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AUTOmated Lending

By: Larry Highbloom

While the problems in mortgage lending have grabbed the lion’s share of attention during the recent financial downturn, banks continue to make improvements in other lending areas, namely automotive lending.

For Ohio-based Lorain National Bank, a long history of focusing on strong credit quality in automotive lending was a catalyst for remaining successful during the downturn. In fact, the average credit score for auto loans at LNB is between 760 and 770. The bank produces between 2,800 and 3,000 auto loans a month with a staff of around 15 people.

In 2011, the department saw significant growth with the expansion of its operations into North Carolina. Now, it conducts auto lending in Ohio, Indiana, Kentucky, Tennessee, Georgia and North Carolina.

Risk-averse lending was one of the major keys to success during turbulent times. LNB’s auto lending department survived the downturn with little disruption due to its well-planned efforts to strengthen processes, mitigate risk and increase efficiency through technology, such as its lending platform and electronic lien and title. The bank adopted a new lending platform that enabled it to work with additional credit application networks linked to dealers, providing a bump in its indirect business. The bank also implemented ELT to ensure it maximized profits on booked loans by reducing operating costs and risks associated with paper titles.

Changing Times

LNB quickly reacted to the downturn in the financial markets in 2008 by making significant changes in its auto lending operations. More conservative loan-to-value guidelines were implemented to better correlate with credit bureau scores and terms. It also transitioned the benchmark used to value vehicles from manufacturers’ suggested retail price to wholesale amounts.

“With potential losses knocking at our door, we knew it was important to find other reliable ways to weather the margin storm,” said Kevin Nelson, senior vice president of indirect lending at LNB. “Thankfully, due to our consistent focus on prime lending, our delinquency rates were never above 1 percent, even at the lowest points in the industry. That, coupled with our quick implementation of other operational changes, helped us ride out the worst of the downturn.”

Like many other areas of the financial industry, the auto market has appeared on the brink of recovery for several years. In early 2011, as it finally seemed things were making an uphill climb, a devastating earthquake and subsequent tsunami hit Japan, resulting in a severe decrease in available product volumes.

A Recovering Industry?

Today, auto lending volumes have begun to climb. According to data from The National Automobile Dealers Association, the U.S. auto industry sold 1.3 million units in May, an increase of nearly 6 percent from May 2011. But to Nelson, these numbers do not point toward a strong comeback.

“It’s true that we’ve increased volumes over May of 2011, but May 2011 was a bad month,” Nelson said. “The tsunami affected sales volumes tremendously. To say that the industry is going to make a dramatic turn for the better based on current year-over-year growth is yet to be seen. The economic recovery is very fragile. An escalation in unemployment could dampen consumer confidence, which would have an impact on auto sales.”

In addition, car prices are declining. Kelley Blue Book data shows that new car prices are down $500 year over year with the most significant declines being seen on vehicles offered by Japanese brands, specifically those that were impacted by inventory shortages resulting from last year’s earthquake.

For these reasons, Nelson plans on continuing to steer LNB’s auto lending down a conservative path, but with some slight reconfiguring. The bank has adjusted its scorecard to help create more efficiencies and decrease turnaround time while further mitigating risk.

“The key to our success is keeping delinquencies low in order to support profitability. Knowing that the market is still recovering, we do everything in our power not to over-extend ourselves,” said Nelson.

LNB has found a good balance by mitigating risk through conservative lending practices and implementing technology that creates efficiency throughout the department. Recently, the bank implemented a new lending platform that creates flexibility and can be molded to the bank’s needs. The system handles decisioning and processing for approximately 40 percent of auto loan applications received, greatly reducing the staff time dedicated to this process. The goal is to continue to improve these numbers.

With this system, LNB grew its volume by nearly 17 percent in 2011, but managed to keep the system costs flat with 2010, leading to more reasonable costs per application and lowering expenses on a per-loan basis.

Another area in which LNB has invested efforts in creating efficiency is in automotive title tracking. The bank uses electronic lien and title to reduce its reliance on paper. ELT replaces traditional paper titles with an electronic exchange of data between states’ departments of motor vehicles and the ELT technology provider that acts as an intermediary on behalf of a lien holder. The program reduces costs with the elimination of paper and automation of a manual process. ELT also reduces the chance for fraud by eliminating paper titles and halting fraudulent lien releases. Click here for a larger chart.

ELT programs are developed at the state level, typically by the department of motor vehicles. States using the system either operate voluntary programs, or have required auto lenders’ use of the technology through legislation. Currently, 16 states offer ELT while eight have passed legislation requiring its utilization by lenders. The technology is growing in popularity across the country as state governments and lenders realize the cost- and time-saving benefits of removing paper from the title process.

ELT has greatly reduced title work expenses for LNB and allows the bank to release liens, transfer titles and correct errors without making a trip to the local title office. Out of its 15 staff members, only one is involved in title work and is also able to handle loan boarding.

Paper titles historically required four to six weeks to arrive at lenders’ title departments. ELT reduces this time to one to two days after the DMV receives LNB’s paperwork. The enhanced reporting function of ELT systems also automates the error-proof pairing of VIN numbers with customer records to reduce filing time and human error.

“The more states that make the switch to ELT, the better off we’ll be. In fact, we expect to see improvements from Georgia’s recent move to legislate its use,” said Nelson. “ELT allows us to quickly complete title work more efficiently.”

In addition to back-office improvements, ELT provides an array of benefits for LNB’s customers. Most importantly, electronic titles cannot be lost or misfiled because they are never printed by the DMV. When a customer pays off his loan, he typically receives a lien-free title from the DMV in a matter of days — there is no chance he will arrive at the bank and be told his title has been lost. When LNB releases a lien, the DMV prints a clean title and sends it directly to the customer.

Leveraging Lessons Learned

Although LNB’s auto lending department is currently in a strong position, Nelson does not plan on slowing down its move toward additional efficiency improvements anytime soon.

“We are continually working with all of our vendors to develop methods to streamline processes. Efficiency is vital in this line of business. Because of the effort we have placed on running a tight ship, we would literally be able to double our volume without bringing on significant staff, and we would like to see that happen,” said Nelson.

Larry Highbloom is president of Philadelphia-based VINtek Inc., a provider of automotive collateral management, electronic lien and title services and direct finance processing.

Copyright (c) August 2012 by BankNews Media