What’s a sticker got to do with your loan portfolio?
A lot, if it’s the right sticker.
You know the one. The ubiquitous piece of new car design, always visible on that passenger window. It even has a name: Monroney labels
Did you know it was named after a U.S. Senator from Oklahoma, Almer Stillwell “Mike” Monroney? Now you do. Go impress your friends.
This is the thing your parents grimaced at as you drooled over that sleek sports car back in your youth. (Writes the guy who drives a sleek sports car.)
Turns out, that simple piece of paper can protect your institution. How? In the same way our Learning Library aims to help: By keeping everyone honest and informed!
What are Monroney Labels?
Today, we call it the window sticker. Yes, this is where “sticker shock” originated. Good thing we have online car buying services today to avoid a nasty showroom surprise!
U.S. law requires a Monroney label be displayed on all new cars. These stickers contain mandatory information about the car, including the following:
- Engine and transmission specifications
- Standard equipment and warranties
- Optional equipment and pricing
- Fuel economy ratings
- Estimated annual fuel cost
- Safety ratings
- Assembly and component country of origin
While only some of those details are important to your financing, together, it provides assurance that the vehicle you’re lending against really is what everyone says.
For us, besides being an entertaining way to dive into a car’s included features (What, is that just me?), Monroney offers a service creating replicas of the original sticker.
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How Can A Digital “Window Sticker” Protect Your Institution?
Your auto lending portfolio depends on correct information. Both from the borrower and the vehicle itself. Get one detail wrong and you might be facing sticker shock of your own! Specifically, you need accurate vehicle information to create your Loan to Value (LTV).
Bad things happen when your underwriting team gets it wrong (often through no fault of their own). Unfortunately, you may not even notice the issue until a need for repossession or when processing a refinance.
For the former, your institution can get “powerbooked”, a type of fraud that’s nowhere near as exciting as the name. On the latter, it simply helps to know the real value of the vehicle in question.
Protect Your Institution Against Powerbooking
The Consumer Law Group explains Powerbooking as one of the most common types of credit application fraud committed by car dealers. Here’s how it works:
A car dealership tells the financing bank or credit union that the vehicle is “loaded”, even when it does not have many of the options described. Basically, they’re saying someone purchased the Signature Limited when they actually have the Sport Value.
If only there were a piece of paper included with every car that could validate their claims…
This fraud isn’t just in theory. Here’s a credit union which dealt with powerbooking first-hand:
Muskegon Co-op FCU, Muskegon, MI
Asset size: $62.6 million
Membership: Greater than 10,000
The auto loan team at Muskegon Co-op FCU began using the Monroney label service in February 2018. Not a moment too soon, from the words of this loan officer:
“We recently had a powerbooking instance where the deal came in and the information didn’t match up. When we pulled the Monroney label, we saw that the dealer had added leather seats, a sunroof, and a tow package that the vehicle didn’t have, which falsely increased the value of the vehicle,” says Lacey Vanderlaan, loan officer at Muskegon Co-op Federal Credit Union.
“Once we used the correct value, the loan-to-value price was too high, and we sent the deal back. Had we made the deal at the inflated value and had to repossess the car, we could have never resold it at an appropriate price.” (Emphasis added)
The team at Muskegon Co-op FCU stopped an issue before it arose. With a Monroney label, they could validate that specific vehicle’s specs. This simple step kept the institution out of a costly situation had that loan gone south.
Preventing powerbooking isn’t the only reason to use Monroney labels, as another team discovered. Turns out, it’s helpful for refinancing. Borrowers looking to get a better rate may not know the exact specs of their car.
Fort Lee FCU, Prince George, VI
Asset size: $178 million
Membership: Greater than 16,000
The team at Fort Lee FCU uses Monroney labels going back two years (as of article publication). Tina Maitland, Senior Loan Officer, explains the use case they enjoy:
“The best part is that the label information helps the credit union to value vehicles accurately, make smart decisions for the credit union, and provide the best value for the member.”
Maitland continues: “I’ve had times that members want to refinance their vehicle and they don’t know what they have. I’ll ask if they have navigation and they’ll say, ‘it has a screen.’ The options can make or break closing the loan because they make a difference to the value of the vehicle.” (Emphasis for clarity)
Monroney labels help ensure your financial institution gets their valuation correct. Because a good LTV makes everyone happy.
What’s wrong with just using the VIN?
The VIN has a lot of information in its series of letters and numbers. But not all of it. Did you know the color of a car can contribute to its purchase price and depreciation rate? When every vehicle is logged as “Slate Gray”, you might have an issue.
A Monroney label (remember, most people know it as the “window sticker”) goes beyond VIN data. On most cars, the VIN can only identify the manufacturer, year, make, and model. You may not know trim levels or options.
And you definitely won’t know about things added by the dealer before purchase. (As an example, my car has door trim and handle “protective coating” applied to prevent small scratches. That is on my Monroney label as an additional cost.)
The VIN Doesn’t Know This
My car, the Mazda Miata, ranges from MSRPs of $25,730 to $30,780, depending on trim level. Then, you can add the GT-S package for an additional $550.
Would you handle a loan for $31,330 with the same values as one for $25,730?
Without accurate window sticker information, your financial institution might be making this “uh-oh” math right now.
Cost of Monroney Labels
Fortunately, there’s no sticker shock here. Monroney offers their service online, charging per use. How much? $7.99 per label.
That’s not too bad, considering interest and non-interest income on a car loan is a lot more. Of course, since you’ll be getting the labels for all your auto loans, it can add up. Consider your annual lending activity. Say you do 1000 auto loans a year. That’s an additional $8000 in loan processing costs.
Plus, A Discount!
However, what if you could get a deal? Yeah, discounts are fun! We’ve got some inside information you might enjoy (because we just so happen to work with them):
If your institution is a VisualGAP client, your cost is only $5 per label. That’s a savings of nearly $3000 in the prior example. Is the 37% savings worth considering a new GAP platform? Maybe. Maybe not.
What if we mentioned that it’s a service-agnostic menu-selling system? Take a look at your current GAP offering. Ask yourself, “if I could change anything about it, would I?”
If your answer is anything besides, “no”, it’s worth a chat.
Regardless of your desired GAP platform, embracing Monroney labels can serve as inexpensive “insurance” to minimize risk. You also become the educated provider to your borrowers.
Window Stickers & LTV Assurance
As you know, it only takes a few small LTV miscalculations to negatively affect your loan portfolio’s performance.
Monroney labels can help keep your auto loan underwriting within the lane markers.
Next time you’re in a dealer showroom, give that window sticker a big smile.
Curious about other ways you can minimize auto loan risks? We have a bunch of content right up your alley. Here’s a couple to get you started:
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Alright, now you’ve got me wanting stickers! You too, right?
Window sticker image credit: Wikipedia
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