Originations

First Investors Financial Services leverages AutoGravity mobile technology

IRVINE, Calif. - 

AutoGravity, a FinTech developer on a mission to transform auto financing by harnessing the power of the smartphone, this week announced a partnership with First Investors Financial Services, bringing the finance company’s indirect financing business onto the AutoGravity platform.

The newly announced partnership expands the financing options available to a growing generation of customers seeking the convenience and empowerment that come with using the AutoGravity iOS, Android or Web App.

The AutoGravity app can connect consumers to finance companies and dealerships using a seamless digital platform. Shoppers can choose any new vehicle, find a dealership that sells the model, apply for financing and select from up to four personalized finance offers. They can then take their chosen offer to the dealership to seamlessly lease or purchase the vehicle they’ve selected.

“Our partnership with AutoGravity helps us reach a new generation of customers and positions us to stay ahead of innovation,” said Tommy Moore, president and chief executive officer of First Investors Financial Services.

“We are excited to work with AutoGravity and utilize cutting-edge technology to meet the needs of our customers and dealers while enhancing our presence in the market,” Moore continued.

Headquartered in Irvine, Calif., AutoGravity was founded by an international team of digital natives and industry veterans on a mission to realize the full potential of smartphone technology to empower customers with vehicle finance offers.

As an early adopter, First Investors can reach digitally-savvy millennials with indirect loan offers through the seamless AutoGravity smartphone experience, sending qualified buyers to the showroom with offer already in hand.

“AutoGravity is reinventing the car financing journey by using smartphone technology to provide a better experience for consumers, dealers and lenders,” said Andy Hinrichs, founder and chief executive officer of AutoGravity.

“Our partnership with First Investors Financial Services reinforces our commitment to provide customers with finance options,” Hinrichs continued. “Additionally, our indirect lender partners gain direct access to customers looking for vehicle financing. It’s a win-win situation.” 

The AutoGravity app is available via the Apple App Store, the Google Play Store and all web devices at www.autogravity.com. The company said additional app features and updates are under development and will be announced soon.

The key to auto finance in 2017: Technology

CARY, N.C. - 

Experts from Equifax, Fiserv and J.D. Power all agree: Technology is going to be the catalyst to keeping the financing cog in the automotive retail machine humming in 2017 at least near the level dealerships, finance companies and other service and product providers enjoyed this past year.

Equifax auto finance leader Lou Loquasto said technology discussions simply can’t be missed whether it was back in November during Used Car Week or when the American Financial Service Association and the National Automobile Dealers Association gather for their annual events in New Orleans later this month.

“Anybody that went to (Used Car Week) or is going to NADA or AFSA — I’ve been going to these conferences for 20 years — they can see how much innovation is going on,” Loquasto told SubPrime Auto Finance News before 2016 closed. “I think because margins are going to continue to be tough to get to the levels post-recession, growth isn’t going to be where it was. So I think 2017 is going to be the year of innovation in our industry.

“When we talk about innovation in our industry, it’s not just about technology. It’s data and analytics, too,” he continued. “In 2017, I think you’re going to see more innovation coming out of our industry because you’re going to have to if you want to keep good margins and continue to grow.”

While most dealerships and finance companies aren’t strangers to technology, the advancements these constituencies have made in the past 15 years evidently still lags consumers’ expectations. According to the Expectations & Experiences quarterly consumer research from Fiserv, the company learned that 53 percent of borrowers had negative feelings about the financing process, including 33 percent who said it made them anxious.

In a phone conversation last month with SubPrime Auto Finance News, Fiserv’s Scott Hendriks added that within the contingent that had negative feelings, 78 percent of those respondents said there needed to be greater efficiencies in the finance process.

“It’s still a very dealer-driven model, going back into the F&I office to determine what rates and programs are available. What’s my payment going to be on a lease or what’s going to be my rate on a retail deal? I think that part of it is still very much in dealer control. I think consumers are looking to have more transparency and take that process online,” said Hendriks, who is director of product management at Fiserv Lending Solutions.

Since joining Fiserv in 2002, Hendriks has been very involved in the development of the company’s auto loan origination system product.

“I think what we’re going to see over the next period of time is that evolution where that very dealer-driven model we have today for finance is going to go the way of the sales process, which is more to a consumer model where they’re able to determine those things up front and arrange financing online. So it is when they go to the dealership a one-stop delivery. It meets the borrower’s expectation of their time as well as their experience,” he said.

“Technology is really at the forefront of how that’s going to happen. Lenders need to have technology assets that allow them give the customer that experience and be able to engage with them online at the point of decision on the purchase as opposed to waiting until they go to the dealership,” Hendriks went on to say.

More of the same sentiment came from the 2016 U.S. Consumer Financing Satisfaction Study produced by J.D. Power. The firm made its assertions in light of expectations of new-vehicle sales to plateau this year, prompting Jim Houston, senior director of auto finance at J.D. Power to say, the marketplace “is making for a very competitive auto lending market, which means dealers and lenders in many ways need to get back to the basics to satisfy customers.

“Lenders need to move beyond a transactional relationship and create a customer-centric culture that helps them build a relationship with their customers. The lenders — and dealers — that are able to do that are the ones most likely to excel,” Houston added.

The J.D. Power study highlighted what analysts called five fundamental “musts” that a dealer or finance should keep in mind as means to improving customer satisfaction. That collection included:

— Understanding the Deal: In the luxury brand segment, overall satisfaction is 49 points higher (on a 1,000-point scale) among customers whose dealer or finance manager explained account features, services, or benefits of their financing than among those whose dealer or finance manager did not (880 versus 831, respectively).

— Reference Guide: A finance company welcome package that answers basic loan servicing questions (such as how to make payments and how to sign up for automatic payments) can reduce the number of contacts the customer needs to make. Specifically, among luxury brand customers who say they “completely” understand all of the servicing information, problem incidence drops to 8 percent, compared with the overall luxury problem incidence of 10 percent.

— Accessible Self-Help Tools: When email customer service is available, satisfaction improves by 42 points among customers of luxury brand vehicles and 61 points among customers of mass market brand vehicles. When online bill pay is available, satisfaction improves by 53 points in the luxury segment and by 86 points in the mass market segment.

—One and Done: Satisfaction declines significantly when a customer has to contact their finance company more than once to resolve a problem. Overall satisfaction among luxury brand customers resolving a problem with one call is 875 points but declines to 821 among those whose resolution requires two calls.

—Satisfaction Equals Loyalty: Highly satisfied luxury and mass market brand customers (overall satisfaction scores above 900) can have a significant effect on dealers and lenders, as they are nearly twice as likely to return to a particular dealership and are more than twice as likely to lease or purchase the same brand again as those who are less satisfied (scores range between 801 and 900).

“In the seemingly complicated environment of vehicle financing, it’s the sometimes-overlooked customer handling steps that can bring clarity to the customer and give dealers and lenders a unique competitive advantage,” Houston said.

“Working together on the steps that clearly affect satisfaction levels can enable dealers and lenders to turn first-time customers into repeat customers,” he added.

3 ways to maintain subprime sales in any conditions

WILKES-BARRE, Pa. - 

Regardless of which way the subprime breezes are blowing, GWC Warranty explained there are certain steps dealers can take to ensure their own subprime business doesn’t fluctuate with the annual ebbs and flows of the subprime market.

The company that specializes in used-vehicle service contracts and related finance and insurance products sold through dealers pinpointed three specific strategies stores could use.

1. The right Inventory.

GWC Warranty emphasized that it starts with selection of inventory and moves on to the inventory dealers present to each individual customer.

“Head to auction with the subprime customer in mind,” the company said in a recent blog post. “Do some research with your lenders beforehand to see which vehicles they’ve had subprime success with and target a few of those each time you’re acquiring inventory.

“And then once they’re on your lot, present them to customers who pre-screen with subprime credit,” GWC Warranty continued. “Once you engage with the customer, try something along these lines: ‘Thanks for reaching out Mr. Smith. I have three great vehicles here that match what you’re looking for and they’re vehicles I know we can get financed for you.’”

2. The right finance companies

GWC Warranty insisted that part of being able to select, present and finance the right vehicle for a subprime customer is having strong contract-purchasing partnerships.

“Seek out lenders who know the subprime space well and operate in it frequently,” GWC Warranty said. “Many can be local providers so finding lenders who know your area well will help too.

“Lenders that meet this criteria will more consistent with their decisions and help you get more subprime deals approved on a regular basis,” the provider added.

3. The right protection.

GWC Warranty acknowledged that a common struggle on a subprime deal can be adding a vehicle service contract on the back end with a limited subprime advance.

“This is an obstacle you can certainly overcome — especially if you’ve worked on the first two points we’ve discussed,” the provider said. “It’s a simpler solution than you’d might think too. Just ask. And you might have to ask more than once, but good subprime lenders will understand the value of a service contract on a vehicle. Remind them of that if you need to.

“A service contract will keep a car on the road, protect a customer’s monthly budget and, in turn, lower the likelihood of a default,” GWC Warranty went on to say.

Editor’s note: This blog post and others from GWC Warranty can be found here.

A dealer’s secret weapon: The underutilized auto finance source representative

CHADDS FORD, Pa. - 

I recently came across an article titled, “J.D. Power: Speed No Longer Top Consideration When Selecting Finance Sources,” and it sparked my interest about what the modern retail automotive dealer leadership really wants to see from their finance companies when ease of use and speed are concerned.  I recently spoke at a conference in Las Vegas, and was surprised by how many of our auto lending competitors were focusing on authenticity and dealer experience, when compared to simply decision and funding speed.

Although I wasn’t surprised that for most retail dealership managers a relationship is more important than application and approval turn-time, one quote in the article mentioned above made me smile from ear to ear as soon as I read the words.

It was this beautiful nugget of information from Jim Houston, senior director of the automotive finance practice at J.D. Power, who said, “Finance sources need to shift from a transactional relationship with their dealers to a more consultative one. Speed has been king and the area lenders have traditionally focused on, but as the market gets tougher, lenders need to center their attention on their relationships with dealers, or they are going to lose business.

For years, we lenders have struggled with the balance of transactional versus consultative selling and (not to pat ourselves on the back) many of us have gotten pretty good at mastering a combined approach, utilizing both techniques successfully.

What was even more interesting were Mr. Houston’s comments about the importance of the lender representative, their interaction with retail sales teams, and the perceived value of the lender representative-dealership call. He shared that consistent visits by a lender representative boosts the overall experience of the dealership’s satisfaction with a lender by as much as 7.5 percent. Those kind of stats put lender representatives and their hard work at an almost superhero or top secret weapon status in our contemporary auto lending environment.

With an impact of lender representative-dealer visits like this, how could it be stated in the very same article that nearly half of dealers surveyed did not receive lender visits at all? Here is where I want to pause and speak directly to the automotive retail dealers’ leadership and management teams.

What’s happening at the store

I know that in your dealership showroom, you can frequently see more lender representatives, vendors, and advertising account managers looking to sell you something than there are “real” customers ready to take delivery of a car. There are an increasing number of hands out, all of them asking for your time and hard-earned cash in exchange for promises to increase profits or reduce your costs in one “new” and innovative way or another. This can be a frustrating occurrence for dealership owners, sales managers, and finance managers like you, particularly when your volume goals aren’t being met and you are struggling to adjust your sales strategy, close out a successful month, and grow your bottom-line according to plan.

As a veteran of the retail auto industry, I remember the days when I swore to myself that if one more lender representative, account manager, or other outside product salesperson came to my desk or headed toward my finance and insurance office, I was going to find a reason to physically throw them out, politely of course, or at least find some personal solace by hiding in the bathroom or the service lane until they were gone. We have all been there.

Call them what you will: lender representative, bank rep, or dealer development representative. Regardless of their title, during my career in retail automotive sales, I was guilty of only leveraging my relationships (or lack thereof) with these sales representatives for a hearty lunch or by asking them for pens, notepads, and the occasional “exception” from their team of credit analysts and funders.

I overlooked these lender representatives for what they were: “secret weapons” that visited me with expert ears and eyes ready to fill me in on all the trends of the industry.  They were providing me customized access to authorities knowledgeable about my competitors and their business strategies (what worked and didn’t work for them), and a consistent one-on-one engagement with a specialist who offered a unique insight into the industry that I was unable to see.

These individuals, who I used to avoid (or perhaps worse — used for just a free lunch), were there poised in my showroom ready to help not only me, but also my business and bottom line in any way needed. I didn’t see their value and failed to ask the right questions for the help and guidance I could have really benefited from.

In regard to my bottom-line profit opportunities, they could have been my hero, but instead of seeing Superman, I only saw Clark Kent.  I could not get past the secret identity that I had created for my lender representative — one with little value. I had been looking over and through this amazing secret weapon! How wrong was I?

I remember one bank representative who consistently said, “I can help you with liquor, lunch, pens and pads, but not a whole bunch more than that.” What I realize now, is that this lender representative was pandering to the misplaced “value” that I had put on their visits. I had come to expect (maybe even subconsciously demanded) a routine and expected quick pitch about their program, and then we were on to negotiations for lunch, pens, pads, or maybe even tickets to a local game or event.

Instead, if I had come to see these visits differently, I could have earned a real relationship and partnership with an expert (along with their supporting service triangle team of credit analysts and funders), all who have been trained to support Dealerships in protecting and building profits.

How it can be different

Here are just two examples of ways that these lender representative “superhero” secret weapons can help you capture more profit this month, and every month into the future, if you only ask them the right questions:

—Service triangles and profit maximization teams: Understanding what happens to your application once you submit it to any given lender is of utmost importance. Your lender representative can easily talk you through this process, provide you all of the most convenient forms of access to your credit analysts (all who are trained to make you the most money), and to the crucial funders, who verify the application and customer information, and book that profitable deal.

Many lenders choose to utilize service triangle teams (area sales manager lender representatives, credit analysts, and funders) who communicate together every day about your individual business and they discuss how to provide you a quicker approval, improve your deal structures to maximize profit, and work together to ensure your deal is funded in record-time. If you have not utilized your relationship with your lender representative to be introduced to your expert service triangle, or other dealer services teams, I guarantee you are leaving money on the table and are not getting the attention, profit, service, and ease of use from your lender program that you want and deserve.

—Profitable Preferred Programs: With the myriad of lenders available on RouteOne and Dealertrack (presently more than 1,200 nationwide), it is impossible to memorize all of the programs that contribute to your dealership delivering more cars and producing a more robust bottom line. Even if you truly understand all of the nuances and “sweet spots” of any specific lender program, the platform and the profit-opportunity is only as good as the specific essentials required to maximize your profit on every approval. You do not need to simply know what type of deal the Lender buys; you need to understand how to make the most profit on every application they approve. Many times, that lies within their individual preferred status or other loyalty programs.

These preferred programs can, many times, open up the maximum number of allowable ancillary products you can sell on both the front and back-end of your deal, allowing product penetration to skyrocket.

The moral of the story here is to take the time to ask your lender representative about their preferred program and what it can mean to maximize your profits. This may not only surprise you at the end of the month during your gross-profit analysis meeting, but it may also change how you think about and interact with your lender representative.

The lender representative secret weapon

In our insanely competitive industry, it is crucial to take advantage of every opportunity and leverage every possible relationship in order to protect and grow profits your way. One easily overlooked (and potentially game-changing) relationship that you may have yet to maximize, is the one with your lender representative.

I have shared a few examples of how to reframe the way you see your Lender Representative and how to utilize their presence in your Dealership to gain a better understanding of market trends, your competition, and the industry. In addition, by utilizing your Lender Representative to better understand their program’s service triangle, or service team, you can substantially increase profit opportunities, decrease your application turn-time, and quickly shorten your “contracts-in-transit” list. 

Lastly, taking the time to ask your lender representative to explain the rules and specific conditions and caveats of their preferred program can change how you think about your profit opportunity on virtually every deal. Don’t worry! Your lender representative will always be good for “liquor, lunch, pens, and pads.”

If you consider looking at these professionals as a new and crucial resource and profit-center partner in your dealership, you may discover that engaging with your lender representative in a different way makes you feel like a superhero, particularly when you start producing uncanny and extraordinary product penetration and gross profit records every month with this new found secret weapon.

George Ewing is the vice president of sales strategy and development at Flagship Credit Acceptance, a national independent auto finance company headquartered in Chadds Ford, Pa. George has spent the last 15 years building a career in the retail automotive industry in roles that include finance, dealership management, underwriting, training and development and marketing.

Auto finance news you might have missed to close 2016

CARY, N.C. - 

With the staff at SubPrime Auto Finance News fresh for 2017, we gathered up some noteworthy announcements that arrived while we celebrated the close of a great year with family and friends.

Among some of the highlights that came during the past few days included an update on defaults, an acquisition by RouteOne and TransUnion settling with the Consumer Financial Protection Bureau in an agreement set to cost the credit bureau nearly $20 million.

First, here is the latest default information stemming out of the S&P/Experian Consumer Credit Default Indices generated by S&P Dow Jones Indices and Experian.

Data through November indicated auto financing defaults recorded a 1.00 percent default rate in November, down 8 basis points from October.

The auto finance default rate hasn’t been that low since last July when S&P and Experian pegged it at 0.93 percent.

Analysts determined the latest composite rate — a comprehensive measure of changes in consumer credit defaults — remained unchanged on a sequential basis as both the October and November readings stood at 0.87 percent.

First mortgages also came in flat in November, holding at 0.70 percent. S&P and Experian added the bank card default rate rose 5 basis points in November compared with from the previous month to settle at 2.81 percent.

S&P and Experian noticed three of the five major cities saw their default rates decrease in the month of November.

Dallas posted the largest decrease, reporting in at 0.66 percent, which was down 10 basis points from October.

New York saw its default rate decrease by 2 basis points to 0.91 percent in November, and Chicago reported a decrease to 0.96 percent, down 1 basis point from the previous month.

Los Angeles watched its default rate increase, up 8 basis points to 0.70 percent.

Miami's default rate spiked to 1.44 percent, up 38 basis points in November and setting a 12 month high. The default rate increase of 38 basis points is unmatched in Miami since January 2013.

David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. explained a historical review of Miami's basis points movement in November shows increases since 2005, suggesting a seasonal up-trend in defaults for the month of November.

“Recent data paint a picture of a strong economy, and lower consumer credit defaults reflect this,” Blitzer said. “Default rates are modestly lower than a year ago, even as continued strength in home sales, auto sales and retail sales are supporting expanded use of consumer credit.

“Money market rates rose after Election Day, the Fed raised the target range for the Fed funds rate (in December) and has indicated that further increases lie ahead. The favorable default trends are likely to be tested in 2017 as interest rates rise,” he continued.

Among the five cities regularly tracked in this report, Blitzer reiterated Miami has consistently shown the highest default rate.

“One factor may be that home prices rising in Miami and mortgages are the largest portion of the city composite rate,” he said. “While Dallas home prices are rising faster than Miami, Dallas prices fell far less in the housing bust and have rebounded to new all-time highs.

“Miami home prices remain more than 20 percent below the highs set in 2006,” Blitzer went on to say.

Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.

The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.

Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.

TransUnion’s CFPB settlement tops $15M

TransUnion said in a filing with the Securities and Exchange Commission that the credit bureau agreed to settle with the CFPB stemming from a civil investigative demand (CID) the regulator delivered back on Sept. 14, 2015.

TransUnion explained in the filing posted on Dec. 29 that that the CID was focused on common industry practices relating to the advertising, marketing and sale of consumer reports, credit scores or credit monitoring products to consumers by the company’s consumer interactive segment.

In connection with the agreed settlement, TransUnion indicated that it has executed and delivered a “stipulation and consent to the issuance of a consent order,” pursuant to which TransUnion will accept the issuance of a consent order by the CFPB requiring TransUnion to:

• Implement certain agreed practice changes in the way TransUnion advertises, markets and sells products and services offered directly to consumers, including more robust disclosures regarding the nature of the credit score being provided as well as confirming consumer consent if the product or service is being sold through the use of a negative option feature (such as a trial period becomes a recurring paid subscription unless the consumer affirmatively cancels their registration).

• Develop and submit to the CFPB for approval a comprehensive compliance plan detailing the steps for addressing each action required by the terms of the consent order and specific time frames and deadlines for implementation.

TransUnion acknowledged that it will incur a one-time charge of approximately $19.4 million in the fourth quarter of 2016, consisting of the following:

— Approximately $13.9 million for redress to eligible consumers.

— A civil money penalty to be paid to the CFPB in the amount of $3.0 million.

— Current estimate of $2.5 million for additional administrative, legal and compliance costs we will incur in connection with the settlement.

“The CFPB is expected to recommend the aforementioned settlement to the director for final approval,” TransUnion said in the filing signed by senior vice president Mick Forde about the agreement reached on Dec. 22.

RouteOne acquires MaximTrak

In a deal effective as of Dec. 20, RouteOne acquired the assets of MaximTrak and its related business in a move that means MaximTrak will operate through its wholly-owned subsidiary RouteOne Holdings. 

The company insisted the acquisition will bring together two long-time partners to deliver a seamless vehicle F&I sales process.

Executives explained the vehicle purchase process has undergone fundamental changes in recent years, and will continue to do so with increasingly rapid speed. Consumers and dealers alike expect consistency and seamless transition across all physical and digital sales channels. 

As a result, both RouteOne and MaximTrak have been pursuing aggressive strategies to innovate the sales process on behalf of their respective customers.  RouteOne and MaximTrak’s complementary strategies have now come together to deliver on the vision of a complete sales and F&I solution that meets OEM, dealer and consumer needs — any time, any place, and on any device.

While reiterating MaximTrak will be operated by RouteOne Holdings, a wholly-owned subsidiary of RouteOne, officials mentioned MaximTrak leadership and team members remain in place and continue to operate from the MaximTrak offices in Pennsylvania.

RouteOne and MaximTrak employ approximately 400 people with offices in Michigan, Pennsylvania and Canada, as well as local staff in major markets. Directly and through partnerships, RouteOne and MaximTrak have customers in the U.S., Canada, Puerto Rico and Mexico.

“RouteOne has had a long and successful relationship with MaximTrak, and we share very similar cultures, values and DNA,” said RouteOne chief executive officer Justin Oesterle. “We are excited to have made this acquisition happen as we believe it creates significant value for all our customers at the OEM, finance source, provider, and dealer levels. 

“It also creates strategic and economic value for RouteOne’s owners: Ally, Ford Credit, TD and Toyota Financial, all of whom supported the investment,” Oesterle continued.

“I, and the entire RouteOne team welcome MaximTrak to the family.  We look forward to doing great things together for the industry,” he went on to say.

The companies added RouteOne and MaximTrak product integration began prior to the acquisition and will now be further developed and strengthened on an expedited basis.

MaximTrak was founded in 2003 by the Maxim family.

“The entire MaximTrak team is excited and energized by the growth opportunities that this transaction represents for our customers, employees and key stakeholders. Like RouteOne, MaximTrak is an established, innovative leader in the F&I space,” MaximTrak president Jim Maxim Jr. said.

 “Where RouteOne excels in the finance elements of F&I, we excel in the “I” side of the equation and in developing technologies that optimize the dealership process and ultimately dealer profitability through F&I product sales,” Maxim continued. “Together, with our combined scale, talents and product line-ups, we will be able to provide a complete digital workflow from initial customer contact and first pencil to finance, aftermarket and eContracting across online, mobile and in-store channels. 

“With that, our emphasis will be on helping our customers deliver a buying experience they control and one that consumers actually want,” he added.

Fed reiterates 3 implications of low interest rates

CARY, N.C. - 

With the Federal Reserve’s final gathering of the year set for next week, an interest rate move certainly appears to be in the works since at least one observer said the market has been behaving that an uptick is coming with “100-percent certainty.”

As the Fed considers a wide range of data points before making an interest rate decision, one member of the Federal Open Market Committee (FOMC) explained three important implications of a low-level interest rate. Fed Board of Governors member Jerome Powell discussed them during an appearance at The Economic Club of Indiana in Indianapolis just after Thanksgiving.

“First, today’s low rates are not as stimulative as they seem,” Powell said. “Consider that, despite historically low rates, inflation has run consistently below target and housing construction remains far below pre-crisis levels.

“Second, with rates so low, central banks are not well positioned to counteract a renewed bout of weakness,” he continued. “Third, persistently low interest rates can raise financial stability concerns. A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth. These are risks that we monitor carefully. Higher growth would increase the neutral rate and help address these issues.”

Perhaps what the Fed might be monitoring is auto financing being extended to the riskiest credit segment, which Experian Automotive noted as being at a nine-year low during the third quarter.

Powell then reiterated what the Fed considers before making any moves regarding interest rates.

“Incoming data show an economy that is growing at a healthy pace, with solid payroll job gains and inflation gradually moving up to 2 percent,” Powell said. “In my view, the case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month.

“Of course, the path of rates will depend on the path of the economy,” he went on to say. “With inflation below target, relatively slow growth, and some slack remaining in the economy, the committee has been patient about raising rates. That patience has paid dividends. But moving too slowly could eventually mean that the committee would have to tighten policy abruptly to avoid overshooting our goals.”

Immediately after the FOMC released minutes from its gathering in early November, Stifel Nicolaus chief economist Lindsey Piegza called them “essentially moot at this point,” because of what chairman Janet Yellen and others mentioned for much of the year.

“Against the backdrop of a flurry of committee members’ comments — including the chairman herself — suggesting a rate rise was imminent, the market is now pricing in a December hike with 100 percent certainty,” Piegza said.

“There remains much debate among the committee members over the need for preemptive Fed action,” she continued. “Some argued that risks to economic and financial stability could ‘increase over time’ if the labor market overheated, and furthermore that maintaining low interest rates for an extended period could lead to a further mispricing of risk. 

“Of course, other suggested that given the sill-lackluster pace of activity in the overall economy, allowing the unemployment rate to fall below its longer-run normal level for a time could result in ‘favorable supply-side effects,’ as well as potentially ‘hasten’ the return of inflation back to the committee’s longer-term 2-percent objective,” Piegza went on to say.

Speaking of employment data, Cox Automotive chief economist Tom Webb noted in his commentary associated with the latest Manheim Used Vehicle Value Index that a 178,000 increase in payrolls in November means that full-year 2016 job gains will likely total 2.2 million — the sixth consecutive year above the 2-million mark. Webb calculated that figure would push the six-year total to 14.5 million. 

“Real GDP growth in 2017 is expected to be significantly faster than in 2016, but job growth will likely be slower,” Webb said.

“Think of it as a capacity issue,” he continued. “The overall unemployment rate is already below 5 percent, and for college graduates it is only 2.3 percent.  But faster economic growth coupled with slower absolute job gains will, by definition, ensure that the benefits will be more widely and evenly spread.  Look for faster wage gains and increased labor productivity.”

Piegza circled back to the employment data to elaborate about what the Fed appears poised to do.

“Employment gains remain modest but solid as we enter into the final month of the year, with the latest November report in line with the trend pace over the past several months,” she said. “For the Fed, the November employment report simply reinforces the notion of moderate labor market conditions: not too hot, not too cold, but good enough to follow through with the expected December rate hike priced in with 100 percent certainty. 

“The market, meanwhile, is already looking out to 2017, with a new world of pro-growth policies expectedly ushered in by a Trump administration,” Piegza went on to say. “The November report does little to undermine the optimism already priced into the market — furthermore, it does little to justify such an extreme reaction since the presidential election.”

How stretching to 84 months is overcoming $4K in negative equity

CARY, N.C. - 

Imagine you’re trying to complete a “first pencil” with a customer who is either in the showroom or communicating through the chat function on your website. The customer has a trade, and better yet, it’s a model you know will turn in 30 days or less.

But then you learn there’s negative equity associated with that vehicle, a record figure in the thousands that Edmunds.com recently discovered to be the average on nearly a third of trades so far this year. What happens next likely determines whether the finance company will buy that deal or if the situation will deteriorate into a slog of trying to get a larger down payment.

“I would certainly say that (negative equity) wouldn’t help in the negotiating at the dealership,” Autotrader senior analyst Michelle Krebs said during a conference call with the media last week.

According to Edmunds data, an estimated 32 percent of all trade-ins toward the purchase of a new model through the first three quarters of 2016 were underwater. This is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new-vehicle purchases from January to September of last year. These “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.

The phenomenon of upside down trade-ins is not limited to new-model purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used market.

“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”

As Drury indicated perhaps negative equity isn’t posing a problem nowadays since contract terms continue to stretch. Experian Automotive indicated in its latest State of the Automotive Finance Market report released this week that 30.7 percent of all new-vehicle financing in the third quarter stretched to 73 months to 84 months, up from 27.5 percent a year earlier. Analysts even added a new segment to its collection of bar charts since now nearly 1 percent of all new-model financing (0.98 percent to be exact) has terms lasting 85 months and longer.

On the used side, analysts didn’t mention terms stretching beyond 85 months, but Experian did point out that contracts lasting between 73 and 84 months represented 17.7 percent of deals in Q3, up from 16.2 percent during the same quarter in 2015.

So if finance companies decide they just won’t stretch the terms any longer, when does all that negative equity start to short-circuit deals?

“Just thinking about it, it’s a great question,” Kelley Blue Book analyst Tim Fleming said during the recent media conference call. “It’s going to be perhaps a growing issue in the next couple of years. But I don’t know that it’s a significant problem right now.”

Stay tuned.

Competition forces Nicholas Financial to make cuts

CLEARWATER, Fla. - 

Nicholas Financial top management explained intense competition for subprime paper triggered not only modifications of its infrastructure and human capital, but also how many contracts the finance company booked during the second quarter of its current fiscal year.

The company reported during the three-month span that finished Sept. 30 that it secured 3,592 contracts, down from the year-ago figure of 4,243. Halfway through its fiscal year, Nicholas Financial added 7,096 contracts, again down from the 8,845 contracts from dealerships the company collected at the midpoint of its previous fiscal year.

“During our second quarter, new-loan origination continued to be below company expectations due to numerous companies looking to acquire automobile retail installment contracts,” Nicholas Financial president and chief executive officer Ralph Finkenbrink said in a news release about its performance.

“Some of these companies are willing to acquire loans at riskier pricing, which we believe will ultimately leave those companies with unprofitable portfolios,” Finkenbrink continued.

Nicholas Financial also reported that its average contract amount and term ticked higher while its average APR dipped a bit. In Q2 of its fiscal year, average contracts stood at $11,565 for 57 months with an APR of 22.26 percent.

All told, the company indicated it held 37,383 active accounts as of Sept. 30, pushing its portfolio to $485.5 million.

As a result of its origination activity plus other market facts, Nicholas Financial mentioned in its disclosures to the Securities and Exchange Commission that it closed three branch locations as a result of these respective markets not meeting the company’s operating criteria to remain viable branch locations. The sites included Sarasota, Fla., Troy, Mich., and Toledo, Ohio, with the company moving activities to other locations already in operation within those markets.

While the company cut those locations, Nicholas Financial also noted in its SEC documents that it opened a full-service branch in Pittsburgh during Q2.

“The company continues to evaluate potential new markets while maintaining its existing markets,” Nicholas Financial said in its Form 10-Q with the SEC. “The company may choose to close or consolidate certain existing branches if they are unable to acquire contracts that meet company expectations. As a result of continued intense competition, the company has been evaluating the long-term sustainability of its current branch-based model.”

Back in the news release, Finkenbrink noted the company also moved all loan-servicing operations from the branch locations to a centralized location within its corporate headquarters in Clearwater, Fla.

“We continue to evaluate the various markets in which we operate,” Finkenbrink said. “However, we do not expect any significant changes to the number of branches or other operations during our third quarter which ends Dec. 31.”

Nicholas Financial elaborated about its personnel and infrastructure moves in the SEC document.

“New regulations and best practices regarding collections were important aspects that led us to the decision to centralize our loan servicing operations,” the company said. “To a lesser extent, the company expects to experience a decline in operating expenses as a result of a reduced headcount.

“The company does not believe there will be any material change in delinquencies and losses as a result of this strategic decision. However no assurances can be given at this time,” the company continued. “The branches will continue to underwrite and acquire contracts. However, any additional material changes to company operations will be evaluated by the company over the next several quarters.”

And speaking of delinquencies, Nicholas Financial reported that its total rate of past due accounts — ranging from just over 30 days to more than 90 days — constituted 9.79 percent of its outstanding portfolio, or about $47.3 million. After Q2 of its previous fiscal year, the company indicated those readings stood at 5.88 percent or $27.9 million.

Looking at its top-line metrics, Nicholas Financial said its Q2 diluted earnings per share decreased 40 percent to $0.25 as compared to $0.42 a year earlier. Net earnings softened to $1.97 million, down from $3.28 million.

The company noted its Q2 revenue remained relatively flat at $22.65 million.

For the six-month span that ended Sept. 30, Nicholas Financial reported that its per-share diluted net earnings decreased 30 percent to $0.62 as compared to $0.89 for six months of its 2015 fiscal year. Net earnings totaled $4.87 million, down from $6.93 million.

Through six months, revenue increased 2 percent year-over-year from $44.71 million to $45.56 million.

“Our net earnings for the three and six months ended Sept. 30 were adversely affected primarily by an increase in the provision for credit losses due to higher charge-offs and past-due accounts along with a reduction in the gross portfolio yield,” Nicholas Financial said. “Conversely, our results were favorably impacted due to a change in the fair value of the interest rate swaps.”

Current amount of subprime paper is ‘probably a good thing’

CHICAGO - 

With subprime paper representing only about 16 percent of the total outstanding auto finance balance figure TransUnion reported for the third quarter, the bureau’s top industry analyst indicated that’s not too much lower-end paper currently in portfolios.

“Overall, it’s probably a good thing,” Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion, said about the latest subprime balance figure that grew by 11.4 percent year-over-year.

“The reason I say that is we’re in the sixth, almost seventh, year of economic expansion,” Laky continued during a conversation with SubPrime Auto Finance News after TransUnion’s Q3 2016 Industry Insights Report powered by Prama analytics. “As long as we’re in an economic expansion, the longer that goes, the more confident I think lenders feel in lending to subprime and non-prime consumers, so I think you would expect that growth.

“Again, the further you get into an economic cycle, the more people are going to have net gains in employment,” he went on to say. “We saw 161,000 net new jobs last month, with many of those people coming back into the workforce and may have been unemployed for a period of time or are relatively new to credit. As people are getting employed, it’s naturally creating this demand in subprime and non-prime and lenders are there to meet that demand.”

Balances are higher as now almost 80 million consumers hold some kind of auto financing — a Q3 metric Laky noted as being about 6 percent higher than a year earlier. However as the leaders of both Consumer Portfolio Services and Credit Acceptance noted when they reported their third-quarter results, there is a bit of turbulence that finance companies are facing.

“If there is a tightening — and the reason I say if — from a consumer market prospective, we’re still seeing good growth of consumers getting autos,” Laky said. “From a tightening perspective you’re seeing individual lenders maybe tightening their policies or reducing or being more careful in how they’re participating in the market. There’s a tremendous amount of competition out there. What we’ve seen is the competition for most risk tiers is driving down interest rates or APRs, how they’re being compensated for the risk they’re taking. It’s harder to get at.

“But at the same time, we’re starting to see the beginnings of a higher cost of funds for lenders,” he continued. “The Fed talks about raising rates a little bit. Some of the investor concerns around the fintechs in the second quarter of the year may have just flowed through to auto lenders, particularly independent auto lenders that might have had a higher cost of funds.

“Those two things together can probably just squeeze margins enough that are causing some lenders to really think about where they want to play a little more carefully,” Laky went on to say.

And if finance companies choose to be a little less aggressive, Laky explained the two most likely strategic moves they can make.

“From a lender’s perspective, the two levers that are probably the easiest or most straightforward to pull are credit scores — changing FICO cutoffs is a quick way to manage the credit side of the risk — and the other lever is on the asset side usually with the loan-to-value ratio. That’s another good lever you can pull pretty quickly as a lender,” Laky said. “You can reduce your caps on LTVs or your score cuts relatively easily.

“Nowadays, a lender with any sophistication, things are so engrained — policies and scores and LTVs — that simply changing one isn’t always an option. There’s a lot of thought that usually goes into either expanding the buy or contracting them,” he added.

SubPrime Auto Finance News closed its conversation with Laky by asking about what TransUnion will be watching in 2017 in order to spot significant change or continued patterns of origination growth that’s been noticed for several consecutive quarters.

“From an auto lender’s perspective, we’re going to look a three areas,” Laky said. “First is we’re always going to keep a look on credit quality. We look to see not just how credit is growing across traditional tiers, but the characteristics of the consumers within those tiers and how they’re changing. I feel that’s our responsibility as TransUnion to help our lenders keep an eye on that overall.

“Second is used-car values,” he continued. “We’re a long time into a strong used-car market. There’s a lot of talk about off-lease vehicles increasing over the next couple of years. We certainly see it in the credit file so we’ll keep an eye on that.

“Third, I would keep an eye on funding costs,” Laky went on to say. “The Fed talks about raising rates. While it might only be a little bit, it does flow through to the cost of funds and can certainly challenge margins for lenders. As long as the economy is strong and the Fed is raising rates because of a strong economy, I think that’s the least of the things to worry about.”

TransUnion’s complete Q3 report can be viewed here.

Credit Acceptance Q4 origination volume off to soft start

SOUTHFIELD, Mich. - 

While still making healthy gains in consolidated net income, Credit Acceptance chief executive officer Brett Roberts pointed to data the subprime finance company shared as part of its third-quarter financial statement to explain how competitive the market is to grow its portfolio with contracts that will mature and be profitable.

When looking at Q3 figures, Credit Acceptance generated a 12-percent year-over-year lift in origination volume as the company booked 82,460 contracts through 7,320 active dealers.

But when Roberts gave a glimpse at how the fourth quarter began, he mentioned that Credit Acceptance sustained an 8.3-percent drop-off in originations during October compared to the same month a year earlier.

“I think the primary driver that you see throughout the release is we continue to be in a difficult competitive environment. It’s one that’s been in place for quite some period of time,” Roberts told investment analysts during Credit Acceptance’s quarterly conference call.

“Our strategy in prior cycles like this has been to grow the number of active dealers. It’s pretty hard to grow volume per dealer in the environment that’s as competitive as it is today. And we’ve had some success with that strategy in the past. And I think what we allude to in the release, that that strategy gets more difficult as the number of active dealers grows; it becomes tougher to grow that active dealer base at the same rate,” he continued.

And so we're starting to run into a situation where our existing sales force is signing up as many dealers as they’re capable, but it’s not enough to offset attrition and the impact of the competitive environment on volume per dealer and still leave us with rapid growth. I think that’s where we are today,” Roberts went on to say.

Also to remain competitive, Credit Acceptance continued to extend terms. The company indicated its average contract term in Q3 stretched to 52.6 months, up from 49.8 months a year earlier.

And with the company taking on more risk and watching its collection projections sink below 70 percent, Roberts responded to inquiries about how used-vehicle values are going to impact Credit Acceptance’s performance.

“There’s obviously been a lot written about predictions of what used-vehicle values are going to do in the future, we’re certainly aware of all that,” Roberts said. “We track all the vehicles in our portfolio and the change in the Black Book value every month. Obviously it’s a used vehicle, so it’s a depreciating asset that goes down every month.

“What we’ve seen so far this year is a steeper decline in terms of the depreciation on the vehicles in our portfolio than we have typically seen, probably the steepest declines this year going back to, I think 2008 was the last time we saw depreciation this steep. So that’s certainly impacting the loan performance to date, and it’s something that we’ve included in our forecast,” he continued.

As we talked about last time, the actual amount that we receive at auction from the repossessed vehicles isn’t a huge percentage of our total expected cash flows. So we don’t necessarily have a prediction of what those used vehicle values are going to do in the future. It’s not as important to us as it is to potentially other, more traditional lenders. You could write a loan today, it’s a 50-month loan, trying to predict what used vehicle values are going to be over the next 50 months is obviously very difficult,” Roberts went on to say.

“So instead what we do is we try to build a margin of safety into our business model. As you know that predicting collection rates is very difficult, so we try to set up a situation where even if our collection forecast comes in a little shy of what we expected, the loans would still be very profitable. And that strategy has worked for us very well over time,” he added.

To recap, Credit Acceptance’s consolidated net income came in at $85.9 million, or $4.21 per diluted share, for the quarter that ended on Sept. 30. A year earlier, the company said its consolidated net income totaled $74.0 million, or $3.53 per diluted share.

Through nine months, the company’s consolidated net income stood at $245.2 million, or $12.01 per diluted share, compared to $219.7 million, or $10.49 per diluted share, for the same period in 2015.