Black Book responded to auto finance companies and buy-here, pay-here dealers still looking for help on how to comply with upcoming accounting changes in connection with reserving for losses.
On Wednesday, Black Book released a new educational white paper titled, “Analytic-Driven Data Helps Auto Finance Lenders Mitigate Risk & Become CECL Compliant.”
To recap, the Financial Accounting Standards Board (FASB) is looking to ensure that financial institutions have solid measures in place to ensure they have appropriate reserves for any future losses based on the life of each auto loan. As a result, the board has instituted its new Current Expected Credit Loss model (CECL).
The new model will require higher levels of loan loss reserves and lead to changes in lending practices and portfolio management. It will also require a significant amount of data capture, analysis and modeling to meet the implementation deadline of Dec. 15.
With CECL’s requirement that finance companies perform life-of-loan loss forecasting, as soon as the provider says yes to a contract, Black Book explained the company must begin reserving for potential losses on that loan. Black Book emphasized this requirement means each finance company must have a much better understanding of the borrower’s financial condition, as well as accurate historical and residual collateral insight, when they make the loan.
The Black Book white paper discusses how auto finance companies have the opportunity to rely even more on having the most accurate and up-to-date credit and collateral data on their portfolios in order to meet these new requirements.
“Auto finance companies can leverage this opportunity to convert this compliance need into a competitive advantage,” said Anil Goyal, executive vice president of operations for Black Book.
“By leveraging granular data and building loan-level analytic models, auto lenders will have a better understanding of risks and improve return on capital,” Goyal continued.
The white paper also addresses the following topics:
• Probability of default methodology
• Estimations of probability of default and loss given default with model samples
• CECL modeling and data readiness
• CECL’s effect on loan strategies
• How varying economic scenarios can impact lender strategies for CECL
To download the new white paper, go to this website.