By Jennifer San Cartier, senior director, ABS, and Stephanie Petosa, managing director, operational risk, Fitch Ratings
Fitch's seller/servicer review process determines the quality and effectiveness of an organization's origination, underwriting, and servicing platform, as well as its operational and financial stability, its compliance with stated guidelines, and the soundness of its internal control procedures.
While Fitch's auto loan ABS ratings have always included a seller/servicer evaluation, the seller/servicer rating program formalizes and standardizes this information, providing a clear indication of origination, underwriting, and servicing capabilities based on standard benchmark assessments.
As Fitch has indicated in recent commentary, the auto industry is in a state of flux, with certain U.S. manufacturers struggling, wholesale prices under pressure and the U.S. consumer increasingly challenged. Further changes in manufacturer and consumer health could put additional stress on the origination and servicing operations of ABS auto loan seller/servicers.
The ratings serve as an added measure of any additional risk or benefit associated with the seller/servicer. Fitch's ABS seller/servicer rating scale ranges from level one (full acceptance with overall superior performance) to level five (not acceptable). Fitch expects that experienced servicers going through their first reviews are likely to be rated in the level two-to-three range.
Fitch's auto loan seller/servicer criteria are divided into three principal areas - corporate background, originations and underwriting, and servicing. The following sections describe more specific criteria and rating factors in these principal areas that apply to auto loan seller/servicers. Fitch evaluates management's commitment to providing strategic direction and developing operational tactics used to fulfill loan origination, underwriting, and servicing objectives. Factors considered as part of this assessment include the following:
*Management stability and depth.
*Operating experience
*Operating history and portfolio characteristics
*Growth strategy
*Legal structure and ownership
*Competitive position
*Compliance and corporate governance
Fitch believes that the financial condition of a company has a direct impact on the stability of its operating platform and ultimately on auto loan ABS performance. An auto loan seller/servicer with limited financial flexibility may not be able to appropriately support its various originations and servicing functions, resulting in weaker collections, higher delinquencies, less efficient remarketing and disposition, and ultimately higher losses. Several factors and quantitative metrics considered by Fitch in its seller/servicer financial condition review include:
*Unsecured debt rating/credit assessment
*Capitalization
*Funding diversity and liquidity
*Operating performance
When reviewing the originations processes, Fitch focuses on the ability of the seller/servicer to devise and execute an approach to originations that is complementary to its core competencies and strategic objectives, which should include maintaining adequate long-term profitability. The review of originations includes an analysis of the organization of the staff dedicated to this function, as well as the channels of origination.
In instances where the seller/servicer also performs an underwriting function, analysis of this process represents an integral part of the seller/servicer review. Fitch places special emphasis on the degree of separation between origination and underwriting objectives.
The servicing function is one of the most critical aspects of loan and transaction performance. Fitch has witnessed several cases in which pools with nearly identical underwriting criteria produced different loss numbers due to servicing capabilities or deficiencies.
Fitch views account management as an important function in an auto loan seller/servicer's operation. Account maintenance functions of auto loans include account establishment and management in a servicing system. Fitch evaluates policies and procedures for account establishment and modifications, including system accuracy, automation, and internal controls.
Fitch views customer service as a valuable direct link with customers that can either enhance a seller/servicer's relationship with an account holder or damage it. This function is largely engaged in handling inbound inquiries from existing and previous customers for information on their accounts regarding, for example, payoff quotes, payments received/due, requests for extensions, or due date changes. Several factors and quantitative metrics considered by Fitch in its customer service evaluation are:
*Customer service strategy
*Customer service technology
*Correspondence and dispute handling
*Internet/Web site availability
*External audit reports and studies
*Metrics captured
*Attrition rate.
Processing operations encompass many vital behind-the-scenes functions for auto loan seller/servicers. As part of the review process, Fitch focuses on the efficiency and effectiveness of processes and policies in place governing these various functions, as well as supportive IT and MIS reporting.
Fitch recognizes that a well-organized strategy that employs effective collection and asset management, including repossession policies, remarketing procedures, and portfolio review processes, can directly affect portfolio performance. Below are several factors and quantitative metrics considered in Fitch's review:
*Effectiveness of contact and collection strategy
*Use of specialized collection programs and third parties.
*Collections IT
*Delinquency policy
*Charge-off policy
*Remarketing management process.
*Repossession effectiveness
*Disposition channels
*Recovery timeline and rates
*Portfolio monitoring and procedures.
Maintaining a stable and efficient work force is a critically important challenge for the auto loan industry. Recruitment and hiring of staff depend on the type of position being filled. The servicing and operations functions of auto loan seller/servicers typically require tens to hundreds of hourly staff members.
To assess the relative success of the recruitment and hiring process, Fitch reviews the number of open positions, length of staff vacancies, average tenure, and turnover rates for different areas. Several qualitative factors and other quantitative metrics considered by Fitch as part of its staffing and training evaluation are:
*Hiring and retention strategies
*Employee performance-monitoring procedures
*Level of experience
*Turnover rates
*Supervisor-to-staff ratios
*Staffing composition (full time, part time, and seasonal).
Effective use of technology is essential to the success of auto loan servicing. Fitch's evaluation includes determining the primary functionality of all systems that are critical to the core servicing functions, such as account maintenance, collections, and asset management. Other issues to be reviewed include the following:
*Degree of automation
*Integration of multiple systems
*Report-writing capability
*Disaster recovery plans
*Internet and web site availability for related parties
*QC of any outsourced or offshore systems management
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