NEW YORK — The economic uncertainty and growing unemployment levels have led auto sellers and servicers to keep a close eye on increasing auto loan delinquencies and take proactive steps to mitigate losses, Fitch Ratings explained this week.

To discover what these companies are doing to combat losses, Fitch completed on-site reviews and detailed its findings:

—Tightening origination and underwriting standards

—Hiring additional collection personnel

—Enhancing collection strategy

—Testing remarketing and resale strategies to enhance recoveries and limit losses.

"Current economic conditions and volatile energy prices have led to softness in the wholesale vehicle market with noted declines in light truck and SUV values," officials indicated.

"The combination of these events has caused loss severities to move higher. Fitch believes auto seller/servicers need to act quickly and adapt to the changing market trends and realities to minimize auto ABS losses," they continued.

Delving deeper into the moves these companies are taking, Fitch first looked at tightening underwriting standards.

"Mortgage contagion is limited, but the weak economy and higher unemployment combined with higher loan-to-value ratios, longer loan terms and a weak wholesale vehicle market is driving losses higher," according to the company.

"Auto seller/servicers have tightened underwriting standards, contract structures and pricing levels to reflect additional risk in the marketplace," executives noted.

These initiatives include:

—Higher FICO score cutoffs.

—Lower LTVs and larger down payments.

—Reduced payment-to-income and debt-to-income levels.

—Shortened average loan terms.

Due to this tightening, Fitch said that there has been growth in the percentage of automatically declined applications.

"Additionally, customers in general are being subjected to more verification of application information, such as references provided and income and debt levels, particularly for higher risk applicants," officials highlighted.

Continuing on, Fitch said many servicers are also increasing staffing levels in their collections' departments.

"Most auto servicers have increased staffing levels in collection departments to address the additional workload and thus reduce delinquent accounts per collector ratios, especially in the later-stage delinquency buckets," executives explained.

"In some cases, servicers are using third-party outsource partners to enhance collection efforts and provide flexibility to staffing models," they continued. "Fitch believes having the appropriate staffing levels and scalability is important in times of financial stress and fluctuating delinquency levels."

Moreover, servicers are changing their collection strategies. Basically, they are segmenting customer risk to determine the most effective way to collect past-due accounts.

"In many cases, servicers are beginning to contact their borrowers earlier in the delinquency cycle," officials indicated. "If contact is not made with the customer, servicers are making calls more frequently, thus increasing the work load for collectors, requiring more personnel."

Additionally, Fitch said servicers are taking advantage of technology to increase results, such as higher usage of auto dialers for more intense calling campaigns, which can be at the expense of manual dialing efforts. So ultimately this can potentially reduce right-party contact rates.

"To combat reduced right-party contact rates, collectors are making more prime time calls, effectively increasing the frequency of right-party contacts," executives pointed out. "In addition, some servicers have begun using other techniques to make contact with delinquent borrowers, including sending text messages, e-mailing and call cell phones when appropriate.

"Fitch considers this to be important because recent trends show that once borrowers enter delinquency it becomes more difficult to bring the borrowers current," executives said.

Reviewing another challenge, Fitch indicated that servicers are seeing a trend of higher inventories within remarketing departments as defaults increase.

Basically, wholesale values have declined as repossessions have grown, Fitch reported. Additionally, overall demand has dropped and gas prices have led to softening recovery values for trucks and SUVs, the company added.

In response, Fitch said that remarketing departments have revamped some of the ways they do business, such as:

—Transporting vehicles to other auction locations (i.e., moving SUVs/trucks to an auction that is seeing higher resale values for that vehicle class), if cost effective.

—Holding event auctions in desirable locations (such as Las Vegas), thereby taking advantage of a particular geography for a specific asset class and/or running upscale and luxury vehicles only through auction lanes that attract buyers of specific vehicle types (at times, auctions provide transportation for vehicles to entice the use of a certain event location).

—Using Internet sales and Web simulcasts.

—Utilizing certification programs where the issuer pays the auction company a fee to certify vehicles with certain characteristics and quality and, in some cases, provide a guarantee that the vehicle meets specified standards.

—Increasing international sales via third-party companies and the Internet to find overseas buyers who benefit due to the weak dollar.

In conclusion, company officials explained, "Fitch believes that the ability of auto sellers/servicers to proactively manage their risk exposure within their portfolios is a critical component to the health and performance of auto trusts that Fitch rates. The use of varying methods to enhance resale value of vehicle inventory is important to minimize losses."