Driving Resiliency:
A Look Forward
Open Lending’s research illustrates how Lending Enablement Solutions are playing a clear and decisive role in empowering auto lenders to expand the volume of loans they’re issuing. Additionally, Lending Enablement tools are helping institutions better curb delinquency rates and meet the needs of near-prime borrowers. In our previous research report, 2023 Vehicle Accessibility Index, Open Lending uncovered a vehicle affordability crisis with far-reaching implications. As we found, non-car owners are far more likely to report personal, health and career setbacks as compared to their car owning counterparts.
Our new research reveals that auto lenders are taking concrete steps to address this crisis by partnering with a Lending Enablement Solutions provider. Yet all Lending Enablement tools are not created equal, and the financial institutions we polled pointed to various concerns with their existing providers, including the need for more transparency a desire for AI-driven analytics and an expanded use of alternative data.
Through industry-leading risk modeling and a proprietary risk-based pricing tool, Lenders Protection™ is allowing credit unions and other lenders to confidently navigate an uncertain financial climate by expanding their consumer base and better reaching traditionally overlooked near-prime borrowers.
Lenders primarily look at FICO scores, income/employment history, and debt-to-income ratio as the main metrics by which they decide to issue auto loans. Less commonly used, though still notable, is alternative credit data, used by 34% of financial institutions.
Alternative credit data is more widely used by community development banks, online banks, and insurance companies, whereas its use lags among credit unions and retail/commercial banks. Meanwhile, bad credit history and high debt-to-income ratio top the list of reasons financial institutions deny loans to potential borrowers.
Financial institutions are prioritizing FICO scores and income/employment history for auto loan decisioning — while overlooking the value of alternative data sources.
The Limits of FICO for Auto Loan Decisioning
Nearly two-thirds (65%) of respondents indicate that they are using a lending enablement platform. But while 96% of those we surveyed said they’re “satisfied” with their current solution, they’re not overwhelmingly happy with it. The largest portion of respondents — 52% — characterize themselves as only “somewhat” satisfied with their existing lending enablement platform.
When we looked at the results based on financial institution type,
we found credit unions are far less likely to be “extremely satisfied”
with their existing Lending Enablement Solution compared to the other financial institutions we polled. When comparing financial institutions that use a Lending Enablement Solution to those that don’t, a much greater proportion of Lending Enablement users reported meeting their ROA targets last year compared to non-users (95% vs. 73%).
Lending Enablement users are also far less likely to report a rise in delinquency rates among those in near-prime categories (12% vs. 57%). The marked contrast here suggests Lending Enablement Solutions have
a notably positive impact on curbing delinquency among
non-prime borrowers.
Biggest complaints about current auto loan decisioning model
Institutions that use Lending Enablement Solutions are meeting or exceeding ROA targets and mitigating delinquency.
Enabling Success
For auto lenders to manage a successful lending process, they need the right tools in place to drive more expedient decisions. Yet as our survey found, slow decisioning time is the top barrier auto lenders face in their current loan decisioning model.
Beyond slow decisioning time, a notable subset of auto lenders say their current models are disqualifying too many applicants, and also offering limited visibility into why these disqualifications are taking place. When we pair this finding with our research revealing an overemphasis on FICO scores, it’s clear the auto lending process is encumbered by an overly myopic process that’s leading potentially qualified and credit worthy individuals to end up in the denial pile.
Slow decisioning speed is holding auto lenders back.
Unfulfilled Auto
Loan Potential
characterize themselves as only “somewhat” satisfied with their existing lending enablement platform.
52%
of respondents indicate that they are using a lending enablement platform.
65%
The trend of prime borrowers driving delinquency rates is similar to what we observed in 2008, when more financially stable individuals were suddenly in a position of having to choose which bills to pay. The typical near-prime consumer, by contrast, is generally always in a state of recession, continuously fighting to make their monthly payments. With prime borrowers, the expectation is that only a small percentage will be delinquent (less than 50 basis points). With near-prime consumers, there’s more of an expectation of delinquency, so near-prime consumers tend to weather the storm better during economic downturns.
As we enter an uncertain financial macroenvironment, financial institutions are going to need to consider expanding their base of near-prime consumers. Otherwise, institutions could face downward pressure on their yield and portfolio performance. Lending Enablement Solutions can help lenders strike a better balance between prime and near-prime consumers. In terms of the relationship between rising delinquency rates and company size, it’s not surprising that larger institutions are reporting higher rates. Large banks generally have less of a direct and ongoing relationship with their borrowers, whereas credit unions and other smaller institutions tend to have a deeper relationship with their borrowers, which leads to better communication that can preempt default behavior.
Our study found that those with lower credit scores aren’t primarily driving an increase in delinquency rates. Instead, respondents who indicated that delinquency rates are occurring in a specific tier revealed that prime borrowers are the bigger offenders here, outpacing non-prime borrowers by 13 percentage points.
Perhaps in response to rising delinquency rates, most financial institution leaders — 76% — say they’re more focused on minimizing defaults than in years past, with one-quarter of respondents indicating they’re “significantly more focused” on default minimization efforts.
Notably, our survey results reveal a direct correlation between company size and delinquency rates, with delinquency rates rising alongside financial institution size. At the largest companies surveyed — those with revenue over $500 million — 81% reported a rise in delinquency rates this year. In stark contrast, only 33% of institutions with less than $5 million in revenue reported rising delinquency rates. Still, efforts to minimize defaults are relatively similar across company size.
Delinquency by Credit Tiers
Near-prime borrowers are not reporting high delinquency rates in 2023.
Near-Prime
Defying Expectations
In February 2023, Open Lending conducted a survey of 95 leaders of auto lending institutions. All respondents are based in the U.S.
with a director-level title or above. Of our 95 respondents, 42 work for
credit unions, with the remainder from other financial institutions, including retail/commercial banks (36 respondents), community development banks (5), online banks (3), insurance companies (7), and captive finance companies (2). Our respondents include notable subsets across financial institutions of all sizes, based on annual revenue.
In this report, we’re presenting the six most compelling lending enablement themes that emerged based on our survey results and data analysis. Each of our six themes contains data visualizations that explore that finding in more granular detail. We’ve divided each of the report’s six sections into two parts: First, a discussion of our findings, including relevant data points, and second, our analysis, where we explore the financial industry implications
of each finding and what our results mean for the future of
Lending Enablement Solutions.
How are auto lenders and other financial institutions adapting to an increasingly unpredictable and precarious lending environment? And how are they using Lending Enablement Solutions to mitigate risk, increase loan volume, and better reach auto consumers?
Loans Within Reach:
Lending Enablement Benchmark 2023
Within the Lending Enablement marketplace, Lenders Protection™
is uniquely positioned to provide financial institutions with the sophisticated analytics and
security they seek.
Open Lending (NASDAQ: LPRO) provides loan analytics, risk-based pricing, risk modeling and default insurance to auto lenders throughout the United States. For 20 years we have been empowering financial institutions to create profitable auto loan portfolios with less risk and more reward.
For more information, please visit www.openlending.com.
Methodology:
Approach:
The auto lending industry is facing a uniquely challenging year, with rising interest rates and the high-profile failure of several banks driving concerns about a banking crisis and continued economic instability.
While the landscape of consumer lending isn’t always directly impacted by a possible banking crisis, the overall financial environment is more tenuous, and that precarity is highlighting how lenders are combatting risk while increasing the volume of loans they issue. For financial institutions and auto lenders in particular, the use of Lending Enablement Solutions is a big part of this equation.
Open Lending continuously strives to better understand the specific challenges facing financial institutions today, and how Lending Enablement Solution providers can help them during uncertain times.
Our most recent research reveals that Lending Enablement Solutions are playing a clear and decisive role in improving decisioning speed, increasing ROA, and reducing risk exposure. Additionally, the use of Lending Enablement Solutions is allowing financial institutions to better reach near-prime consumers — an audience that’s strategically critical to serve, especially in an economic downturn.
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Just as auto lenders are overvaluing FICO scores, they’re undervaluing other factors due to the limited scope and capabilities of their current auto loan decisioning models. The consequence here isn’t just that creditworthy individuals aren’t getting a fair chance at securing an auto loan — it’s also that auto lenders are missing out on the significant opportunity presented by traditionally overlooked consumers. A robust Lending Enablement Solution can help resolve this problem by providing lenders with the resources and analytics to drive greater speed and enhance lending volume.
For us, this finding reinforces the value of using an industry-leading Lending Enablement Solution as a means of identifying, through data on the front end, how to price loans appropriately and better determine potential risk. Without such a solution in place, financial institutions are more at risk of being impacted by borrower behavior that can lead to default.
Best-in-class Lending Enablement Solutions are a critical factor in effective front-end pricing and risk mitigation. When vetting potential solutions to support the automotive loan decisioning process, look for providers with a proven track record of using sophisticated analytics to manage risk both at loan origination and in the case of potential default. Evaluate case studies and consider how other financial institutions have been able to use the solution to tangibly grow their loan portfolio while controlling for risk.
It’s concerning that financial institutions may be placing too high a value on FICO scores at the exclusion of more thorough analysis, as that’s a reductive approach to evaluating auto loan potential. Going back to the Great Recession, some of the biggest losses institutions experienced during that time were among prime borrowers whose FICO scores would suggest safe borrowing potential.
FICO scores should absolutely be one factor in your auto loan decisioning, but you must use debt-to-income ratios and alternative data for a more holistic picture of risk. For instance, alternative data can illuminate non-traditional trade line payments, like delinquent mobile phone bills, that can help paint a future view of a borrower’s credit worthiness. If you’re not using a combination of data sources that require machine learning and AI capabilities for auto loan decisioning, you’re putting your institution at risk.
Our key FINDINGS
AI and predictive analytics are poised to disrupt every industry, and Lending Enablement is no exception to this trend. However, when financial institutions are vetting potential Lending Enablement Solutions, they should be wary of how potential providers are defining “AI.” Some providers — particularly newer ones with more nascent offerings — will use the term more as a marketing device than a core and differentiating feature of the product.
The breadth and quality of data are material in how robust an AI solution is. A key question to ask a Lending Enablement Solution provider touting an “AI” capability is whether they only use the institution’s data or a broader set of federated data. The history of data the provider has experience with is also critical, as the algorithms that build into any AI system need to account for changes that come with how consumers, vehicle valuations and loans perform at different points in an economic cycle.
It’s important for financial institutions to holistically evaluate prospective Lending Enablement Solutions and look for the specific ways AI and machine learning are being integrated.
“Increasing the speed of loan approvals.”
“It should include features like real-time credit decisioning, online document management, and borrower self-service portals.”
Greater transparency and expanded features
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We asked those using an automated lending platform, “What is the single greatest area of improvement your automated lending platform could implement?” The answers to this open-ended question reveal three key areas in which respondents are hoping for improvement.
Institutions want more transparency and AI-driven analytics from their Lending Enablement providers.
Elevating Lending Enablement
For easy reference, here’s a brief explanation of some of the terms we’ll mention throughout the report:
Key Terms:
• Lending Enablement Solution:
Digital platforms that use sophisticated analytics to evaluate nontraditional variables, thereby providing lenders with a more holistic view of credit worthiness.
Near-prime borrowers are individuals whose credit makes them just fall short of traditional lending requirements.
• Near-prime borrower:
Return on Assets - the main metric by which financial institutions measure profitability. The formula is [Net Income / Average Total Assets].
• ROA:
Like the previous finding, this result strongly affirms the value of partnering with a Lending Enablement Solution provider such as
Lenders Protection™, given the unique and differentiating benefits of this solution relative to others in the auto marketplace.
Lenders Protection™ has a highly sophisticated risk-based pricing tool that allows financial institutions to safely expand their auto lending activities while effectively analyzing risk and potential loss for each loan. Lenders Protection™ is also backed by robust loan default insurance that absorbs over 80% of loan portfolio losses.
Improving loan-decisioning speed is a top priority
for 2023 — but it shouldn’t introduce avoidable risk.
Balancing Speed and Risk
Financial leaders indicate that driving faster loan-decisioning is tied for priority No. 1 for 2023, which explains why most respondents currently rely on a Lending Enablement Solution. Yet respondents emphasize that even as they’re prioritizing decisioning, they’re not overlooking risk exposure and recovery on defaulted loans. Increasing the volume of auto loans also ranks within the top five priorities for the year.
Examining respondents based on financial institution type, we found credit unions are relatively more likely to cite growing ROA and improved loan decisioning speed as top priorities for the year, compared to all other types of financial institutions surveyed, which alternatively point to reducing risk exposure as their priority for 2023.
Bad credit
history
71%
Top 5 Reasons for Denying Auto Loans To Potential Borrowers
High debt-to-income
ratio
61%
Low credit
score
52%
Income too low for
desired loan amount
48%
Unstable employment history
42%
“By focusing on transparency, personalization, and customer support, my automated lending platform could significantly improve the experience.”
“Our platform could better use machine-learning algorithms and other advanced analytical techniques to more accurately predict a borrower’s credit worthiness and assess the risk of loan default.”
“Use of machine-learning algorithms and predictive analytics to provide more personalized loan terms and real-time lending decisions based on factors such as market trends, borrower behavior, and macroeconomic indicators.”
“More sophisticated algorithms and models to analyze data, incorporating alternative data sources, and regularly refining and updating credit models.”
Increased use of AI/advanced analytics
“More robust fraud detection measures.”
“Provide a top level of security. Don’t let your reputation be impacted negatively through data breaches and security-related compliance issues.”
“Ensuring more data safety security.”
Better security
Introduce auto loan penetration among members/banking customers
38%
Increase auto
loan volume
41%
Reduce risk
exposure
42%
Grow Return
on Assets
44%
Improve loan-decisioning speed
44%
Top Five Priorities for Lending Companies This Year
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1. Results for “Somewhat satisfied” and “Neutral” for “Other financial institutions” include small sample size.
2. Notably, greater transparency was also something non-car owners indicated they wanted during the car buying process when we conducted a survey in late 2022 for our “Driving Opportunity” report.
2
TOP THREE AREAS OF IMPROVEMENT
Delinquency by Company Size
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Our key FINDINGS
Our key FINDINGS
Our key FINDINGS
Our key FINDINGS
Our key FINDINGS
Our study found that those with lower credit scores
aren’t primarily driving an increase in delinquency rates. Instead, respondents who indicated that delinquency rates are occurring in a specific tier revealed that prime borrowers are the bigger offenders here, outpacing non-prime borrowers by 13 percentage points.
Perhaps in response to rising delinquency rates, most financial institution leaders — 76% — say they’re more focused on minimizing defaults than in years past, with
one-quarter of respondents indicating they’re “significantly more focused” on default minimization efforts.
Notably, our survey results reveal a direct correlation between company size and delinquency rates, with delinquency rates rising alongside financial institution size. At the largest companies surveyed — those with revenue over $500 million — 81% reported a rise in delinquency rates this year. In stark contrast, only 33% of institutions with less than $5 million in revenue reported rising delinquency rates. Still, efforts to minimize defaults are relatively
similar across company size.
Learn more about Lenders Protection
TM
Learn more about Lenders Protection