By Ray Birch
BURNABY, B.C., Canada—U.S. lenders are taking more time to close transactions from auto dealerships due to the pandemic, and those that are taking the longest risk getting fewer indirect deals once the health crisis ends, warns one analyst.
Vladimir Kovacevic, co-founder and managing partner of Inovatec, said his company’s latest study of U.S. lenders uncovered two reasons for the slowdown, which is adding about an hour on most deals.
“One has to do with just the nature of credit now, where a lot of lenders have tightened their credit policies,” explained Kovacevic. “That means more applications are getting manually reviewed with tighter credit policies. And the moment you increase your manual review workload you increase the turnaround time proportionally.”
Of those dealerships surveyed, 75% said customer credit application forms could take up to one hour to complete. When asked about the average transaction time, 39% of dealers reported their transactions take between one to two hours. An additional 21% said a transaction takes between two to three hours, and 12% said between three to four hours. Just over a quarter, 28%, said they are turning around decisions in under an hour. When dealers were asked how long the average lender transaction processing time has increased during COVID-19, 62% said it has increased by approximately one hour.
Kovacevic said the study shows credit tightening by 20% across a sampling of U.S. lenders.
“We saw during the April/May timeframe that tightening of credit was above 20%,” he explained. “So, if I was approving 50 out of 100 applications, now I am improving 40.”
Kovacevic pointed to another reason for the slowdown, which he said might be having an even greater impact on turnaround time.
“This second reason is around fulfillment,” Kovacevic said. “With the pandemic, this is just a different environment.”
Dotting the i’s
What has changed is that lenders, with all the uncertainty surrounding jobs and with borrowers’ employment status sometimes changing quickly, are asking dealers to be very thorough in the fulfillment process.
“Whereas before the health crisis lenders would have allowed for more flexibility at the dealership in complying with all of the policies and steps to complete a loan application,” said Kovacevic, “now you have to collect a whole bunch of documents, and you need to validate that everything is correct. All incomes are being verified. All the signatures…everything has to be in the right place. Lenders are not allowing for exceptions. They have a lot of in-house policies and requirements, and often, before the pandemic, they would let some of those go at signing and then resolve some of the issues later. But now they are being super-strict on their policies, all of the i’s are being dotted and t’s crossed.”
While e-signatures speed the signing process, the solution sometimes slows approvals down if the lender has not been accustomed to using e-signature to a great extent, added Kovacevic.
Vladimir Kovacevic
“The lenders are the ones taking the risk, so ultimately they are the ones who have to decide how strict they want to be on their policies,” said Kovacevic. “But I really believe in times of crisis, when you have the opportunity to demonstrate to the dealer that you are there for them and you are going to step up and be a part of the solution and that you're not going to present more barriers, you will be the one they make sure they turn to when times are better.”
Kovacevic said it is human nature to become risk-averse during difficult economic times.
“But what you are doing now, the delinquencies won’t typically show up for 18 months, so tightening up standards will not help you in the short term,” he said. “A lot can happen with the economy in 18 months.”
A Loosening By Some Lenders
Kovacevic said he is now seeing more lenders Inovatec works with actually loosening standards.
“They are getting back to more traditional approval rates and turnaround times,” he said. “If you are too slow now, dealerships, and direct borrowers will go somewhere else. You risk losing business to fintechs, as well. I think everybody slowed down the process initially when the pandemic arrived. But I think it will be those who open things up back quickly who will get the most auto lending business this year, and down the road when the dealerships remember who helped them today.”