Loan Defaults Jar Lenders

In early 2006, finance trend trackers began detecting a disturbing rise in loan defaults and delinquencies, says Brent Burns, president of World Omni Financial Corp.

“The bad news is that we haven't seen it bottom out yet,” he says, referring to a chart showing a sloping rise in consumer credit-quality deterioration. “If you turn the chart upside down, it would look like it's going in the right direction.”

Thirty-day delinquencies are up by more than 8%, according to Experian Automotive, a credit-rating and information agency. That means nearly $33 billion in auto loans are a month late,

Auto credit quality will probably worsen in 2009 and it is spreading to consumers with high credit scores, Burns says at a Auto Finance Summit in Las Vegas.

“In today's economy, there are people who were never past due — who didn't know what it meant to be past due — who are suddenly in that situation,” says Rod Arends, World Omni's assistant vice president-collections.

Before, a consumer with a Fair Isaac Corp. (FICO) credit score of 720 was considered a fairly safe loan risk. Today, lenders run risks even at that level.

“The deterioration starts in the 720-and-above range and widens as you go down the credit spectrum,” Burns says. “Today, 720 is a far different story than it was five years ago, more so as you get into the 680s.”

Spikes in delinquency rates have occurred in areas where the real-estate market overheated the most, Burns says. That includes parts of Florida, California and Arizona.

The increase in defaults and delinquencies has left auto lenders jarred, more cautious and stepping up risk-management efforts.

To reduce the chances of loans going bad, lenders are placing greater demands on auto dealers. That includes insisting they verify information a customer provides on a credit application.

Dealers are rising to the occasion, Burns says. “I've been surprised how our dealers have responded. We position it that the more we can weed out bad stuff, the better it is for everyone. Our message is to verify everything. It's an incredibly effective tool.”

With more loans breaking down, lenders are increasing and prioritizing their collection efforts. The greater the debt, the greater the attempt to get the money. The best collectors are assigned to the worst cases.

“It's about getting the customer on the phone so they'll talk to you,” Arends says. “That's the biggest part of the battle. We've discovered that 42% of the time what was given as a residential phone number was actually for a cell phone. To me, that's amazing.”

The prevalence of cell phones has allowed bill collectors to use text messaging if a borrower in arrears isn't taking calls. Legal restrictions apply, such as ensuring a recipient is not charged for receiving the text messages.

World Omni also is testing the use of emails, Arends says. “Text and email is how the younger generation communicates. We want to get every strategy in place to be able to contact a customer, so they can't say, ‘Well, you never notified me.’”

Once a delinquent borrower is contacted, the bill collector use a script to explain how non-payment can mar a credit rating. They also explain options, with an eye towards finding solutions.

“We try to keep the car on the road, if we can,” Arends says. If not, the borrowers lose their vehicles, either by voluntarily turning them in or through involuntarily repossession.

“It used to be 60% involuntary, 40% voluntary,” he says. “Now, that's flipped. We're seeing a lot of Toyota Sequia SUVs and Tundra pickup trucks being turned in.”