges credit unions face in 2023 and associated tactics to overcome them. In case you missed the podcast episode, here are the highlights:

Vehicle affordability is impacting uninsured collateral.

The reduced affordability of vehicles across the board is bringing delinquencies back fast and furiously. This happens as high interest rates intersect with high vehicle prices, making vehicles less affordable than a few years ago. Insurance premiums are also higher because of higher vehicle values. Borrowers are canceling insurance policies at alarming rates. These factors combined present lenders with a heavy risk of uninsured collateral – collateral that may be valued at less than the loan balance in the event of an accident or total loss. A perfect storm is brewing and delinquencies are at the center. With rising delinquencies and deficiencies, we will start seeing deficiency balances return.

Loan volume is shrinking.

The loan demand we saw during the pandemic is dipping as buyers respond to soaring interest rates. Now, if rates come down, we may see demand grow. In the meantime, loan balances have increased by 38% from 2021 to 2023.

These loans are on overvalued, possibly uninsured, vehicles, bringing large risk profile increases. This highlights the need for enhanced risk measures like securing recovery resources and a risk management insurance program. It is critical for credit unions to be prepared ahead of a surge in loan demand.

Vehicle values are inflated – but not for much longer.

What goes up must come down. This will be the last year, possibly even the last quarter we’ll see inflated vehicle values. Until they come down, insurance claims remain high. The average collateral protection insurance (CPI) loss pre-pandemic was $3,500. In 2023, the average is over $6,000. A nearly doubled increase proves the value and need to protect credit unions and borrowers alike with CPI.  When securing private insurance is difficult, a CPI certificate benefits the borrower by keeping the loan in good standing. In the event of an accident, a CPI claim gives the borrower actual cash value (ACV), minimizing losses across the board.

Repossessions are back, agents are not.

The recovery sector was nearly decimated during the pandemic. Only 70% of repo companies are still in business. Generation Z and millennials are not entering this industry, so these repossession resources will remain restricted.

Here’s the situation: Delinquencies are rising, and we have 30% fewer resources to secure collateral. Fewer resources results in more than a quarter of all industry repo assignment requests being denied.

It’s key for credit unions to aggregate volume with other credit unions for preferential treatment from remaining repo agents. CPI providers (like Allied) can provide aggregated volume and fairly pay repo agents for compliant, effective recovery. The aggregated volume makes your assignments worthwhile for agents.

What now?

I saw things during the pandemic that I’d never seen in my 30 years in this industry. As a result, deficiency balances may be larger than expected, and the pressure on financial institutions to collect that deficiency balance gap through CPI and optimize recovery must be a focus.

As we think about the long game, credit unions must grapple with bolstering risk management measures while still caring for members. Collateral protection insurance is the way to do both. CPI not only protects the lender’s collateral but also has a dual interest aspect: a certificate that is applicable to the borrower in the event of an accident.

It all boils down to recovery rates: CPI provides a 65% recovery rate, compared to a 27% success in recovery without CPI.

Tune into the podcast to hear more auto market predictions for the rest of 2023 and into 2024.