news.cuna.org/articles/108236-automation-advances-auto-loans
Lending leaders

Automation Advances Auto Loans

Customization capabilities, time savings enable CUs to compete with major lenders.

October 29, 2015

Like the six blind men asked to describe what part of an elephant they were touching—trunk, leg, ear, tail, etc.—summarizing auto lending software in one word isn’t easy.

Is it customizable? Yes.
Can you generate other types of loans with it? Yes.
Once you make an auto loan, can the software protect you from fraud? Mostly.

Custom design is now a standard car loan software feature. “Credit unions can set their parameters for loans on the software,” says Will McGregor, president of Integrated Lending Technologies (ILT) in Salt Lake City, Utah. “Our technology makes credit unions more effective lenders by reducing staffing hours and errors involved in making a loan for a car or other transportation device. It allows credit unions to compete with larger financial institutions in indirect lending.

“Our key to customization is creating a 'rate matrix,’ which deals with the many factors you weigh to determine a car loan rate,” McGregor adds. “There's a lot of math involved, and some clients will ask us to set up a matrix for their particular needs.”

McGregor says his company's system helps generate increased revenue from noninterest income. “Our DigiDocs™ electronic documentation system uploads documents, approves the loan, and then charges the dealer an acquisition fee—anywhere from $200 to $500—that merges into a borrower's total cost. There's no need for anybody to cut a check.”

Customization relies on access to large auto dealer databases that allow credit unions to choose relationships wisely. “We create data networks that allow credit unions to take on different loans,” says Paul Kirkbride, senior vice president of credit union solutions at CU Direct in Ontario, Calif. “For example, we have a 12,000-auto dealer database.”

Even so, Kirkbride sees the need for credit unions to look beyond auto loans for high returns: “The auto marketplace right now is highly competitive, which means lenders must offer low rates to be competitive.”

Credit unions can derive maximum car loan revenue by pursuing aftermarket sales of gap and accident insurance, McGregor says, especially relating to indirect loans.

The software morphs

Since the crash of 2008, mid-sized banks—$500 million to $5 billion—have entered the indirect lending market in greater numbers, McGregor observes. “Previously, they couldn't compete with big banks' economies of scale,” he says. “But sophisticated software, combined with a significant increase in available capital and the promise of higher returns, has increased the number of lenders in the indirect market."

Independent finance companies also have jumped into the subprime loans market, according to McGregor. “They have an enormous amount of money to lend, but are relatively new to the market. They see a niche that nobody is particularly exploiting. ILT's technology allows credit unions to compete in the subprime market by providing tools for digging deeper into loan applications and verifying the information members provide."

More information, McGregor says, makes it less likely credit unions will make wrong decisions on loans.

CU Direct has a network that can help credit unions offer retail loans for merchants, Kirkbride notes.

“These loans might present more risk than auto loans, but they also carry higher interest rates and provide more income,” he says. “With our tools, credit unions can do two important things. First, they can identify loan opportunities they might not have been aware of. They can look for and find other credit unions' portfolios and study credit unions similar to theirs that have successfully entered new loan spaces. Second, they gain efficiency in loan originations and closing via automation.”

Automated decision engines have become so sophisticated they can significantly reduce the need for manual review of loans. But credit unions have yet to fully integrate this technology.

“Most credit unions still could have a leaner, meaner loan process,” Kirkbride says. “Right now, credit unions approve about 65% of loan requests they receive, but only 10% are approved automatically."

Automated decisioning accelerates the process, which members and dealers prefer, resulting in a higher close rate, Kirkbride says.

“All in all,” he says, “there's no reason credit unions shouldn't be able to automatically make decisions on 50% of their auto loan applications."

Customizable marketing campaigns

Automation would aid another application, too, according to Kirkbride: Data analysis.

“One underused credit union strength is the gold mine of member data credit unions might not have the time or tools to leverage," he says. "Most other industries would be intensely jealous if they had that big a data cache.”

If a credit union can tailor and automate communication, it can execute four or five simultaneous loan campaigns, with members receiving customized pitches via different channels.

"The solution isn't credit unions simply branding data as their own," Kirkbride says. "The future lies in using shared data to create seamless member experiences, where they can move from platform to platform and see no detectable difference in look or content.”

CU Direct's recent acquisition of Intuvo, a digital marketing platform, enables credit unions to stay in constant contact with “TBDs”—To Be Determined borrowers who have been shopping around for loans.

“We incorporated this feature into our indirect lending software so would-be borrowers are reminded the credit union has them in mind.”

Still, McGregor says credit unions can make these common mistakes:

Failing to match the right rate with the right term with the right credit;
Omitting or missing a fact or number; and
Transcribing incorrectly information from a document.

“A credit union's analysis of its portfolio is crucial," McGregor says. “Recognize your areas of greatest risk and the course that would be most profitable for you."