CECL will affect every aspect of credit and lending. At the consumer level, individuals can expect more stringent requirements, higher application fees, and a longer wait for credit approval. For in-house auto lending services, employees and managers can expect a more complex process that still requires some hands-on analysis for the qualitative measures.
It Should Raise Your Loss Allowances
According to Visible Equity, one of the biggest changes CECL will bring is the need to consider the “life of loan” time frame when estimating an expected loss. Depending on specific circumstances, a lender’s increase in model-based loss allowance could reach more than two times the incurred loss number. According to Cars Direct, in general, the longer the life of the loan, the more likely the borrower is to default. This is because it provides more chances to miss a monthly payment. People who need longer terms for their loans typically have lower incomes, too.
Expect Some Variation
In-house auto lenders should expect to see variations in the effects caused by CECL. How it affects one lender could be different from another because of differences in accounting practices, portfolios, customer base and economic outlook. For example, auto loan lenders that have larger buffers may have a smaller impact from CECL. Those that have long auto loan periods of 72 months or have more subprime borrowers may have higher lifetime losses. A downturn in the economy could also increase expected losses. According to Business Process Incubator, the more data that a lender has, the more stable the calculation of expected losses will be.
More Changes in Back-End Processes
According to Premier Insights, smaller in-house lending operations can expect to see more changes in back-end processes. This is because smaller lenders may not have a lot of years of data to review in order to make the estimates about their expected losses. In-house auto lenders who do not originate a lot of their own loans but do have a long timeline of lending may also find that their back-end processes will be subject to a lot of changes.
CECL will initiate a lot of changes in late 2019 and throughout 2020. In-house auto lenders should expect an extended period of a lot of changes as they figure out what works, what does not and what they need to do. It will be important for lenders to inform loan applicants about these changes in order to avoid any miscommunication or frustration during interactions.
For another article on car sales, check out this other article about how to handle car sales objections!