Dealers understand that finding ways to obtain financing — both for themselves and especially their customers — is just as important as procuring inventory and quality leads. In light of how the economy has behaved in the last few years, Auto Remarketing took an extended look at vehicle financing, insurance and more.

Industry analysts and company executives all shared their views on how the last recession affected the current landscape and where the industry could be headed.

We have broken our analysis of the F&I world into two parts, the first of which will look at the lending environment.

Dealers Should Be Seeing More Consumers Getting ‘Bought’ as Vehicle Financing Conditions Improve

Two primary questions might run through a salesperson’s mind when an “up” arrives on the lot or online through the business development center.

First, “Do we have the car they want already, and if not, how fast can I get it at auction?”

Second, “How hard is it going to be to get this deal bought?”

As supply relief appears to be coming on the wholesale front,  business office personnel are slowly finding their jobs a little more easier in 2012.

They’re seeing automaker’s finance companies, commercial banks or institutions on the secondary market more apt to give financing to customers — especially ones who might be considered subprime after the rocky recession that began in 2008.

“There is just a great sense of optimism for the marketplace of expected growth,” Melinda Zabritski, director of automotive credit at Experian Automotive, said recently.

“I think we’ll see the growth both in volumes as well as more of the subprime business coming on the books,” Zabritski continued. “But there’s always the question of where do we think it’s going to go back to. Will it go back pre-recession?”

To shed some light on that question, Zabritski shared with Auto Remarketing the opportunity she had earlier this year.

She took an unofficial poll of executives from about 50 different lenders at an industry event in an attempt to gauge their sense of where the market was going. Zabritski had done a similar query during the height of the recession — 2009 and 2010 — when F&I managers struggled to put deals together unless the potential buyer had a sterling credit report.

“Previously, the mood was frustration. It was more so from the standpoint of you didn’t have customers out there shopping. Of what you had, subprime was very challenged to get financing mostly because lenders didn’t have a lot funds, especially from the finance companies that relied on the secondary markets,” Zabritski recapped. “Those lenders that did rely on the second markets, it was more lack of funds. I think there was definite frustrations, definite concerns
because of the rise in delinquencies.

“It was also very telling right after the recession when we were beginning to recover, there the mood was interesting because the lenders had money,” she continued. “They just didn’t have the customers out there coming into the marketplace. It cycled from frustrations and challenges and lack of funds to uncertainty.

“Now it seems like we’ve got the optimism in the marketplace; we’ve got customers out there shopping again. We’ve got banks with money. We’ve got open lending programs and really the ability and willingness to fund,” Zabritski went on to say.

Early Vehicle Financing Data

In late May, Experian Automotive released its report analyzing first-quarter vehicle financing activity. Its review of second-quarter figures should be available later this summer.

Nonetheless, Experian discovered the average credit score for financing a new vehicle dropped six points to 760 and dropped four points to 659 for used vehicles during the first quarter.

Comparatively, credit scores in Q1 of 2008 were at an average of 753 for new vehicles and 653 for used.

Experian also noticed lenders continued to set favorable terms for consumers during Q1. Interest rates were lower year-over-year; and loan terms were longer, giving consumers access to potentially lower monthly payments.

For example, the average interest rates dropped to 4.56 percent on new-vehicle loans and to 9.02 percent for used. The average loan terms also increased, extending by one month for new and used vehicles to a total of 64 and 59 months, respectively.

Experian’s analysis also showed an increase in the average amount financed. The average amount financed on new vehicles rose by $589 in Q1, reaching a total of $25,995. For used vehicles, the average amount financed increased by $411, bringing the average total to $17,050.

“Our report shows automotive lending is as healthy as it’s been since the market bottomed out in 2008,” Zabritski emphasized. “With consumers doing a good job of paying back loans on time and the percentage of dollars at risk reaching its lowest point in six years, lenders are able to extend terms and provide lower rates. This thawing of the credit pipeline has been good for everyone, from consumers to lenders to automotive retailers.”

Some additional highlights from Q1 included:
—Vehicle loans to nonprime, subprime and deep subprime customers increased by 11.4 percent
—Repossession rates are down by 37.1 percent.
—30-day delinquencies dropped by 7.6 percent; 60-day delinquencies dropped by 12.1 percent.
—Banks and credit unions gained market share. Banks grew by 7.5 percent to 40.21 percent market share, while credit unions grew by 10.5 percent to 16.89 percent market share.

How Lenders Are Handling Business Nowadays

According to Experian’s first-quarter data, Ally Financial held the top spot for most market share of vehicle loans at 6.39 percent. Company officials recently offered a glimpse of their strategy to Auto Remarketing and how their approaching customers who managed to stabilize their personal finances after undergoing some turbulence from a cut in income, job loss or worse.

“Funding is readily available. As the economy steadily improves and the job market stabilizes, we expect a continued positive impact on consumer credit profiles and continued growth in the industry,” Ally Financial officials indicated. “We have expanded our credit parameters over the past two years, priced accordingly and with solid underwriting standards.

“Ally’s strategy is to use sound underwriting criteria and responsible financing practices. We are a full service creditor and provide financing across a broad spectrum of credit,” they continued.

“With respect to nonprime, we place greater emphasis on the higher end of the nonprime spectrum and only approve credit for qualified customers who demonstrate the ability to pay,” Ally officials went on to say. “Many factors come into play when we are evaluating creditworthiness and the level of risk for a particular credit is priced accordingly.”

While lenders such as Ally have such a close connection to franchised dealers, institutions like Turner Acceptance that cater to independent stores also used the recession to sharpen strategies.

Turner’s Andres Huertas, director of direct and merchant financing, explained how the company did this.

“Prior to the recession, the auto finance arena gained players that entered with very aggressive lending programs with the purpose of gaining market share.
During the recession, those players left the market as fast as they came, leaving some dealers and customers without financing options. During the recession, Turner made adjustments  to right-size our operations to assure that we can always be there for our customers and dealers when they need us the most,” Huertas highlighted.

“After the recession, our business has been growing consistently. We expanded our auto lending programs, adding Indiana; created a special finance program for franchise dealers; and we opened more branches where individual customers can get automobile financing and personal loans,” he continued.

“Some of the biggest lessons learned are that you have to be consistent with your lending philosophy; do what is right for your customers; never compete just to win market share; and not only make the right credit decisions, but also price them right,” Huertas went on to say. “At Turner, we are very passionate about what we do. Turner is a company that is here for the long run, so we work very hard in creating consistent lending programs that help dealers and consumers to get the result they want.”

While lenders appear to be doing all they can to ensure the best practices possible, how consumers behave continues to be a wild-card element of the future vehicle financing landscape.

If the consumer side of the equation maintains steady footing, Colin Bachinsky, president of GO Financial, believes access to capital so those loans can be funded should remain stable, as well.

“Back in 2008, when everything tightened up in the securitization market — it really shut down there for about nine to 12 months — everybody retrenched. I think it was a fear-based market at the time,” Bachinsky recalled.

“Unfortunately, what was happening then was the mortgage industry was going through a lot of pain, a lot of it tied into subprime mortgages going sideways. Unfortunately, the auto industry got pulled into that whole mess just because of the subprime connection,” he continued.

“Now fast forward the clock a couple of years, as the mortgage experienced all that pain, the auto industry, specifically subprime auto, came out of that mess a lot less bruised,” Bachinsky surmised. “It seems like access to capital on a global perspective has flowed from mortgages into auto.

“This typically is a pretty cyclical business,” Bachinsky went on to say. “There have been several periods over the last 20 years. New capital comes in, and lenders get more aggressive and start buying a little bit deeper. Then it’s the old cycle of where delinquencies and losses go up, and lenders kind of back out of the market. It’s this ebb and flow of capital in and out of the marketplace.”

Permanent Changes to Vehicle Lending

Looking deeper at the overall impact, Auto Remarketing recently asked several industry analysts and lending executives if the recent recession has left the vehicle lending market in a different place, permanently.

Amy Crew Cutts, chief economist with Equifax, doesn’t think so.

“The reason is that in the auto lending sector, when a loan goes bad the system is well-organized to either get the borrower current on the loan or to repossess the property and charge off the losses,” Cutts responded. “The ability to close out bad accounts quickly is an important one in restoring balance again in the lending market and quickly letting banks and other lenders to move on.

“In contrast, the mortgage foreclosure process is taking about a year on average but can last several years in some states, due to the need to use judicial process,” she continued. “This increases the costs of lending, delays resolution and hurts the housing market for non-foreclosed homes.

“What has permanently changed is the overall burden of regulation in all lending markets, and the changes that those have imposed will be longer lasting. Some practices may never return (and that’s probably a good thing), but there is a lot of benefit in a conservatively managed subprime lending market,” Cutts noted.

With that in mind, Cutts also considered what conditions it took for lenders to loosen credit for vehicle buyers, especially subprime customers.

“The lenders had to get their own houses restructured — most of them now have enough capital set aside to begin lending to a wider base again; the regulatory regime is better understood; and the losses on existing portfolios of auto loans are back in line with historical norms,” Cutts surmised.

“Importantly, a loan to a borrower with a 620 credit score today is a lot different from one originated in 2007 due to much more rigid underwriting standards,” she continued. “There is nothing wrong with banks or finance companies lending into this market provided the loans are properly and fairly priced; the risks are well understood, and the borrower’s ability to repay the debt under the new loan terms is verified. Where lenders got into trouble was by not paying attention to borrower capacity and thinking that there was no way asset prices could fall.”

Whether or not vehicle lending has changed forever prompted Zabritski to ponder what is “normal” when it comes to financing.

“That’s what I struggle with. What is normal? Was 2005 normal? When you look at what the SAARs were from the early 2000s, is that normal? Is that sustainable? I don’t know the answer,” Zabritski acknowledged.

“I think we’ll expect to see the market continue to cycle. I wouldn’t be surprised to watch growth in subprime and have delinquencies begin to increase again,” she continued. “They will as you grow subprime because subprime loans have a greater likelihood of going delinquent. As we see that happen, we may very well see the market pull back again and restart the cycle.

“I believe we might have already seen the cycle start to occur because we saw the subprime market begin to shrink pre-recession,” Zabritski added. “It was just the massive impact of economic conditions that really threw us for a tizzy in 2008. I think we’re pretty much returning to a normal cycle of the automotive finance market.”
 

Editor’s note: Stay tuned to AutoRemarketing.com for Part II of our analysis. The complete 2012 F&I Report can be found in the July 15-31 print edition of Auto Remarketing.