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  • Writer's pictureW.B. King

How Credit Unions Are Managing Auto Lending Risks in a Volatile Market

By W.B. King

Banking liquidity issues, rising interest rates, inflation in FICO scores caused by “pandemic-era abnormalities,” along with an "ongoing vehicle affordability crisis," are among factors impacting automotive lending rates, explained Open Lending’s Chief Revenue Officer Matt Roe.

“In 2023, we’ve seen how market instability can impact lenders’ bottom lines,” he told Finopotamus. “As it is central to the charter of the credit union system, the mission of improving the financial well-being of their members, the ability to meet the auto borrowing needs of credit union members while also managing risk in a volatile market is incredibly challenging given the stated factors.”

The Austin, Texas-based fintech specializes in loan analytics, risk-based pricing, risk modeling and automated decision technology for automotive lenders throughout the United States. Among clients using its flagship product, Lenders Protection, is the $2.8 billion Tacoma, Wash.-based Sound Credit Union, which supports 166,000 members and 26 branch locations.

“Our employees focus on listening to our members so we can understand their needs,” noted Tammie Atoigue, vice president of consumer lending at Sound Credit. “We were aware some people purchasing vehicles from dealerships that were charging interest rates at 25-30% only to drive off the lot and have the car break down. Then they would struggle to come up with money for unexpected repairs. As a community credit union, we want our members to find a reliable vehicle and offer an affordable loan with a reasonable interest rate.”

Streamlining Underwriting and Funding

Processed using MeridianLink Consumer Classic Loan Origination System (LOS), Open Lending’s Lenders Protection program has helped Sound Credit Union evaluate and insure both direct and indirect loans for near- and non-prime borrowers.

Roe explained that “full implementation” of Lenders Protection typically takes four to six weeks to roll out. Sound Credit Union, he noted, had a slightly different strategy.

“They wanted to provide members with better rates while still expanding their lending portfolio and spent most of the six-week implementation period setting new loan types, testing and training staff,” Roe said. “After the system went live, Sound Credit Union booked its first loan within a month, increasing its automotive loan volume by over 8% since 2019.” Today, the credit union funds between $1-3 million with Lenders Protection every month with an average loan of approximately $30,000.

From a technology perspective, implementing Lender Protection is generally viewed as a “low IT lift” for most clients, Roe noted.

“The system can seamlessly integrate with a third-party LOS and be active within minutes. For example, credit unions using the MeridianLink Consumer Classic LOS can activate Lenders Protection with a few clicks,” he continued. “Open Lending can also create a tailored solution for in-house LOS systems relatively quickly, depending on the scope of the customization. All decisioning results will be delivered solely within the LOS without complicating existing loan underwriting and funding processes.”

The Future of Lending

The fintech industry, Roe explained, continues to find new ways to utilize artificial intelligence (AI) and machine learning for risk assessment and mitigation, customer service, personalization, fraud detection and loan decisioning speed. To inform long-term lending strategies, credit union executives, he said, should keep pace with these changes.

Matt Roe

Lenders Protection, he explained, is powered by AI. In less than five seconds, the solution sifts through over 20 years of proprietary data, two million existing risk profiles, and extensive third-party data to price and structure an accurate loan.

“Users gain an advantage over competitors who produce less accurate decisions at a slower rate. Still, it’s important to look at AI as an enhancement, not necessarily a replacement,” he said. “AI isn’t infallible, and human empathy and intuition are still essential to fintech operations.”

The days of unregulated fintech are over, he added. “Fintech companies must adhere to all fair lending, securities and consumer protection regulations and leaders must prepare to adhere to new legislation and prioritize member protection.”

In Roe’s view, this approach will result in “greater scrutiny” toward fintech vendors and partners, which, in turn, will better protect consumers and the economy.

“As financial institutions face new requirements like the current expected credit loss (CECL) standard, companies that are equipped with robust risk analytics and predictive modeling through lending enablement solutions like Lenders Protection will be more adept at handling tumultuous market conditions and proving their reliability,” he said.


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