I’ve recently spent a considerable amount of time poring over the 2018 Non-Prime Automotive Finance Survey, which is administered annually by the National Automotive Finance Association.

All who review this important survey will see the story of increasing operating expenses, alongside investments in innovation that are yielding fruit. And, while not explicitly part of the survey, you can sense some of the financial and strategic impacts of Dodd-Frank.

However, the most important thing that I took away from the report is where this pattern is leading me. We need to see an absolute expansion of outsourced strategy to places where executive control and ego have limited the possibility for better results. Now is the ideal time to make some big moves as an industry… not just to “pivot,” but to make substantial strategic decisions that will move the ball forward.

The numbers tell a story

The 2018 Non-Prime Automotive Finance Survey tells a story about how finance companies, captives, and banks are changing from 2016 to 2017:

• Operating Expense saw increases for small (25 percent) and medium sized (7.8 percent) finance companies and banks, while the largest were able to stay flat

• Allowances for loan losses rose an average of 9 percent

• Cost of funds saw increases of 8.8 percent

• Respondents reported a drop in return on average equity of 25 percent over the two-year measurement period

During the same period, respondents reported declining performance for charge-offs, increases in repossession rates, and increases in unrecovered skip rates.


In light of the expense pressures and eroding performance in asset recovery, the results of applying innovation to the front-end processes — while not compelling enough to outshine the negatives — were actually eye-catching. Automation of credit decisioning, along with innovations in loan processing, is having a real impact in terms of faster turn times and reported reductions in the cost to process applications and contracts. When looking at the disintermediation of the middle man across the entire industry, I think we are just seeing the beginning of how far we are going to push it.

More innovative customer contact methods such as text messaging and email saw increases in adoption, as you would expect since this can be seen as less of a true “innovation” and more of a way to keep in step with modern day communications. Similarly, over 60 percent of respondents reported having a company mobile site or app.

Making sense of the paradox

Non-prime financing sources have made meaningful investments and innovations in ways that benefit the dealers (increases in auto-decisioning, faster funding times), and customers via improved/expanded communications channels (email, text, mobile enablement). But a deeper look shows that the use of automated dialers, especially in predictive mode, is still only penetrating a third of the overall market. So, why would we be ok with expanding contact channels and not optimizing the telephone contact channel?

While not included in the Non-Prime Automotive Survey, it’s obvious to anyone in and around finance companies since the beginning of Dodd-Frank that the focus on compliance has resulted in increased operating expense and has been a guiding influence of strategic investments made in recent years. And, while many companies are taking the “foot off the gas” as it pertains to compliance spend, I believe that we will continue to see restraint in activities that could result in any kind of “regulatory violation that becomes a class action lawsuit.” To me, this is what explains the focus on innovations that are perceived as positive to the consumer, while auto-dialer innovation is not moving forward.

Summing up the last two years and considering the next two years

In the last few years, we have seen higher rates of adoption of innovative front-end acquisition processes that have benefited dealers and customers, and delivered improved speed and reduced costs for the lenders. While these improvements are reported to have reduced costs, they have not delivered serious economic benefits to lenders of any size, as measured by operating expense. During the same period, lenders saw their losses (as associated allowances for loan losses) go up, and their performance in back-end recovery processes (repossessions, unrecovered skips, charge-offs) worsen. Finally, while not directly stated in the survey, increased regulatory “fear factor” forced an overly conservative approach to collections and recoveries.

 My assessment is that we have to hit the “reset” button and get back in shape. Let’s think about what makes our industry resilient and focus on the truly strategic pieces and outsource the non-strategic parts. In reality, we have probably made it 25 percent down this path already with loan originations processes. The smaller and mid-sized companies need to access cheaper outsourced IT, mail shop, and servicing operations. There is a story to be told about how the large companies tend to all have a strategic view towards outsourcing of operations, and I believe it is a big part of how they are able to keep their operating expenses flat during the last two years.

Thinking differently about control, risk and recovery

Recently, I reached out to many executives at finance sources to find out how strategically they are thinking about outsourcing of servicing operations. Only the largest or most innovative are thinking strategically about their outsourcing and deploying that strategy. What I found common among this group is that they all had outsourced some of their front-end processes (loan processing, first party / early handle) and were in a mode of constant improvement and are looking to expand further into the process. Perhaps this cautious approach is a meaningful template for others to utilize. At the same time, many of the most innovative in the space (think of companies like Capital One) have been outsourcing to a variety of similarly equipped vendors and analyzing their performance and consuming the good / bad learnings and turning around quickly and baking that into their strategy. This is active and live benchmarking within your own company – a very healthy exercise of improvement.

Any lender — but especially the smaller ones that are seeing massive operating expense increases — should think about the value that a strategic outsourcing strategy can bring. It can allow you to measure, monitor, and innovate strategies — versus the heavy lifting of building it all out yourself — while trying to compete with the big boys that have flat cost structures where yours is increasing by a quarter year-over-year.

The case for giving up direct control over resources (and measuring success by the size of your organization), and focusing attention on managing by data and measuring performance has never been greater. The market has already been readying itself to provide; there are many qualified domestic, near-shore, off-shore providers that have been readying for this day. Take, for example, Servicing Solutions, a large-scale servicing operation with facilities in Texas, California and in Tijuana, Mexico. It is a nice format that I have seen across a few offerings, and with Servicing Solutions they have it all in a single “on shore / near shore” configuration. Servicing Solutions have been managing non-prime auto, and non-prime un-secured portfolios for years. And, they see the opportunity to provide the benefits to operating expense while taking a big swing at helping auto finance companies (large or small) to make serious improvements in reducing losses and improving recoveries.

I had the chance to catch up with Louis Ochoa, president and CEO of Servicing Solutions. According to Ochoa, “Servicing Solutions is in the business of providing all the benefits of best practices across a variety of asset classes to improve portfolio performance. And it’s not just for financial services companies that we have had big success with; we have managed portfolios directly for Private Equity and Asset Management firms for over 15 years. To me, my job is to improve the life of my client CEO, and the same goes for the rest of the Servicing Solutions team, that we improve the lives of our client counterparts.”

When asked about how he does that, Ochoa talks about his experiences and those of his team: “Over the span of my career, I have never really worked on any easy accounts. For the past several decades I have been focused on improving portfolio performance in the non-prime space. My first-hand experience at driving performance of late stage, skip, recovery has been translated and codified into a system that I use to manage. And my team of professionals that I have built up over the years has utilized this system and improved on it over time.”

On the concept of differentiation, or what makes Servicing Solutions unique in the market, Ochoa believes that aside from their successful track record that it comes down to three key capabilities, or his 3 T’s: transparency, technology and touch. Ochoa adds, “I know that delivering portfolio performance involves a strong partnership that is based on open communications and a constant evaluation of your own performance, which is our first T of Transparency. And when you really push hard to find and deploy the best technologies, and couple that with time tested, high-touch methods, you get to a point where you are really distinguishing yourself from the pack.”

We spoke a bit about some of the challenges to getting the smaller to mid-sized companies to embrace an outsourcing strategy. To Ochoa it is about “truly understanding what it is like for a CEO or a head of Servicing to give up the wheel. I get it. This is why we focus so much on communication, details, and showing the monitoring of results.” According to Ochoa, at the end of the day the big focus on communications is what instills confidence in CEOs to take the leap.

We’ll know when we’ve arrived

To me, the forecast for the future of auto lending is positive, even given the negative headwinds discussed thus far. The reason for my optimism is that I believe that the industry is awakening to not just the potential of innovative tech, but more importantly in embracing the value of giving up direct control in order to step back and manage performance. It is easier for lenders to get comfortable with the thought of outsourcing a function to a tech solution than it is to outsource actual servicing work in a more direct fashion. From what I am seeing, the head scratching is about to end, and a season of moving forward with a new view on strategic partnership is upon us.

Joel Kennedy is a director with Spinnaker Consulting Group. He has more than 23 years’ experience helping big banks down to start-up finance companies to build, grow, improve, and repeat. He can be reached at 240-308-2169 or