LAKE FOREST, Calif., and SCHAUMBURG, Ill -

As auto loan defaults piled up stemming from the recession that began back in 2008, recovery operations managers at lenders large and small had to tighten up procedures and more in order to handle the added volume.

Now four years later, the amount of delinquencies might have slackened, but by and large recovery industry executives are using the same strategies that got them through the worst of the recession.

“I think during the last recession lenders really went in and looked at their processes and tightened up every seal that they could and made things as efficient as they could,” stated Sam Van Scoyoc, national account manager at National Creditors Connection (NCCI), a field services company established back in 1992 whose clients include nearly all of the leading auto lenders, as well as mortgage originators and credit card companies.

“We’re seeing that it’s very important in the auto sector to see what you have,” continued Van Scoyoc, who spent nearly two decades with auto lenders before joining NCCI three years ago. “Unlike mortgages, auto collateral can move. It can be depreciated and depreciate quickly. It can be wrecked. It can be chopped. The urgency is still there in the auto sector to make sure you’ve got good contact with the customer and you know where your collateral is located. 

“The auto segment really benefitted in that they always did a nice job of verifying up front and underwriting the loan,” he went on to say. “They performed fairly well through the recession. I think it lent a lot of strength to the lending model that indirect lenders had and really made people comfortable with the type of lending that is going on in the auto sector.”

Wholesale Values Support Recovery Efforts

As industry leaders know, prices in the auction lanes are as strong as ever. For example, the Manheim Used Vehicle Value Index for March came in at 126.2, an increase of 1.6 percent from a year earlier. 

At that point, Manheim calculated that wholesale values stood only 1.3 percent from the record reached last May.

“Ultimately as far as recovery rates are concerned, the last couple of years have been interesting from the perspective that we’ve seen prices at the wholesale level increase dramatically during at least the last year, year and a half. That’s a little unusual considering we were going through a pretty severe economic downturn,” explained Vann Humphrey, senior manager of collateral recovery and remarketing at First Investors Servicing Corp.

“We’re in position for the short term to see recovery rates remain stable and possibly increase. There’s nothing in the near future that would increase (wholesale) supply dramatically. And demand, as long as we continue to see some kind of an economic recovery, it will continue to go up as well,” Humphrey continued.

“Once you get into 2013, we’ll probably see prices start to go down and supply start to get to a higher level,” he went on to say. “I don’t think the current environment will last. At least that’s my perspective. It might for the next 12 months.”

Joe Miller, director of customer service at AutoIMS, also touched on how robust wholesale vehicle prices are aiding lenders beyond what they can recover after the unit is sold.

“The lender community is incredibly upbeat given the asset values they are recovering at auction,” Miller began.

“Our clients are also taking advantage of the time afforded them due to lower volumes to evaluate their business and make critical process and technology changes that they didn’t previously have time to execute,” he surmised. 

“We see lenders putting their repo agents under the microscope as well, evaluating performance, managing each assignment more closely, and forging stronger relationships with a smaller number of vendors,” Miller added.

Trends in Delinquencies and Charge-offs

Stemming from what its lead analyst said was conservative lending activity, Experian Automotive determined repossession rates and average charge-off amounts all dropped year-over-year as the fourth quarter closed.

The overall repo rate slipped 5.8 percent to 0.63 percent, the lowest level of the past two years. Experian indicated the overall rate stood at 0.67 percent at the end of 2011 and 0.714 percent at the finish of 2010.

Experian indicated captive finance companies saw their repossession rates drop the most year-over-year, plunging 18.9 percent to 0.43 percent. The level continued a steady decline since 2010 when it was 0.60 percent.

Commercial banks also enjoyed a healthy decline in repossessions, according to Experian’s quarterly analysis. Banks’ repo rates sunk 15.2 percent to 0.31 percent, a level only bested by the rate posted by credit unions.

Experian noted the repo rate generated through credit unions came in a 0.18 percent, a level 5.5 percent lower than the fourth quarter of 2011.

By far, the highest repo rates came within finance companies and other providers, lenders such as Santander, Consumer Portfolio Services and others not holding bank deposits. Experian found their repo rate settled 4.7 percent lower to sit at 2.47 percent, reversing an end-of-year trend that produced a gain from 2010 to 2011.

Meanwhile, Experian determined lenders posted across the board declines in average charge-off amounts.

Overall, the fourth-quarter reading dropped $779 to $6,815, an amount approaching half of the level Experian reported two years earlier. At the end of 2010, the average charge-off amount was $10,315.

Experian broke down the average charge-off amount by lender category:

—Commercial banks: down $788 to $6,141.

—Captive finance companies: down $695 to $6,916.

—Credit unions: down $561 to $6,442.

—Other finance companies: down $761 to $7,126.

Melinda Zabritski, director of automotive lending at Experian Automotive, explained what the trends mean.

“We’re still seeing the effects of very conservative lending from 2008–2010,” Zabritski indicated. “This has had a positive impact on overall consumer delinquency as seen in the low repo rates. 

“Especially when it comes to repossessions, the strong wholesale market has also helped reduce the severity of the losses as seen with the reduction in charge-off amounts,” she continued. “With such low delinquencies and strong performance it helps also shed light on why we’re seeing growth in subprime financing.”

Experian also discovered that trends regarding loans before they reach the repossession charge-off stage also are improving, too.

Zabritski noted the 30-day delinquency rate dropped 6.57 percent year-over-year from 2.98 percent to 2.79 percent. She said the 60-day delinquency rate sunk 9.51 percent from 0.79 percent to 0.72 percent.

Experian expects the newest data covering the first quarter of this year to be available by the end of May.

“From everything I hear from lenders whether it’s at conference or being in meetings, there continues to be a lot of optimism for the year,” Zabritski stated. “People are really benefitting from really low delinquencies. From what we saw all of last year, the lenders have the funds to lend. I think they’re seeing a lot of optimism. I think the biggest thing that has people more aware is the high wholesale prices in the used market.”

Recovery Success in Connecticut

While most lenders opt not to discuss specifics about their recovery efforts, Robert Boucher offered a glimpse into how successful recoveries have been at Nutmeg State Federal Credit Union.

Boucher took over as the chief lending officer at the 76-year-old Connecticut operation a year ago. Bringing his collections manager with him from his previous credit union post, Boucher indicated Nutmeg “picked all of the low-hanging fruit last year,” in terms of recoveries. After attempting to reach the borrower with mailings and phone calls, Boucher said he took advantage of field services and door-knocking strategies to bring back as much collateral as possible.

“They’ll ask around if they’ve seen a 2008 Chevy Cobalt for example,” Boucher shared. 

“We now have very few skips,” he continued. “When I got here, we went back and found skips in Tennessee, several in Florida. They had been charged off in previous years because they could never find the car. But we regained them and sent them to auction.”

Boucher indicated Nutmeg uses nearby Southern Auto Auction, an independent operation in East Windsor, Conn., to handle the remarketing of repossessed collateral.

“We don’t put anything on the lot or take private bids,” Boucher added.

Thanks to tightening up as many recovery and lending protocols as possible, Boucher noted Nutmeg’s delinquency rate is down to 0.22 percent across all credit spectrums in its portfolio.

“Charge-offs are low, too,” Boucher declared, adding that, “2012 looks to be the best year we’ve had since 2008.”

An Alternative to Recovery

For many lenders, the last step they want to do is conclude that the borrower is not going to resume payments, resulting in repossession and remarketing measures.

“Our first step is to work with customers to encourage them to bring their accounts to a current status. Our primary aim is to keep customers in their vehicles,” Ally Financial said in a statement.

But if the debtor and a lender such as Ally cannot come to terms, organizations such as LEAP Financial look to leverage what Tim Condon sees as an opportunity.

“We think there is an opportunity where lenders are losing more money than they need to by taking the vehicle to auction and customers lose their car,” explained Condon, LEAP’s co-founder and chief executive officers.

“There are lot of customers coming out of the recession where maybe a spouse isn’t working anymore so they have lower household income, o. Or maybe they lost their job and got in trouble with their vehicle and now have another job and can’t come up with what’s due in the past but can continue to make payments,” he continued.

So LEAP comes in and pays a lender more for the vehicle than they could fetch on the wholesale market, and the company renegotiates a contract with the borrow, sometimes reducing payments by as much as $100.

“Our whole team goes way back. We’ve got folks from HSBC and Capital One and other lenders. We’ve got a long history in the business. We were aware of the constraints. When we launched LEAP in late 2009, we wanted to develop a model that was unique and added value,” Condon insisted.

“Every lender has their own hardship program,” he went on to say. “Some might demand the total amount due. Some have a limited ability to restructure payments. Our objective is to add on to that. Where ever you draw the line, LEAP will step in and see if we can incrementally save more of those vehicles for the borrower.”

So far, LEAP has worked more than 150 different lenders during the two years the company has existed, creating new deals for borrowers in 42 states.

“We have some lenders say they’re surprised nobody else has done this because it seems so obvious, but it’s not that easy to do,” Condon acknowledged. “It’s a good idea in principle, but it’s not easy and we’ve got a lot of experience.

“It’s a very big market and we’re just a teeny piece of it,” he added. “These customers have talked to every collector in the world and have gone through a terrible process. For someone to come forward with more of a carrot — let’s see if we can work this out — sometimes that’s all it takes.”