An avalanche of auto trade-in is approaching: are you ready?
The impact of the COVID-19 pandemic on the US economy is significant. As businesses across the country shut down to comply with stay-at-home orders, workers have been laid off at record pace. With unprecedented unemployment rates, many borrowers are struggling to keep up with their auto finance payments.
As the state-imposed repossession moratoria put in place during the pandemic begin to expire, cautious lenders should assess the potential impacts on their auto finance portfolios. Lenders need to proactively prepare for an avalanche of defaults, credit losses and vehicle foreclosures. With this trend likely to continue for many months, lenders face substantial risk if they do not prepare in all jurisdictions where they have credit exposure.
Economic drivers of repossession
When COVID-19 hit the United States, consumers were already facing many financial challenges that lenders were facing, and those challenges were only exacerbated as businesses were forced to shut down.
The pandemic stimulus packages and additional federal funds for unemployment have only acted as a temporary band-aid to reduce the impact of COVID-19. Providing additional monthly resources relieved consumers for a short time. However, most of that funding has now expired, leaving consumers no better off than before. At the end of the second quarter of 2020, auto loans over 90 days past due accounted for 5.03% of the total outstanding balance, up from 4.64% a year ago, according to the New York Federal Reserve.
As more and more consumers find themselves working remotely and no longer using their vehicles for commuting, the need for property decreases, as does the urgency for car loan repayments. Lenders may see this translate into a higher number of motor vehicles voluntarily surrendered.
Process repossessions and implement internal controls
Repossession moratoria and mandatory payment deferrals previously granted to borrowers are starting to fade. As of October 2020, the District of Columbia – by emergency legislation – and Maryland – by executive order – still have a repossession moratorium in place. It is also important that lenders understand the time periods for any moratoria that were in place to ensure that their practices were compliant in those jurisdictions during those periods.
Going forward, lenders should document their approach to managing motor vehicle repossessions and implement these practices consistently. A well-written compliance management system (CMS) should help lenders move forward. This includes: ensuring that the board of directors and relevant management committees remain informed of any ongoing issues; policies and procedures are implemented consistently; employees are properly trained to work with affected customers; consumer complaints are investigated and dealt with; there is oversight of how policies and procedures are implemented; and ensure that the internal audit function provides a thorough and independent assessment of the operations of the company.
It is expected that state and federal regulators of a lender, as well as the plaintiff’s attorneys, will focus closely on how institutions deal with motor vehicle repossession issues with affected customers, and how lenders are handling the situation when the impending avalanche of foreclosures occurs. Tactically, lenders need to ensure that they have title to a vehicle that will be repossessed and that the title is perfect. Addressing vehicle title processing issues early helps manage exceptions and reduce costly delays.
Practical considerations lenders should think about:
- Always keep up with the news. Before starting a repossession, verify that the repossession moratorium has expired in this state. It’s easy for a state to extend a moratorium, so you must confirm before repossessing a consumer’s motor vehicle.
- The impact of mobile guarantees. The downside to motor vehicles as collateral is that they are always on the move. Lenders may discover that the borrower has moved to a different jurisdiction than where the loan originated from. Lenders cannot use the same repossession notice in every state and must follow state-specific documentation and procedural guidelines and requirements.
- Exhaust all loss mitigation avenues rather than resorting to repossession. In addition to getting into the good graces of your regulator, the court of “public opinion” will be more likely to favorably view lenders who go above and beyond for their clients during this time. Additionally, by keeping customers in possession of their vehicles, lenders will maintain the customer / borrower relationship and maintain payments.
- Examine your portfolio now for exceptions. Be prepared for the anticipated influx of defaults and repossessions by making sure you are properly noted as a secure part of the title, so you don’t add time and complexity to the process. Doing this before the resumption will save you hassle and save you time and money.
- Adjust your deadlines. As you process repossession titles, start your title requests earlier to account for delays at the Department of Motor Vehicles.
- Consider automation or outsourcing. It can be difficult to manage the volume of repossessions with existing staff. A third-party vendor can help you streamline your repossession titling process, reduce pain points, and provide transparency.
With preparation, solid documentation, and a solid plan, proactive lenders should be equipped to minimize the effects of the impending repossession avalanche.
Marc Edelman acts as chairman of McGlinchey ‘s National Financial Services Compliance Practice Group.
Colin Quillan is a partner in McGlinchey’s office in Albany, where he advises financial service providers to consumers on compliance with federal and state laws.
Rick vanko is the Motor Vehicle Solutions product manager for Wolters Kluwer Lien Solutions.
Marina hardy is Associate Director of Product Marketing at Wolters Kluwer Lien Solutions.