The true cost of repossession

Being an auto lender comes with several perks—you get to experience the joy of putting your valued members behind the wheel of a vehicle that they may need to get back and forth to work or school, you build and deepen relationships with those members who, hopefully, will continue to do business with your credit union; and, you create a stream of interest income. However, as most lenders know, auto lending also comes with the challenge of delinquency, insurance tracking and placement (which comes with its very own set of challenges!), and in the worst of cases, repossession. Surely, you do as much as you can to avoid getting to this point—practicing conservative lending standards, running an efficient collection operation, and working with your members when delinquency becomes a problem. I can’t imagine a lender ever wants to repossess their member’s vehicle—it’s a lose-lose for everyone involved, but unfortunately, sometimes that is the only option a credit union has to recoup their assets. When it does, consider what repossession really costs your credit union:

Time

Repossessing a vehicle is not a quick process. It requires your collection staff to take time away from their regular duties to contact all of the third-party vendors that it takes to repossess and remarket the vehicle, and see the process all the way through. It can take several weeks of follow-up, and without a streamlined process in place, the communication process can be disjointed.

Furthermore, as I mentioned above, when anyone on your collections staff has to manage the repossession process, they are not on the phone making contact and/or receiving payments from early-stage delinquent borrowers, and the further borrowers fall into delinquency, the higher the likelihood they could potentially experience repossession.

Actual Dollars

Time is money, but an inefficient and substandard recovery process could cost you actual dollars as well. The asset recovery industry is complex—it involves multiple vendors, including repossession agencies, transportation companies, and auction facilities. Forming a partnership with a national remarketing agency can give your credit union access to better rates that are based on volume. In addition to the expertise that comes from working with hundreds of repossession vendors nationwide, these agencies have programs designed to maximize returns at various auctions for the highest return on your assets. In these circumstances, an internal lack of expertise can truly impact your bottom line.

Compliance Risk

It’s no secret that compliance is the name of the game for credit unions, and for the financial services industry, in general. When even presidential candidates are speaking up about the burden lenders face complying with regulations and laws that are handed down by government agencies, it’s evident that remaining compliant is a critical component of risk management for credit unions.

Asset recovery comes with its own set of compliance requirements including due diligence on vendors, which can be time-consuming, as it involves making sure insurance, licenses, and bonds are in place and that they remain up-to-date. Many lenders conduct due diligence when they first start doing business with a vendor, but fail to have a process in place for making sure insurance, licenses, and bonds don’t lapse, and that your institution remains as a loss payee on the insurance. In addition to due diligence on vendors, remaining compliant also means staying up-to-date on the specific requirements state-by-state. Should you end up with a repossession outside of your local area, it becomes critical that you ensure you are operating within those state statutes. If your lending staff and the person(s) handling your repossession efforts do not stay abreast of the various requirements, and keep meticulous records, it could put your entire organization at risk.

Member Relationships                

I think I can be presumptuous here and say that repossessing your member’s vehicle is probably the last thing that you want to do. Not only do repossessions cause deficiency balances and income loss for you, but they put a major strain on your members, which naturally impacts your relationship with them. Even if you worked tirelessly with your member to avoid repossession, at the end of the day, you still end up being coined the “bad guy” in their eyes.

And, when it comes to lender placed insurance policies that push members deep into delinquency, resulting in repossession, the noise and loss of relationship is even more unfortunate. Repossession could lead to a member discontinuing their relationship with you altogether.

Understanding the negative impact that repossession due to premium add-on can have both to our credit union clients and their members, we developed a lender placed product that reduces lender placed premiums to $50 to $90 per month, instead of the typical $2,000 annual policy. Sound too good to be true? It’s not. This CFPB-friendly product, while reducing compliance-related risk for credit unions is more readily accepted by borrowers, too.

Check out our case study, where we highlight three credit union clients who converted from a traditional collateral protection program to our hybrid program, and subsequently experienced reduced member noise, reduced administrative burden on their staff, and an increase in risk tolerance.