The Payment Moved, The Depreciation Didn’t

New Auto Loan Data Raise Questions About the Growing Cost of Failed Extensions

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For decades, payment extensions have been one of the most ordinary tools in a credit union collector’s toolbox. A member falls behind. The hardship appears temporary. Move a payment or two to the back of the loan, give the member some breathing room and allow the account to recover.

The basic rules surrounding extensions haven’t changed dramatically. Many credit unions have long operated around policies limiting how frequently a loan can be extended, with two extensions within a 12-month period a familiar industry benchmark. NCUA guidance similarly says that when a credit union restructures an individual loan more than once a year or twice within five years, examiners expect documentation supporting the borrower’s continued willingness and ability to repay. (NCUA)

But something else has changed.

The loans have gotten longer. The vehicles have gotten more expensive. And the consequences when an extension ultimately fails may be getting larger.

New loan-level auto ABS data now put numbers behind that concern.

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Extended Loans That Fail Are Losing More

LoanTape’s analysis of standardized SEC ABS-EE loan-level filings found a substantial difference in loss severity among subprime auto loans that eventually charged off.

Depending on loan-to-value range, previously extended loans lost approximately 50.1% to 60.0% of their outstanding balance when they ultimately charged off.

Comparable loans that had never received an extension lost approximately 40.6% to 52.1%. (LoanTape)

That does not establish that extensions caused those additional losses.

The borrowers receiving extensions were already more likely to be experiencing financial difficulty. LoanTape itself cautions against treating the relationship as causal.

But for collections managers, perhaps the more important question isn’t whether the extension caused the loss.

It is whether the extension accurately identified a borrower whose financial condition was likely to improve.

That has always been the judgment behind a good extension.

And that judgment may deserve considerably more attention today.

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Two Extensions May Still Be Two Extensions. But the Loan Underneath Them Has Changed.

A traditional 48- or 60-month automobile loan and today’s 72-, 75-, 80- or 84-month loan are very different animals.

Consider two hypothetical loans for the same vehicle at the same interest rate.

One amortizes over 60 months. The other over 84 months.

After two years, the 60-month borrower has paid down substantially more principal. The 84-month borrower has spent those same two years making payments but remains much closer to the original balance.

Now give each borrower two one-month extensions.

The calendar advances exactly two months in either case.

The vehicle depreciates during those two months regardless of whether a payment is being made.

That is the part of the extension equation that deserves renewed attention.

An extension stops a scheduled payment.

It does not stop mileage.

It does not stop mechanical wear.

It does not stop depreciation.

And it does not make an underwater loan amortize faster.

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The Longest Loans Are Already Receiving More Extensions

Another LoanTape finding makes the relationship particularly noteworthy.

Among prime auto ABS loans, loans originated with terms of 76 months or longer received extensions at a rate of 0.76%, compared with just 0.08% for loans originated at 60 months or less.

That’s a 9.7-to-1 difference. (LoanTape)

LoanTape found original term to be a substantially stronger separator of extension usage than even vehicle age.

Again, correlation is not causation. A long loan doesn’t automatically create financial distress.

But the pattern deserves attention because longer terms are increasingly being used to solve an affordability problem.

The monthly payment doesn’t fit, so the term stretches.

If the payment later stops fitting anyway, the extension stretches it again.

Eventually, collections may be trying to cure an affordability problem that underwriting already pushed seven years into the future.

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The Missing Variable May Be Objective Ability to Repay

Historically, extension policies have concentrated heavily on how many extensions a borrower can receive. That’s understandable. limits provide consistency and prevent endless “rolling” of delinquent loans.

But perhaps the more important question today is not: How many extensions has this member had?

It is: What objective evidence tells us the member can make the payments after this extension expires?

NCUA already points credit unions in precisely that direction. Its workout guidance says credit unions should base decisions on a borrower’s renewed willingness and ability to repay, and expects additional documentation when repeated modifications occur. (NCUA)

That suggests the strongest extension policy may combine a numerical limit with a forward-looking assessment.

A member who temporarily lost overtime and can document that those hours have returned presents a very different risk than a member whose regular monthly income hasn’t covered the vehicle payment and other obligations for six months.

Both borrowers can be brought “current” with an extension.

Only one underlying problem may actually have been cured.

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Current Is an Accounting Status. It Isn’t Necessarily a Forecast.

That distinction becomes particularly important when portfolio reporting is involved. An extension can remove an account from delinquency statistics without changing the economics of the loan.

The payment is moved, the maturity date changes, the account becomes contractually current. From an operational perspective, that’s a success!

From a credit-risk perspective, however, the outcome isn’t known until the borrower demonstrates the ability to resume contractual payments.

LoanTape has begun measuring precisely this phenomenon through what it calls an Extension Default Rate, the percentage of extended loans that are again at least 30 days delinquent or charged off roughly two months later. (LoanTape)

That is potentially a much more useful collections KPI than extension volume alone.

Credit unions routinely know:

How many extensions did we grant?

Perhaps they should increasingly ask:

How many were still performing six months later?

And then:

How much did we lose on the ones that weren’t?

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Principal Versus Depreciation Is Where the Real Cost Appears

Imagine a vehicle worth $30,000 securing a $35,000 balance.

The borrower is already $5,000 underwater.

The credit union grants an extension.

If the member resumes payments and successfully completes the loan, the decision may have saved both sides from an unnecessary repossession.

But suppose the borrower defaults six months later.

During those six months, principal reduction was slowed by the extension while the vehicle continued depreciating.

If the vehicle is now worth $27,000 and the balance remains $33,000, the collateral deficit has grown from $5,000 to $6,000.

Add another extension and another period of delinquency and the lender may eventually recover a substantially older vehicle while still carrying a surprisingly large principal balance.

The mathematics become increasingly unforgiving as original terms stretch toward seven years.

And recent collateral trends aren’t helping. Wholesale values have been declining again while increasingly long terms keep loan balances elevated.

That creates a race between principal amortization and vehicle depreciation.

Every successful payment pushes the lender toward the finish line. Every extension gives depreciation a little more time to run.

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This Doesn’t Mean Credit Unions Should Stop Granting Extensions

Quite the opposite. A good extension can be one of the least expensive loss-mitigation tools available.

Repossession creates recovery fees, transportation expense, auction costs, potential deficiency balances, consumer disruption and frequently substantial collateral losses. Keeping a borrower in the vehicle who genuinely can resume paying is generally better for everyone.

NCUA itself recognizes that prudently underwritten modifications can help borrowers repay while allowing credit unions to avoid the costs associated with default. (NCUA)

The emerging data instead argue for better selection.

The objective shouldn’t necessarily be fewer extensions. It should be fewer unsuccessful extensions.

That may mean looking beyond the traditional number-of-extensions rule and incorporating factors such as current wholesale collateral value, current LTV, remaining term, prior payment performance, previous extension performance, documented hardship, income restoration and the borrower’s realistic post-extension debt burden.

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The Data Are Beginning to Ask a Different Question

Credit unions have spent decades developing rules around when an extension is permissible. The new data suggest collections departments may increasingly need to measure whether it was successful.

LoanTape already shows that long-term prime loans receive extensions almost ten times as frequently as loans of 60 months or less. And among subprime loans that eventually charge off, previously extended accounts are producing materially greater loss severity. (LoanTape)

Neither finding proves extensions are causing losses. They point instead toward something potentially more useful.

The extension itself may be becoming a credit-risk signal.

And as auto loans stretch farther beyond six years, the cost of getting that decision wrong may be increasing.

Because while the extension may move the payment to the end of the loan, depreciation doesn’t wait its turn.