Read what lenders are doing to protect their auto portfolios in Bonnie Hickmann's guest column in Auto Finance News

Over the past several years, auto lenders have enjoyed relatively low auto loan losses and delinquency rates. But with longer average loan terms, shrinking down payments, higher loan-to-value ratios, and an increased frequency of physical damage insurance loss, lenders need to brace for change.

A key component of protecting an auto portfolio is to enforce the insurance requirements of the loan contract.Why? When repossessed vehicles have damage, the value of the collateral is significantly reduced — resulting in a much higher charged-off balance.Soliciting a response from a borrower about whether he had comprehensive and collision insurance — after the car was repossessed — is challenging.

According to a study conducted by Balboa Insurance Co., 20% to 38% of repossessed vehicles have physical damage in excess of $600, depending on the lender. Using a sample lender with 10,000 annual repossessed vehicles and an average damage estimate of $2,000 per incident, additional charged-off losses would range from $4 million to $7.6 million each year.

Lenders have two options when deciding whether to track loans to ensure compliance with insurance requirements. The first, known as a “track-only” program, matches all insurance records to the appropriate loan and, in the event of a lapse in insurance coverage, issues notices to borrowers reminding them of their insurance obligations. A final default report is then sent to the lender for follow-up.

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