NAFCU Services Blog

Jan 31, 2024

Adapting Market and Economic Shift in 2024: Considerations for an Effective Risk Management Strategy

By:  Open Lending

Over the past 12 months, consumers have started feeling the pinch of the Fed’s rate hike campaign. After enjoying historically low rates just a few years ago, more consumers are priced out of the automotive market, especially those in the near and non-prime segments. Growing vehicle unaffordability combined with tightening lending requirements and increased rejection rates have caused more consumers to distrust financial institutions, a theme we’ll discuss more thoroughly in our upcoming 2024 Vehicle Accessibility Index.

Interest rates are also leading to greater economic uncertainty as lenders become weary of borrowers’ ability to repay loans and pay them on time. Financial institutions are also facing liquidity risk, regulatory changes, and an increasingly competitive market.

Want even more insights as you plan for 2024? Check out our latest Near- and Non-Prime Consumer Update for insights into consumer behavior and car buying and financing preferences.  

For automotive lenders, a robust approach to risk management is critical, given the many challenges they’ll likely continue to face in 2024. At Open Lending, we recommend a “more-better” strategy, which involves doing either more of or doing better in the following areas:

Data-Driven Decisioning

Today, financial institutions must be equipped with cutting-edge tools that analyze vast datasets in real time. Big data increasingly dominate the financial services industry, and automotive lending is no different. If you haven’t found a lending enablement solutions provider, you may already be behind in a market that is growing more and more crowded. By partnering with a lending enablement solutions provider, you can harness the power of AI and machine learning to analyze data deeper and more accurately to make more informed decisions, identify patterns, and predict potential risks.

With a lending enablement solution, loan decisioning can be more dynamic and accurate. For example, Open Lending’s Lenders Protection™ solution uses extensive proprietary and third-party data (including borrower, vehicle, and loan attributes) and analyzes over 2 million risk profiles to predict the probability of prepays, defaults, and default severity. Lenders not only get an accurate score, they also receive an approved or countered loan structure, risk-adjusted price and, unique to Lenders Protection™, third-party default protection.

Dynamic Credit Scoring Models

Traditional credit scoring models fail to capture the dynamic landscape of borrowers and consumers. These standard methods of gauging creditworthiness provide only a partial view of an individual’s financial history and potential, doing the borrower and lender a disservice. Automotive lenders should seek lending enablement solutions that employ adaptive credit scoring models to consider a borrower’s real-time financial behavior. By incorporating alternative data and monitoring changes in creditworthiness, automotive lenders can more accurately assess risk and tailor their decisioning to individual circumstances.

Providing a more accurate view of a borrower can lead to a broader and more diverse borrower base and lending portfolio. For over two decades, Open Lending has advocated for the value of the near- and non-prime segment. These borrowers are often overlooked or deemed too risky prematurely. But Lenders Protection™ analyzes the broadest range of rich data to determine more creditworthy near- and non-prime borrowers and high-yielding opportunities for automotive lenders.

Automated Compliance

Navigating an ever-evolving regulatory environment is something financial institutions have faced for decades. Staying on top of shifting regulations to remain compliant requires significant time and resources. However, lending enablement solutions can help automate routine compliance tasks, freeing resources to focus on more strategic initiatives while ensuring financial institutions exceed regulatory expectations.

One regulatory hurdle facing our customers and financial institutions nationwide is the Current Expected Credit Losses (CECL) accounting standard. Our Lenders Protection™ can help ease the compliance burdens of CECL specifically because it includes third-party default insurance, which can be accounted for as an embedded credit enhancement under CECL, thereby reducing expected credit loss allowance levels and loss provisions.

Decisioning at Speed

Borrowers expect a quick and personalized lending experience. If an automotive lender can’t meet those expectations, there are plenty of other options for them to try. Speed is critical for automotive lenders to stay competitive, enhance customer satisfaction, and capitalize on market opportunities. If you’re looking for a lending enablement solutions provider — or assessing your current partnership — consider how easily the solution integrates with existing systems and how quickly it can provide a score with a complete loan structure, price and decision.

Faster decisioning speed should be a priority for every automotive lender, and your lending enablement solution should help you achieve that. Lenders Protection™, for example, provides a complete loan structure and pricing recommendation in less than five seconds, making automotive loan decisioning virtually instantaneous.

Lending Amid Uncertainty

As we tick down to 2024, automotive lenders should look at their current risk management strategies and find areas to expand innovation and ways to ensure sustainable growth and resilience. While no one can predict the future, the economic outlook seems unlikely to become clearer or more stable in the coming months. However, financial institutions and automotive lenders, in particular, are familiar with operating amid uncertainty. Managing risk is an inherent component of automotive lending, but that doesn’t mean your strategy and approach can’t be enhanced.

Lending enablement solutions ensure your risk management strategy is robust and effective by facilitating data-driven decisioning, delivering dynamic credit scoring, automating compliance, and accelerating decisioning speed. Lenders Protection™ checks these boxes and more by unlocking the value of the near- and non-prime segment and providing third-party default protection. In other words, Lenders Protection empowers growth and risk management simultaneously.

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