Automotive Lenders Are Overlooking the Value of Alternative Data and Instant Decisioning, Open Lending Research Finds

Rhea-AI Summary

Open Lending's (NASDAQ: LPRO) second annual Lending Enablement Benchmark Report highlights that three in five automotive lenders are seeing rising delinquencies, driven by prime borrowers. Traditional credit scores are exposing lenders to elevated risks, prompting a call for alternative data usage. The report shows an 8% increase in delinquencies among prime borrowers and a 12% decrease among near and non-prime borrowers. Though 40% of lenders use alternative credit data, there's still room for growth. Slow loan decisions are causing missed opportunities, as only half of lenders provide instant loan rates. The report surveyed 113 senior leaders in the U.S. auto lending industry.

Positive

• 40% of lenders now use alternative credit data, up from 34% in 2023.
• Adoption of Lending Enablement Solutions (LES) is increasing among financial institutions.
• Lenders using LES find it helps grow return on assets and reduce risk exposure.

Negative

• Three in five automotive lenders are seeing rising delinquencies, driven by prime borrowers.
• 8% increase in delinquencies among prime borrowers year-over-year.
• Slow loan decisions are causing lenders to lose potential business opportunities.
• Only 40% of lenders use alternative credit data for loan decisioning, indicating a concerning oversight.

Insights

Financial Analyst

Open Lending's second annual Lending Enablement Benchmark Report provides critical insights into the current state and future direction of the automotive lending sector. The rise in delinquencies among prime borrowers is particularly striking, reflecting potential vulnerabilities in traditional credit assessment methods. This increasing trend of delinquencies can jeopardize lenders' profitability and overall financial health. A shift towards alternative data for creditworthiness evaluation could mitigate this risk. Alternative data, such as utility payments, rent and other non-traditional credit indicators, can provide a more nuanced understanding of a borrower's financial stability.

The report indicates that only 40% of financial institutions are using alternative credit data, up from 34% in 2023. However, this adoption rate remains relatively low, suggesting a significant opportunity for growth and innovation in the industry. The slow adoption could be attributed to several factors, including technological barriers, regulatory concerns and a general inertia in changing established practices. Lenders who can effectively integrate alternative data into their decision-making processes may gain a competitive edge by identifying reliable borrowers who might otherwise be overlooked.

Moreover, the slow loan decisioning times reported, with only half of lenders providing rates within minutes, highlight an area ripe for technological advancement. Rapid decision-making not only enhances customer satisfaction but also captures market opportunities that might be lost to faster competitors. The impact on profitability and market share for lenders who fail to adapt could be significant.

Market Research Analyst

The findings from Open Lending's report underscore a critical shift in the automotive lending landscape. The reliance on traditional credit scores appears increasingly inadequate in accurately assessing borrower risk, as evidenced by the rising delinquencies among prime borrowers. This discrepancy suggests that traditional credit metrics may not fully capture the financial behavior and risk profiles of modern consumers. Alternative credit data, which includes non-traditional financial behaviors, could provide a more comprehensive risk assessment and potentially reduce delinquency rates.

The report also highlights a notable trend: the market's slow pivot to alternative data despite clear benefits. This hesitation could stem from a lack of familiarity or confidence in the efficacy of alternative metrics. As more lenders recognize the limitations of traditional credit scores, the adoption of alternative data is likely to accelerate, offering a more inclusive and accurate picture of borrower creditworthiness. This shift could democratize access to credit, enabling more consumers to qualify for loans and, in turn, expanding the customer base for lenders.

Additionally, the slow decisioning times present an operational challenge. In a competitive market, speed is crucial. Lenders who leverage advanced lending enablement solutions to provide instant decisions can capture a larger share of the market, enhancing their competitive stance. Those who lag in this aspect may find themselves at a disadvantage as consumers increasingly prioritize convenience and speed in their financial transactions.

Three in five automotive lenders are seeing rising delinquencies as prime-focused lending standards prevail

AUSTIN, Texas--(BUSINESS WIRE)-- Open Lending Corporation (NASDAQ: LPRO) (“Open Lending” or the “Company”), an industry trailblazer in automotive lending enablement and risk analytics solutions for financial institutions, today released its second annual Lending Enablement Benchmark Report. Report findings reveal that traditional methods of assessing borrower creditworthiness are exposing automotive lenders to risk and volatility as delinquencies rise.

Open Lending surveyed senior leaders across banks, credit unions, insurance companies, and more to understand how macroeconomic factors shape automotive lending challenges and identify opportunities for success through lending enablement solutions (“LES”). Despite more financial institutions using LES, many lenders still rely primarily on traditional credit scores to measure creditworthiness. This report reveals why quick, comprehensive loan decisions are necessary to build a resilient portfolio and increase yield on existing assets.

Key findings from the study include the following:

• Three in five lenders are seeing rising delinquencies, with prime borrowers driving them. When asked about the credit tiers' impact on driving delinquencies, lenders reported an 8 percentage point increase in the "mostly prime/+" category and a 12 percentage point decrease in the "mostly near- and non-prime" category year-over-year. This shift illustrates the need for alternative data to give a more clear and accurate picture of borrower risk beyond traditional credit scores alone.
• There is a positive trend in the adoption of alternative credit data, but there is still room to grow. “Low credit score” is financial institutions’ top reason for denying loan applications, with only 40% using alternative credit data for loan decisioning. While this figure is up from 34% in 2023, it still shows a concerning oversight given heightened delinquency rates.
• Slow loan decisions are costing businesses crucial opportunities. Only half of lenders provide auto loan decisions with rates within minutes after application submission. The lenders who don’t may find that their prospective borrowers will seek and obtain loans from institutions that provide faster decisions.

“Most lenders are satisfied with their current lending enablement platforms but underestimate the importance of harnessing alternative credit data and receiving decisioning information more quickly,” said Kevin Filan, senior vice president of marketing at Open Lending. “Using the right LES empowers lenders to be inclusive and competitive while growing return on assets and reducing risk exposure.”

For more insights, access the full report.

Methodology

Open Lending surveyed 113 senior leaders (director-level and above) from across the U.S. auto lending industry, including representatives from financial institutions of all sizes. Open Lending denotes near- and non-prime as a credit score less than or equal to 659. Prime and super-prime is denoted as a credit score greater than or equal to 660.

Learn more about Open Lending at openlending.com.

About Open Lending

Open Lending (NASDAQ: LPRO) provides loan analytics, risk-based pricing, risk modeling, and default insurance to auto lenders throughout the United States. For over 20 years, we have been empowering financial institutions to create profitable auto loan portfolios with less risk and more reward. For more information, please visit www.openlending.com.

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Media Inquiries

press@openlending.com

Investor Relations Inquiries

openlending@icrinc.com

Source: Open Lending Corporation

FAQ

What recent trends are affecting automotive lenders according to Open Lending's report?

The report reveals rising delinquencies among prime borrowers, with an 8% year-over-year increase in this category.

How many automotive lenders are seeing rising delinquencies?

Three in five automotive lenders are experiencing rising delinquencies.

What percentage of lenders use alternative credit data according to Open Lending's report?

40% of lenders use alternative credit data, up from 34% in 2023.

How quickly do most lenders provide auto loan decisions?

Only half of the lenders provide auto loan decisions with rates within minutes after application submission.

What is the impact of slow loan decisions on lenders?

Slow loan decisions result in missed business opportunities as prospective borrowers may seek faster options elsewhere.