As delinquencies rise and an economic downturn looms, limiting credit risk and mitigating losses are top of mind for many auto financiers.
“Delinquencies are up, losses are up, so what are we going to do to contain them?” Chris Mitcham, senior vice president of servicing at Security National Automotive Acceptance Co., asked the audience at the Auto Finance Risk Summit last month.
“We should all know that you make or lose money when you make a credit decision to buy the loan. That’s when you win or lose,” Mitcham continued. “In collections, though, we can do a lot to improve it, but — and this is coming from a servicing guy, so it hurts me a little to say it — there’s only so much we can do to contain it.”
At SNAAC, Mitcham oversees loan servicing, loss mitigation, recovery, and remarketing operations. Mitcham shared strategies for honing operations for faltering credit performance, payment methods that yield stronger returns, and where machine learning can help with collections. What follows is an edited version of Mitcham’s Q&A with Auto Finance News from the summit.
Auto Finance News: What are some signs a consumer will likely become delinquent, and how can you mitigate that risk from the outset?
Chris Mitcham: A big piece of controlling that early delinquency is knowing that early delinquency is not just 30 days past due. You need to identify that population of people who are late on their first payment. Why are they 10 days late? Why are they five days late? A lot of the time we don’t really pay attention unless they’re over 15 days or 30 days [late], and now it’s a problem.
You have to be watching those first three payments very closely to understand their payment behaviors, and then segment those customers and communicate with them in a different manner. Isolate those customers — start communicating with them early, start the payment reminders early, to start catching these folks very soon.
AFN: What’s a simple, cost-effective strategy to contain credit risk?
CM: Effective boarding and welcome calls. If you’re a huge organization, chances are you aren’t doing this — making calls — but alternate calls with email, mailers, welcome letters, statement notifications, whatever you’re sending out at the beginning of your loan.
It’s a really important time to touch base with your customers and start learning about what they’re wanting to do. There are critical things you need to do during this portion, and if your team isn’t doing this, they need to start. There has to be a plan when you originate these loans on how to get this customer on a recurring payment arrangement. Look at your loss curves for consumers who originate on a recurring ACH or debit versus those who don’t — you’re going to see a huge difference. Folks who are not on recurring [payments] charge off at a much faster rate.
Secondly, catch your preferences early for your consumers. Ask your customers — you’ll be amazed at what they tell you. You need to know up front, early on in the loan, how your customers want to communicate, what their preferences are, how to talk to them, and even how to market to them. To mine to your own customer base, having consent is critical. Take that opportunity in the welcome call or early stage boarding calls to gain explicit consent to use that mobile number or email for account services — but also for marketing.
AFN: How might the proposed CFPB debt-collection rule affect SNAAC?
CM: SNAAC has already been expecting this. There are already some states out there that limit your contact opportunities. There are 16 states that consider you a debt collector according to their state rules already, so if we’re not looking ahead, which we should be, whether it’s seven-seven-seven, we certainly should be, and that’s why your text and email strategies are critical. They gave us some wins in regards to e-communications, but the seven contacts in a week — you’ve got to be good at what you’re doing on your calls — make those calls count. Again, that’s why it’s important to talk to your customer. Figure out when, where, and how they want to communicate, so you can make the best use of your communications.
AFN: What are some of SNAAC’s latest collection initiatives?
CM: It’s all about customer experience and e-communications. That’s what we’re focused on this year. We changed the way our IVR flows; we have different outbound customer care strategies and different inbound customer care strategies from those calls. We’re trying to understand why those calls are coming in.
AFN: How could machine learning be implemented for collections, and what’s on SNAAC’s radar for 2020?
CM: I love [machine learning.] We’re so good on the front end, if you think about it. How much time do you spend on your front-end credit decision-making? And it should be like that, that’s when you make or lose money, when you make those credit and pricing decisions on the loan.
I will tell you this: There are so many really awesome options for servicing. If you don’t want to build it yourself or spend a fortune, there are a lot of options available to you now on the back end of your business to start implementing more of these statistical and AI-based machine learning. [It is] constantly feeding in your day-to-day activities, and it is constantly learning.
Today, we’re not necessarily at the level we want to be, certainly for predictive changes in our [consumer behavior] score, but we’re doing a lot internally starting to mine that data. That’s probably more of a 2020 initiative we have coming.