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Data Due Diligence: A Three-Pronged Approach to Risk Mitigation

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Even with our strong economy, delinquencies remain an issue despite seeing high prime and subprime recoveries. Still, increased vehicle demand does not equal increased profit.

Solution: Throw Data at it. Lots of it.

Longer loan terms driven by higher vehicle prices and loan payments present a challenge. You can’t afford to lose track of the loan because the losses on the backend tend to be higher on an asset that depreciates quickly. And more traditional loans also require strategies to manage risk throughout the lifecycle of the loan. Add to that the challenge presented by the transient nature of customers who relocate, change employers, or change life status and you’ve got even more data. In our interactions with lenders like you, we always ask about what data sets you turn to mitigate these risks.

We’ve surveyed many lenders and found that they employ solutions, such as credit histories, work histories, propensity to skip/behavior models, and multiple data vendors. While it may seem like credit and work histories provide a complete picture of a borrower, most of the data you find can be self-reported and incorrect. We’ve seen that layering in different data sets like vehicle location data with credit and work histories can paint a better, more accurate picture and help you create a scoring model to better predict the borrower’s behavior. Data can be overwhelming, but intelligence can be actionable. That’s a distinction that matters.

Results: Lots of Data, Few Insights.

Basically, throwing data at questions and problems without a strategy is a waste of time. In our experience, we learned that bad data has cost U.S. business $611 billion per year. Before you set out to tackle the risks you are facing, develop a strategy to proactively manage risks and use the good, clean data you have at your fingertips. Allied Solutions and DRN work together to provide lenders with data they need to not just collect on loans and track insurance coverage, but also to mitigate the risks they may face. To help, we’ve developed a three-prong approach that we’ve seen lenders use to approach risk mitigation.

First Prong: Address Data Spread

Yes, you may have an abundance of data, but is it all actionable? Before you can approach risk mitigation, you need to ensure you have the right data you need on hand. Are you able to easily extract reports you need to make the right party contact? Is that data accurate and compliant? Can it generate action? You want to get a complete solution together first rather than piecemealing your data as you go in order to have better data on hand.

Second Prong: Stay Ahead of Risk to Rate, Recover and Recoup

The best way to mitigate risk is to stay ahead of it. Layer in risk protection from day one by evaluating behavioral scoring models, going beyond one-dimensional credit files, and integrating early delinquency indicators and insurance risk monitors. Build the models you need to understand your loan better. Use data to confirm/dispute the self-reported data you may incur. Measure what is at stake at the beginning rather than waiting for skip payments to occur.

Rating from the insurance perspective is one thing, but rating from a risk standpoint is different. Use the data to understand the risk the vehicle is facing.

Third Prong: Apply an Intuitive Delinquency Strategy

Lastly, bring all of the good data together to create the waterfall and strategies you need to mitigate risks. Use the data that you have to develop the strategies to stay ahead of the risk before the loans reach delinquency.

Limiting Lending Opportunities is Not a Strategy

Staying proactive is the best way to make sure these payments are being made. If you’re waiting for the first sign of trouble to take action, you will only be reactive rather than being strategic with your approach. Monitor your collateral in case you have to locate it in the future. Also, add more than just data – add insights. Data can only tell you so much. Analyze what you are seeing and use that data to make your analysis powerful to help you with your loans. Data is here to help you, but it can only do so much without a strategy.

Ready to get started on that strategy? DRN and Allied Solutions can help.

This blog post was derived from a co-hosted webinar between Anne Holtzman of Allied Solutions and Jeremiah Wheeler of DRN. To watch the webinar, click here,