Missed opportunities and poor decisions – in business, the sting almost never goes away. In fact, some might say it gets worse over time. When it comes to perhaps some of the most regrettable business decisions ever made, there are a number of lists out there that include examples such as the Louisiana Purchase (thanks France), New Coke or Kodak deciding to do nothing with technology that would ultimately lead to digital cameras and cell phones. The lists go on and on, but the underlying message is quite succinct – markets evolve, and the minute you think you’ve arrived, you’ll be left behind.
Especially in indirect lending, where competition grows fiercer by the day, financial institutions are always looking for a leg up on the competition. Rates and relationships go a long way to win business from the dealer’s perspective, but so does a lender’s underwriting speed and efficiency. Dealers hate to wait, so wasting time or effort is obviously the fastest way to miss out on great opportunities. This week, we thought we’d run through some best practices to remember when evaluating your indirect lending program.
Mitigate risk whenever possible
Recognizing risk factors isn’t enough – your institution must also mitigate them. Simply rejecting a loan without considering how some of those concerns might be mitigated can cost you loans and hamper your portfolio’s potential. Besides increasing the rate, which is often the first option, other alternatives include conducting a personal interview with the applicant to clarify credit discrepancies and vehicle use, cutting the advance and requiring a verification of income plus personal references. Please note that it’s prudent to decision the loan even if the finance manager is not available. Consider adding extra stipulations just to be safe.
Routinely conduct lost-opportunity reports
Collecting feedback is always smart when it comes to optimizing your underwriting procedures. There can be several reasons why an approved loan didn’t go through, and the best way to find out is to ask the dealer. Things such as better advances, rates and terms are all items that your underwriting team can adjust if those are the reasons you’re losing business. Also, the dealer might have gone with another institution because you had too many stipulations, slow turn-around times or lower reserves. Take the initiative to have conversations with your dealers about why your expectations for incoming deals are not being met.
Limit stipulations on low-risk loans
Stipulations can be a real annoyance for dealers looking to close business quickly. They are meant to protect the lender on high-risk loans, but they can be frustrating when overused on low-risk loans. When overused, they complicate the entire process and cost dealers more time. For example, a stipulation to avoid on a low-risk loan is the requirement to provide two references for applicants with high scores. It is likely dealers will avoid institutions with those types of across-the-board stipulations for applicants, regardless of scores.
Good programs go far beyond underwriting
Much like rate sheets and targeted niches, underwriting standards and strategies vary across competing financial institutions in the indirect lending market. Following the best practices mentioned above is a great first step to maximizing your program’s efficiency and profitability. However, underwriting is just one of the five important facets of any successful indirect lending program.
CRIF Select has a proven track record of helping banks, credit unions and other financial institutions of all sizes build strong indirect lending programs and strengthen relationships with their dealers. For more information on how we might be able to help you as well as specific best practices to follow for each segment of your program, click the button below to request our “Universal Roadmap for Indirect Lending Success” eBook.
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