Most auto lenders surveyed by Black Book said remarketing is a top strategy for handling lease returns, but few are making use of data deemed key to developing an effective remarketing strategy.
The most effective remarketing relies on insights gleaned from residual data, but two-thirds of lenders said they do not use residual data when evaluating their portfolio, Black Book said.
“Typically, residuals have not been a critical component of risk management because used-car values have been very high and more consistent,” Anil Goyal, senior vice president of automotive valuation and analytics at Black Book, told Automotive News.
Used-vehicle prices have been strong since the recession, due to the supply shortage that resulted from the collapse in new-vehicle sales during the recession and the federal cash-for-clunkers program that took used vehicles out of circulation.
‘More effort’ needed
As risk increases now amid a climate of growing used-vehicle supplies and rising auto loan delinquencies, “there needs to be more effort in trying to project losses in lease and loan portfolios,” Goyal said.
Some lenders are looking at loss scenarios, but they haven’t yet improved their processes to incorporate residuals, he said.
This month, Black Book Lender Solutions surveyed more than 500 auto lender executives about their portfolio strategies. Some of the lenders that use residual data do so not only in lease portfolios, which has been common, but in loan portfolios as well, to assess the loss impact when the vehicle is traded in or repossessed, Goyal said.
As subprime lending rises, used-vehicle volume increases and residuals are suppressed, “the forecast on used will be lower than today,” he said. “It’s important for lenders to take into account the changing scenario and ensure they are measuring remarketing returns for repossessions better,” he said.
The solution to managing portfolio risk for most lenders surveyed is tightening underwriting standards. More than half of the lenders surveyed said they would focus on tightening underwriting criteria to manage risk.
In the past, lenders have set a residual at the start of a lease term, but they typically did not update it. Now more lenders want to know what the residual value of the leased vehicle will be in a year, for example, as compared with the end of the term.
Dealers and F&I managers can utilize residual data by working closely with lenders on a strategy around when the vehicle will be returned, Goyal said.
If dealers and F&I managers have the data, they can offer incentives for customers to keep a vehicle longer if it will be more valuable after the lease contract expires. For example, if the lender forecasts a residual value for the return date that’s actually $2,000 less than the value at the return, the dealer could offer the consumer an incentive to hold onto the vehicle longer and reduce the loss that could happen if the vehicle was returned on time and sent to auction.
Still, Goyal said, 64 percent of lenders do not ask for residual data.
“These are the kinds of things the industry needs to take in account to make sure they don’t get into an unexpected scenario,” Goyal said. “When more and more lenders [leverage residual data], it makes us more prepared for a downturn, and we avoid getting into a bubble scenario.”
The survey also found that more than half of lenders are open to exploring used leasing.
Some said used leasing can add market share, create an opportunity to move off-lease vehicles and reduce the amount of risk due to the age of vehicles.
Lenders do have concerns about used leasing, though. Some said used leases could lead to higher collateral risk, marketing challenges and more delinquencies. Others said used leases may not be competitive against the high incentives for new-vehicle leases.