It's not one size fits all
Electronic contracting, or econtracting, is a relatively new technology process that enables all players in indirect automotive lending, including credit unions, to use electronic-based documentation instead of paper-based documentation in the signing and closing of loans. This process can increase accuracy and improve efficiency during the loan credit and funding process.
Econtracting requires up-to-date technology and seamless communication between dealer and lender, which can seem overwhelming to implement and coordinate. However, when effectively deployed, it provides a powerful way to facilitate everything from validating contract data through automated booking to the funding of a contract. This could involve all facets of a credit union’s contract validation (also referred to as “discounting” or “funding”) process, which includes confirming member information, valuing collateral, validating contract financials and compliance, verifying pricing and dealer compensation, and calculating disbursement amounts.
The traditional ways dealers have executed customer contracts have gone through the evolution from paper to electronic for nearly a decade. At first, only a slim minority of lenders and dealerships employed digital capabilities. There was no incentive to move away from paper when few others were taking part. For example, why have an econtract when your loan servicer may only deal in paper contracts? While the technology that enables Econtracting made the process easier and more accurate, the cost-savings were not yet there.
Today, econtracting has reached the tipping point. More lenders are employing the capability, and the time is ripe for the remaining lenders, including credit unions, to join in. With many larger financial institution players firmly entrenched in the eContracting camp, dealers are now accustomed to doing business this way, which has paved the way for credit unions to jump in with less resistance.
And it is no wonder that this is the new reality – the benefits of econtracting are tangible. With auto-population of contract data, automated contract validation, integrated status messaging and expedited dealer plan disbursements, dealerships and credit unions alike are able to process contracts with fewer errors, allowing staff to process a greater number of contracts and loans. Those that employ econtracting typically experience greater efficiency, limited errors, fewer instances of re-contracting and faster funding.
When reviewing your options for an econtracting platform, which is oftentimes a component of a loan origination system, it is important to keep in mind that the technology must seamlessly integrate the credit union with the dealer to make the experience best for everyone involved. The technology should focus on not only making it easy for dealers to close contracts, but also easy for your credit union’s operations staff to fund deals, which increases member satisfaction by shortening delivery time and streamlines the back-office process to facilitate faster funding.
When employing any new technology, it can seem daunting to ramp up the multiple new processes that will enable the benefits listed above. However, your credit union does not need to implement all these functions at the same time. When analyzing an econtracting rollout strategy, it’s important to evaluate which components will provide the greatest lift and focus on those first. Other components can be rolled out later. A credit union can take a phased approach over time, with each phase providing an incremental benefit.
For example, in the first phase, a credit union may choose to just perform electronic validation, or evalidation, either within its origination solution or within a dealer portal or dealer management system. Evalidation serves to confirm contract financials, such as that fee amounts fall within preset limits, and compliance requirements, such as meeting the Reg Z annual percentage rate disclosure standard or ensuring the APR falls within a state’s usury limit, as well as eliminate re-entry of contract data. Evalidation accomplishes this by comparing and validating the data received from the dealer against a lender’s internal policies and federal and state guidelines.
The reduction in contract errors gained from evalidation alone would certainly quicken the overall discounting process and allow the credit union to fund dealers faster and with fewer held offerings. Evalidation could then be leveraged to support additional functions in later phases, ultimately getting the credit union all the way to e-signed digital contracts and “lights-out” booking (also referred to as “auto-booking” ) where the entire process—including automated contract validation and funding of an account—occurs without any user interaction.
Or, a credit union could choose to roll out electronic signatures and electronic vaulting, or evaulting, to take advantage of electronic documents. Evaults are a repository for the authoritative copy of the e-signed loan document(s). These instruments bear the same level of legal commitment as a traditional ink-to-paper contract but as they are electronic and not physical paper, they do not require a traditional storage facility. This cuts down on storage costs and mail delays, and makes securitizations easier.
Because econtracting can have a significant impact on a credit union’s auto lending process, extreme due diligence is required when selecting a service provider. Today’s call for greater transparency demands adherence to National Credit Union Administration guidance on granting credit, and the provider should be able to speak to those demands. The provider should also be able to demonstrate substantial experience in automotive lending and leasing; knowledge of current industry best practices in electronic lending; solutions that are easily integrated with the credit union’s existing lending systems; and the ability to meet the operational – and member – needs of the organization.
Leveraging econtracting tools can help a credit union create an environment that allows management, regulators and members to have a better understanding of the credit-approval decisions being made via the data tracking capabilities of the tool.
As technology solutions continue to evolve to support econtracting, credit unions that are not yet in the market need to look closely at which aspects of econtracting would provide the most benefit and then create a strategic plan that incrementally rolls those out. The econtracting world may seem complicated, but it can be within the reach of any credit union willing to look at the smaller, targeted steps to achieve an ultimate goal of increased efficiency and member satisfaction.
Scott Hendriks is automotive finance product manager/lending solutions with Fiserv, a CUES Supplier member based in Brookfield, Wis.
