The following is a guest post by Matt Roe, Chief Revenue Officer at Open Lending.

Due to a precarious automotive lending environment — driven by inconsistent supply, rising interest rates, and continued economic instability — lenders are under more pressure to grow returns on assets (ROA) and curb risk.

Open Lending’s latest research, “Loans Within Reach: Lending Enablement Benchmark 2023,” surveyed 95 automotive lending leaders at U.S. financial institutions to understand their current challenges and how technology is helping them adapt.

The results show that traditional automotive loan decisioning methods expose financial institutions to market volatility.

But Lending Enablement Solutions can broaden borrower pools without adding unnecessary risk, providing a shield amid a tumultuous era for automotive lending.

Slow and narrow decisioning processes holding lenders back

Slow decisioning speed is a top challenge facing automotive lenders, Open Lending’s research revealed. Nearly half of those surveyed named “improve loan-decisioning speed” a top priority. Other priorities include growing ROA (44%), reducing risk exposure (42%), and increasing automotive loan volume (41%).

Updating existing underwriting models with Lending Enablement Solutions can help automotive lenders achieve these goals by going beyond the conventional markers of creditworthiness.

Traditional underwriting models that consider FICO scores alongside income, employment history, and debt-to-income ratio often overlook many applicants because they evaluate borrowers using limited insight and narrowed reasoning.

Open Lending found financial institutions often overly rely on FICO scores in automotive loan decisioning and forgo doing a more thorough analysis that could better illustrate a borrower’s creditworthiness.

Lenders can gain a more holistic and accurate borrower profile by including and considering alternative data (e.g., rental history, mobile phone payments, and account balances).

When lenders rely on more narrow datasets, they risk overlooking potentially profitable automotive loans and the opportunity to diversify their portfolios.

Lenders can identify overlooked borrowers and opportunities with Lending Enablement Solutions and significantly increase decisioning speed.

Lending enablement solutions improve balance, resilience

The value of Lending Enablement Solutions isn’t lost on automotive lenders. Nearly two-thirds (65%) of survey respondents have access to a lending enablement platform.

These digital platforms use sophisticated analytics like machine learning and AI to quickly evaluate nontraditional variables and provide affordable rates for borrowers that meet lenders’ profitability goals.

Lending Enablement Solutions use a combination of software applications, data analytics tools, and integration capabilities to streamline the borrowing process.

Loan origination systems, loan management systems, credit scoring and risk assessment tools, and automated decision-making capabilities contribute to increased decisioning speed and a more balanced and resilient portfolio.

Improved data analytics help financial institutions price automotive loans more appropriately by factoring in and protecting against potential default risk.

As a result, Lending Enablement Solutions improve ROA — the primary metric by which financial institutions measure profitability — and reduce risk exposure.

Fulfilling auto loan potential against all odds

While ROA is always top of mind for lenders, it’s especially critical now as they navigate a market downturn.

Open Lending found that automotive lenders who use a Lending Enablement Solution are more likely to meet their ROA targets than those who don’t (95% vs. 73%).

With Lending Enablement Solutions, lenders can reach people across credit segments, including near-prime borrowers, a group that can significantly increase a portfolio’s resiliency.

By providing effective front-end pricing and risk mitigation tools, Lending Enablement Solutions empower lenders to serve the near-prime borrowers who traditional models often underestimate and exclude.

Given the current economic outlook, automotive lenders are even more wary of risky loans.

Over three-quarters (76%) of respondents are more focused on minimizing defaults now than in years past.

Typically, near-prime borrowers — individuals whose credit falls just short of traditional lending requirements — are viewed as default risk.

But Open Lending’s study found that those with lower credit scores are less likely to default on automotive loans.

More automotive lenders observed delinquency in prime borrowers (33%) than in near-prime borrowers (20%). Moreover, lenders using Lending Enablement Solutions are far less likely to see a rise in delinquency rates among near-prime borrowers (12% vs. 57%).

Financial institutions facing downward pressure on their yield and portfolio performance due to the uncertain financial macroenvironment will need to consider expanding their base of near-prime borrowers.

Lending Enablement Solutions allow lenders to serve this segment accurately and quickly, offering the best rates without unnecessary risk.