By Ray Birch
CHICAGO—Credit unions are being urged to beef up their auto-decisioning systems to capture more lower-score auto loan borrowers as those folks come rolling back to the market.
Satyan Merchant, SVP of financial services and leader of the automotive businesses for TransUnion, explained a significant number of below-prime and subprime borrowers have been out of the market during the pandemic for several reasons, but now are re-entering the space and looking for a speedy deal.
Merchant said many credit union auto-decisioning systems are not geared for the below-prime borrower—instead focusing on prime paper—and the result is often these below-prime applications get kicked out of the digital pipeline to a human for a decision, which slows down approval and often loses the borrower.
“Traditionally, credit unions have had relatively low rates of auto loan auto decisioning approvals as a percentage of their overall loan approvals,” said Merchant. “They use relatively simple auto-decisioning systems that are not quite as sophisticated as the independent auto lenders and even captive lenders, that are able to really find qualified borrowers and provide them an appropriate offer for a loan.”
Merchant said what that means is credit unions, with their auto decisioning tools, tend only to capture the “easy stuff.”
“We are talking about the super, well-qualified borrowers where you don't need too much sophistication to make a loan at a 780 credit score,” he explained. “What they need to do is to continue to work on their automated loan decision systems so that they can try to get more of that middle-ground borrower, not necessarily the subprime. But it's maybe near prime or just below prime.”
Those kinds of underwriting decisions are going to be needed to keep pace with other lenders who will be making loans to more borrowers below prime in the coming months, according to Merchant.
Future Growth?
As CUToday.info reported, TransUnion’s latest data suggest more lenders will focus on subprime to grow in a year in which auto lending is expected to remain strong, before fading a bit, according to a recent CUNA forecast. “Future growth … may be dependent upon subprime borrowers,” TransUnion’s report stated.
Satyan Merchant
As CUToday.info has also extensively reported, new car prices have been accelerating quickly in recent years, first due to all the additional technology included in vehicles, and now due to a shortage of microchips that has stalled production of new cars across all automakers.
The new car shortage has even led to many buyers now paying above sticker for the new vehicle they want, raising the average selling price. In turn, that has led to higher used car prices as well, which has then led to a used car shortage that has driven prices higher.
Driven Out of Market
Merchant said the high price of cars had driven many subprime borrowers out of the market.
“In the fourth quarter of 2020 we saw a pretty significant drop-off in sub-prime borrowers, in year-over-year decline,” said Merchant. “And there's a good explanation for that. That was the beginning of what we're still experiencing now—the vehicle inventory challenge. That really started to hit towards the end of 2020, and the impact of the inventory shortage was prices of vehicles began rising. That basically took a lot of subprime borrowers out of the market, because the inventory of the vehicles they could afford was not available. They could not find the monthly payments, cars in their price range, they had been looking for. That ended up in a big drop in subprime borrowers.”
Merchant noted that federal stimulus payments had dried up at that point, making it even more difficult for borrowers below prime to buy a car.
But Merchant said TransUnion is forecasting a pickup in below-prime subprime borrowers, adding that signs of this segment rebounding are already appearing in Q1 2021, and that will be made clear when that data is finalized.
Merchant emphasized the decline in the number of below-prime borrowers is not the result of lenders tightening their credit standards. Rather, he said there was some natural tightening when the pandemic first struck due to all the unknowns, but standards have since begun to loosen.
Expanded Tools
Yet, with all lenders in what has been a flat auto lending market this year fighting for a piece of a smaller pie, Merchant believes it will be a very aggressive year for auto lending, and emphasized the need to rely on strong auto-decisioning tools designed to make sound decisions for more than just well-qualified borrowers.
Merchant said more credit union decisioning tools should include not just FICO scores but also alternative data, such as rent payments or payments for other goods and services.
“We are seeing this in the captive space and even in the bank lender space,” said Merchant. “The larger banks are using alternative data that can give them greater insight into the borrower. It helps to better assess the risk of the borrower.”