Predicting the rate at which a used-model depreciates, or the collateral risk on an auto loan, can be a very difficult task. So how can lenders assess loss severity potential for their portfolios? Black Book believes it has a solution.

The company is looking to help fill this void by launching a new Black Book Risk Score that can predict vehicle collateral risk associated with lending, ultimately helping to ensure lenders lean toward underwriting customers into models that retain their value stronger, ensuring the lender sees the highest recovery rates possible if a default occurs.

In today’s environment, with volumes low at auctions and bidding intense, lenders are enjoying high recovery rates on repossessed vehicles, bolstering their bottom lines, explained Black Book’s Lou Loquasto to Auto Remarketing. The higher the recovery rate on the repo vehicle, the less the lender needs to charge-off on a defaulted auto loan.

However, while volumes at auctions might be low now, this will not always be the case and lenders need to be prepared, the vice president of Black Book lender solutions pointed out. So the question becomes, what is the collateral risk on certain vehicle models down the road as macro and microeconomic factors change?

“I’ve been with the company now for about 18 months and have met with many of the top finance companies. These guys were worried about future recovery rates and loss severity. Values are strong now, but what about 12 to 24 months down the road?” Loquasto asked.

Because Black Book and Fitch Ratings are related through their parent company Hearst, Black Book also has access to all the macro and microeconomic analysis and forecasting from the ratings firm and can pull this information into its model.

The scoring can help lenders to understand factors such as historical depreciation curves, recent and predicted reversion from these curves, along with the expected condition and mileage and potential for fraud. This is all down to the trim level, Loquasto stressed.

Say gas prices begin showing some significant growth again, the scoring is designed to shed light on how higher gas prices will impact larger automaker models, as well as small.

“There is so much information that needs to be taken into account. We knew it needed to be practical and easy to use. We wind all the information up into a predictive collateral risk score,” Loquasto said.

Generally, if a consumer is going to default on an auto loan, chances are likely it will occur within the first 12 to 24 months, so factoring in the proper loan-to-value ratio when underwriting can be key to reducing loss severity, he added.

About 10 of the top lenders teamed up with Black Book on this new scoring system. Loquasto said these companies helped to gear the development of the scores and how the information is reported.

The scoring is already available for the early lender partners; however, it is now being rolled out to other organizations in the industry.

And particularly in the non-prime lending sector, where competition is beginning to heat up, such a tool could help lenders drive more business by pricing the best deals possible.

“This scoring model can tip lenders off to approve a deal and price it right. If it’s a borderline deal, it can help them decide to go ahead and do the deal when another lender might not,” Loquasto noted.

Meanwhile, Tom Cross, Black Book’s president, said, “The product’s bottom line is that it protects companies from crucial automotive value issues and surprises that lead to higher loss severity and lower recovery rates."

Loquasto added, “With vehicle values at an all-time high and just three years away from all-time lows, auto finance companies face significant risk concerning a vehicle’s value over the life of a loan. The objective of Black Book Risk Score is to create a resource that rank-orders the degree of collateral risk all the way down to the year/make/model trim levels. We are particularly excited about how this new product will help our lenders and grateful to the partners that helped in its development.”

And a similar tool is in the works for dealers, according to Loquasto, to help them gauge the models that are most volatile.

For more information on the Black Book Risk Score, call Loquasto at (770) 533-5213, or email lloquasto@blackbook.com.