The Income Equation

Factors are in play in the macroeconomic environment that may significantly impact lenders' portfolios. In particular, borrowers are faced with less disposable income and "income compression." The end of the payroll tax holiday has left consumers with less take-home pay, and they may face additional cuts to real income if employers pass along the higher healthcare costs that are forecast in some projections. Inflation — so far held in check — is bound to eventually increase with continued government "easing," along with interest rates.

Meanwhile, buyers struggle with higher vehicle costs, particularly in the post-Sandy used market where supplies remain tight. At the same time, government regulation remains a variable that will impact vehicle costs, and the actions and appetite of capital markets can also hinder originations.

All of these factors are on the horizon and will place significant pressure on the ability of an individual consumer to meet his debt obligations. Lenders must recognize that some individuals will compensate for less discretionary income by sacrificing other obligations — such as insurance — even if just temporarily.

When the economy causes changes in borrower behavior, lenders with strong underwriting practices, ongoing diligence, and a CPI program in place as a backstop stand the best chance of mitigating risk. In addition, those lenders who measure potential macro risk will be the ones who maintain market leaders regardless of the economic conditions.