NAFCU Services Blog

Jul 27, 2023

Report on Lending Enablement Solutions

By Matt Roe, Chief Revenue Officer, Open Lending

Rising interest rates and inflation continued to rock the financial sector in the first half of this year. With another rate hike expected before the end of the year, credit unions are facing even more pressure to increase ROA. And many are realizing that traditional borrower pools and decisioning are limiting their ability to serve members and meet profitability targets, especially given the current economic environment.

Open Lending surveyed a group of automotive lending industry leaders for its latest research to discover how lenders are combatting today’s economic uncertainty. The results show that profitable financial institutions often rely on Lending Enablement Solutions to expand their auto loan servicing capabilities and mitigate unnecessary risk.

Near-Prime Borrowers Bolster Credit Unions Against Uncertainty

Amid the potential economic downturn, credit unions must diversify their lending portfolios to reduce risk and maintain profitability. Near-prime borrowers, with credit scores between 560 and 699, represent an opportunity for credit unions to extend their portfolios outside traditional limits and improve resiliency.

While the near-prime borrower segment is often thought to be financially risky, it’s a strategically critical audience to ensure economic resiliency. Interestingly, the typical near-prime consumer actually weathers recessions more effectively than prime consumers because they are more familiar with financial instability — they’re used to managing their finances closely and are less likely to spend money they don’t have.

Automotive lenders reported increased delinquencies from prime borrowers (33%) compared to near-prime borrowers (20%) in recent months. If the trend continues, servicing near-prime borrowers could be the answer to minimizing auto loan defaults — a critical focus for three-quarters (76%) of automotive lenders.

More Inclusive Auto Loan Decisioning Models Are Out There

To reach these near-prime borrowers and mitigate risk, credit unions must embrace new decisioning processes for auto loans.

Fourteen percent of automotive lenders say their current loan decisioning model disqualifies too many applicants. Financial institutions cite bad credit history (71%) and high debt-to-income ratio (61%) as the top two reasons for denying auto loans to potential borrowers. Credit unions must widen their purview to expand their borrower pool.

Traditional underwriting models prioritize FICO scores, income and employment history. Only 34% of institutions use alternative credit data in auto loan decisioning, such as rental history, account balances, and mobile phone payments. Using alternative data helps credit unions identify creditworthy borrowers who may have otherwise been overlooked.

Lending Enablement Solutions Drive Resiliency and Success

Adding more data to the decisioning process may seem counterintuitive, considering the number one complaint among automotive lenders about their current decisioning process was its slow speed. But Lending Enablement Solutions can quickly analyze additional data while streamlining and accelerating the auto loan decisioning and underwriting process.

Look for a Lending Enablement Solution that uses sophisticated analytics like AI and machine learning to quickly evaluate nontraditional variables alongside FICO scores to accurately determine a borrower’s creditworthiness. In many cases, Lending Enablement Solutions can set acceptable profitability criteria, ensuring auto loan rates are both affordable for the borrower and lucrative for the lender. This improved decisioning process leads to better results, like:

·         Financial institutions using Lending Enablement Solutions are more likely to meet their profitability targets than non-users (95% vs. 75%).

·         Lending enablement users are far less likely to report a rise in delinquency rates among near-prime borrowers than non-users (12% vs. 57%).

Nearly two-thirds (65%) of automotive lenders have access to a Lending Enablement Solution to streamline automotive loan decisioning and improve portfolio resiliency. Lending Enablement Solutions empower credit unions to meet the needs of near-prime borrowers and increase auto loan volume while curbing delinquency rates.

To see how Lending Enablement Solutions are helping credit unions navigate an uncertain financial climate confidently, download the full Loans Within Reach: Lending Enablement Benchmark 2023 report.