DECEMBER 2004

Technology Lowers Auto Delinquencies

The old maxim "possession is nine-tenths of the law" describes the obstacle that auto lenders have traditionally faced in trying to collect delinquent loan payments. Even though the auto loan is typically secured by the vehicle, the collateral is in the hands of the borrower and is highly mobile. However, a new tool is available to subprime auto lenders that neutralizes to some degree that possession advantage held by delinquent borrowers. Starter-interrupt devices are being installed by some dealers so that the car can be quickly and effectively disabled if a borrower falls behind on loan payments.

The electronic device installs in the dashboard. A keypad requires drivers to punch in a code provided by the lender prior to starting the car. The device can be disabled remotely in the event the borrower becomes delinquent. The Wall Street Journal reports that the devices are rapidly becoming popular with independent auto dealers, especially those who carry their own financing. Such lenders account for $80 billion in annual auto loan originations. The product is being used primarily in conjunction with loans to higher risk borrowers. One manufacturer, Gordon Howard Associates has reportedly sold about 160,000 of its PassTime interrupt devices to 1,600 auto dealers. Another company, Payment Protection Systems, Inc. has sold 130,000 of its On Time devices.

According to Leedom and Associates LLC, an automotive data company, delinquency rates on loans to borrowers with such devices in their cars have fallen to 7 percent from an average of 29 percent. Like more conventional loan features that offer lenders some default protection, the starter-interrupt devices make it possible for lenders to make loans to higher risk borrowers who otherwise might be rejected, or make the loan at a lower interest rate. It also allows borrowers with poor credit histories to rebuild their credit sufficiently to qualify for lower-rate financing.

Electronic payment reminders are included as a feature of some devices. One version of the device emits a warning sound (about 20 seconds in duration) of an imminent payment due date whenever the car is turned on or off. Another device displays a countdown on the keypad beginning three days prior to the payment due date. On the day before the payment is due the device displays a "1" and begins to beep.