Space Coast Credit Union Embraces E-Contracting


A Florida credit union adopted RouteOne’s e-contracting product, DiscountOne, for its east coast member base.

Space Coast Credit Union, located near Kennedy Space Center and Cape Canaveral, will use DiscountOne to transfer contract packages and conditions quickly and securely to any of its more-than 230,000 members and the dealers they are doing business with.

The direct aim of DiscountOne, by making it easier for financial institutions and dealers to communicate with each other and their mutual customers, is to speed up the funding process.

Jennifer Delaney, the manager of indirect processing at the credit union, believes the program will aid in expediting the time it takes to process the various financial programs that SCCU offers.

“At Space Coast Credit Union, we understand that time is precious, and we strive to find new ways to give more of that time back to our members,” Delaney said. “By offering services over the phone and online, we are able to reduce the wait time for our members.”

For more information about DiscountOne, contact RouteOne at 866.768.8301 ext. 4.

AFC Moves 4 Western Offices

CARMEL, Ind.  - 

Automotive Finance Corp. announced this week that a few of its branch locations located in the Western U.S. have moved to larger offices.

The move, aimed at fostering AFC’s growth, will aid in the company’s ability to serve dealers. The offices relocated include AFC’s locations in Denver; Albuquerque, N.M.; San Diego; and San Jose.

Joe Keadle, vice president of AFC’s Western division, believes the relocation of their offices will make them more convenient for dealers to visit en route to doing business.

“Our new location in the Denver market makes it very convenient for our dealers to stop by on their way to and from the auction,” Keadle said. “We are also in a much larger space, one that is more accommodating to our growth.”

Kelly Evans, the branch manager of AFC Albuquerque, looks forward to the new facility’s proximity to the New Mexico Independent Dealers Association.

“We work very closely with the association,” Evans said. “With so many joint customers, our new location makes it even more convenient for dealers to combine visits to the association and AFC in one easy stop.”

Of the California offices, the San Diego location’s construction was completed recently with more than twice as much space as the previous facility. The San Jose site will be closer to auctions and features nearly double the space of the existing branch and is expected to open August 1.

The addresses are below:

AFC Albuquerque
608 Chama Street NE
Albuquerque, NM  87108
(505) 244-3828

AFC Denver
7100 North Broadway, Building #8 Suite 8B
Denver, CO 80221
(303) 832-4757

AFC San Diego
2175 Cactus Road
San Diego, CA 92154
(619) 205-1349

AFC San Jose
1475 South Bascom Ave. - Suite 205
Campbell, CA 95008
(408) 260-2761


Ally Teams with Dealers to Promote Financial Literacy


The National Association of Minority Automobile Dealers and Ally Financial introduced a financial literacy initiative today at NAMAD’s 2014 Conference that is designed to help dealers educate consumers and employees about the financing process.

The free “Guide to Being Wallet Wise” is a resource dealers can use to not only increase knowledge of car financing but also teach consumers about additional topics pertinent to financial decision-making.

Included in the Guide are:
— A brochure with vehicle financing and leasing tips for consumers
— An Equal Credit Opportunity Act training course for dealership personnel
— A social media resource
— An optional consumer financial education class to be taught in the store.

The consumer-facing brochure mentioned above is based on Wallet Wise, which is Ally’s financial literacy program. Wallet Wise includes free courses on budgeting, credit, banking and investing, and auto financing. 

Ally plans to make a donation towards implementing Junior Achievement’s financial literacy programs in various markets for each NAMAD member registering for the guide before July 18. Junior Achievement uses hands-on programs to educate students on workforce readiness, entrepreneurship and financial literacy.

“Dealers play a key role in helping consumers understand the vehicle financing process,” said Damon Lester, president of NAMAD. “Becoming a financial literacy leader in their community provides NAMAD members additional opportunities to build and strengthen their relationship with customers.”

“Ally has been a supporter of advancing financial literacy for about a decade, and we know that education can be a powerful tool,” said Jeffrey Brown, president and chief executive officer of Dealer Financial Services for Ally. “With the support of NAMAD and its member dealers around the country, consumers will receive this valuable information to make informed decisions about the auto financing process.”

Loan Lengths, LTVs Concern OCC Officials


The lengthening of vehicle financing contracts as well as the loan amount attached to those deals has the attention of another federal regulator — the Office of the Comptroller of the Currency.

The auto finance market appeared several times in the OCC’s Semiannual Risk Perspective from its national risk committee, which monitors the condition of the federal banking system and emerging threats to the system’s safety and soundness. NRC members include senior agency officials who supervise banks of all sizes, as well as officials from the law, policy, accounting, and economics departments. The committee meets quarterly and issues guidance to examiners that provides perspective on industry trends and highlights issues requiring attention.

“The OCC sees signs that credit risk is now building after a period of improving credit quality and problem loan clean-up,” the agency said in the report. “Examiners have observed erosion in the underwriting standards for syndicated leveraged loans, as well as loosening of standards and increased layering of risk in the indirect auto market.

“Further, bankers are speaking out increasingly regarding their concern with competitive pressures. Given these trends, the OCC will increase its attention on underwriting standards and encourage banks to diligently assess their credit risk appetite in this stage of the credit cycle,” officials said.

To reinforce its assessment, OCC officials cited several metrics previously reported by SubPrime Auto Finance News, including Experian Automotive’s quarterly analysis of term length and loan-to-value ratios.

According to Experian’s latest State of the Automotive Finance Market report, loan terms in the first quarter of this year reached the highest level since the company began publicly reporting the data in 2006.

The analysis also showed that loans with terms extending out 73 to 84 months made up 24.9 percent of all new-vehicle loans originated during the quarter, growing 27.6 percent since the first quarter of last year.

The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new-vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.

“Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available,” the OCC said in its report.

“The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident,” officials continued. “Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance and aftermarket accessories into the financing

“The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure,” the agency went on to say. “Average charge-off amounts are higher across all lender types over the last year.

“These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently,” the OCC concluded.

Vosotas Resigns as Nicholas Financial Chairman


After almost 30 years with the company he founded, Peter Vosotas no longer is chairman of the board and a director at Nicholas Financial, an indirect special finance company that originates subprime loans with more than 1,600 dealers.

According to the company’s filing with the Securities and Exchange Commission, Vosotas resigned as of June 25.

“Mr. Vosotas’ decision was based on personal reasons and was not the result of any disagreement with the company on any matters relating to the company’s operations, policies or practices,” Nicholas Financial said.

Then on Tuesday, the company’s board unanimously appointed president and chief executive officer Ralph Finkenbrink to serve as chairman of the board.

The board also unanimously elected Kevin Bates, the company’s senior vice president of branch operations, as a director to fill the vacancy created by Vosotas’ resignation.

The leadership of Nicholas Financial wasn’t finished making major decisions.

The board also determined to discontinue its previously announced exploration of possible strategic alternatives for the company, including, but not limited to, the possible sale of the company to Prospect Capital Corp. or another third party, potential acquisition and expansion opportunities and/or a possible debt or equity financing.

“After careful consideration, the board determined that the company and its shareholders' interests will be best served at this time by the company focusing on its operations as a stand-alone entity,” Nicholas Financial said.

Officials also indicated their annual general meeting of company shareholders, which was tentatively scheduled to be held on July 30, now will be held on Aug. 12, 2014.

The company anticipates mailing a proxy statement and related materials on or about July 11 to shareholders entitled to vote at the annual meeting.

The series of moves caps what’s been a whirlwind few months for Nicholas Financial.

Coming off an appeal to remain listed on Nasdaq, the board of directors voted in June to terminate an agreement to be acquired by Prospect Capital Corp., through a deal that hit snags because of demands by the Securities and Exchange Commission.

During a June meeting, the company’s board determined certain conditions requisite to consummation of the arrangement “could not be satisfied by the termination deadline,” which was June 12.

According to Prospect Capital’s latest quarterly filing with the SEC, agency officials asserted that certain unconsolidated holding company subsidiaries through which Prospect holds an investment in operating subsidiaries should be consolidated. Consequently, Prospect said the requirement is delaying the effectiveness of its registration statement on Form N-14 related to the transaction involving Nicholas Financial.

Last December, Prospect entered into a definitive agreement to acquire 100 percent of the common stock of Nicholas Financial for $16 per share, pushing the total transaction figure to $340 million.

But just before Nicholas Financial’s special meeting, Prospect Capital learned that it would not be required to restate its prior period financial statements to consolidate certain wholly-owned or substantially wholly-owned holding company subsidiaries based on its discussions with the staffs of the Division of Investment Management and the Office of the Chief Accountant of the SEC.

Meanwhile, Nicholas Financial appealed the determination by Nasdaq to delist the company’s common shares from the Nasdaq Global Select Market.

On May 20, Nasdaq advised the company that the hearing panel handling such an appeal granted the company’s request for continued listing. The decision was subject to the condition that, on or before Aug. 31, the company informs the panel that the company has solicited proxies and held an annual meeting of shareholders.

The new developments regarding that potential acquisition and its standing on Nasdaq all came after Nicholas Financial watched its net earnings soften as it closed its 2014 fiscal year.

For the three months that ended March 31, net earnings decreased 40 percent to $2,860,000 as compared to $4,787,000 for the same span a year earlier.

The company’s fourth-quarter diluted earnings per share decreased 41 percent to $0.23 as compared to $0.39 a year ago. Nicholas Financial’s revenue increased less than 1 percent to $20.443 million for the fourth quarter, compared to $20.372 million during the previous year’s quarter.

For the 2014 fiscal year, Nicholas Financial reported that its net earnings decreased 16 percent to $16.703 million as compared to $19.941 million for the 2013 fiscal year.

Diluted earnings per share decreased 17 percent year-over-year to $1.36 from $1.63. Annual revenue increased 1 percent to $82.629 million, up from $82.11 million.

“Our results for the three and 12 months ended March 31 were adversely affected by a reduction in the gross portfolio yield, an increase in the provision for losses and an increase in operating expenses compared to corresponding periods ended March 31, 2013,” Vosotas said.

“Each period was also significantly affected by professional fees associated with the previously announced potential sale of the company. Such fees were principally related to fiscal 2014 and resulted in a higher effective tax rate as the majority were not deductible for income tax purposes,” Vosotas continued.

“The after-tax impact on diluted earnings per share by such professional fees totaling $1,131,000 and $2,312,000 was approximately $0.09 and $0.18 for the three and twelve months ended March 31, respectively,” he went on to say.

Despite the softening of some financial readings, Nicholas Financial originated more contracts in both Q4 and the fiscal year. The company’s number of contracts jumped from 4,240 to 4,661 in the fourth quarter, and from 14,789 to 15,949 for the year.

The company presently operates 65 branch locations in Southeastern and Midwestern states.

Millennials Give Finance Companies New Challenges

FORT WORTH, Texas - 

Beyond the metrics about originations, collections and other figures associated with vehicle financing, the 2014 member survey orchestrated by the National Automotive Finance Association highlighted just how important Millennials are to the present and future of the industry.

During his presentation at the 18th annual Non-Prime Auto Financing Conference, George Halloran discussed at length this new crop of consumers, individuals who are comfortable handling just about any part of their financial lives through the Internet at just about any time of the day. Halloran is the auto finance program director at Benchmark Consulting International, which assembled the survey for the NAF Association again this year.

“I think it’s very much on the minds of all finance sources because what we see is the younger generation, if they’re not shopping, they show up with mom or dad or grandma and grandpa,” Halloran said. “The dealerships are becoming much more connected to this kind of shopping. And the finance source similarly is becoming much more connected because these people want to shop when they want to shop. They want products and services available on their schedule with complete information and transparency.

“It’s kind of like if they wake up at 2 in the morning, eat a Snickers, drink a Red Bull and decide they want to buy a car, they want to do it right then,” he continued. “They want to find their financing then so you have to be online with your offers and processes so they can go to them and almost get to the point of pre-approval.

“In the non-prime market, it’s a little tougher, but that’s what they’re looking for. And the younger shoppers are shopping sometimes not for themselves,” Halloran went on to say.

The dialogue about Millennials that started again at the conference and now continues isn’t something new per se, according to Halloran. During other presentations at NAF Association events, he said the topic of Millennials came up, but now it’s even more pressing since this demographic appears to represent a much larger piece of the potential buying pool.

“I don’t think it’s too much of a culture shock, but it has been something they’ve been monitoring for years,” Halloran said. “It’s an evolution. Right now finance companies are serving two types of marketplaces. Those who are not Millennials, and those who are.

“They might not be actual customers yet, but they have a huge impact on the actual customer in terms of how they operate and the tools they use and information channels they use,” he continued.

Halloran made two other points about how finance companies must approach Millennials.

“These people are very social in the way they define social, which means they want what they want when they want it, and it has to be available in a fully transparent way,” he said.

“They’re not particularly price sensitive. They’re not necessarily shopping for the best price,” Halloran continued. “Their shopping revolves around more of what they want and what they can afford. If they think they can afford something, they’re not just going to look for the lowest price around. If they find something that’s acceptable — that’s what it means to be social to them — that’s the implication in terms of pricing and availability.”

Revamped Study Produces Enhanced Results

The NAF Association included metrics from the past two years in its latest study because officials took a one-year hiatus to revamp the survey process with their partner, BenchMark Consulting International. The association meshed together some of its long-standing analysis with new material provided by Experian Automotive and FactorTrust.

The new product resulted in the NAF Association and its members being able to identify nearly a half dozen challenges that are either new or have been presented but intensified in the past couple of years.

To reinforce the validity of its process, orchestrators pointed out that 77 percent of companies that participated are repeat contributors. The total accounts for the 22 finance companies that completed the survey surpassed 1.2 million, up 5 percent from two years ago when the last survey was compiled. The outstanding balances within the portfolios of the participants exceeded $10 billion, up 10 percent from the previous installment.

The 22 finance companies that participated included:

— AFS Acceptance
— Anderson Brothers Bank
— Automobile Acceptance Corp.
— Chase Auto Finance
— Crescent Bank & Trust
— FIFSG/First Investors Financial Services
— Foursight
— Gateway Financial Solutions
— MarkOne Holdings
— MPH2 Funding
— Nationwide Acceptance Corp.
— PFS Corp.
— Prestige Financial Services
— Regional Acceptance Corp.
— Security National Automotive Acceptance
— Southern Auto Finance
— Summit Financial Corp.
— Tidewater Finance Co.
— Top Finance Co.
— Turner Acceptance
— United Finance
— Westlake Financial Services

“A year and half ago, we decided that the survey questions that were being asked and the report we produced, the information was available from other sources,” NAF Association executive director Jack Tracey said. “We made a conscientious effort to try to find out what the marketplace wanted to know. We then built the survey form we’re using today to gather information so we could produce more relevant information that would be useful and not necessarily available anywhere else.

On top of that we brought in Experian and FactorTrust with their information stratified into just the non-prime markets. We feel now that we’re getting a broader overview of the industry, and the details we are providing hopefully will be some metrics to help manage their organizations,” he continued.

Highlights of Conference

One of the largest crowds ever attended this year’s NAF Association Non-Prime Auto Financing Conference, pushed in part by the presence of the Consumer  Financial Protection Bureau.

“I think it went very well. The feedback has been almost universally favorable,” Tracey said. “People think we really raised the bar this year on what we provided to the people in attendance.

“It was just a good event. It challenges me to keep the conference as interesting as we need it to be,” he continued. “With the CFPB out there doing things, it’s not hard to come up with items that people are concerned about.”

The event started with a Q-and-A session only for NAF Association members with Jeffrey Langer and Eric Reusch, who both are in the Office of Installment and Liquidity Credit Markets with the CFPB. Later a select group had the opportunity to have a lunchtime discussion with both of the CFPB officials who shared their perspective on the regulatory requirements the bureau is asking of finance companies.

“The CPFB people were very pleased with the opportunity to answer the questions the NAF members asked,” Tracey said. “Our people were extremely pleased with the exchange of information, getting a real appreciation for what the CFPB is trying to do.”

The conference included presentations from Sandy Schwartz and Tom Webb from Manheim, Amy Martin from Standard & Poor’s and Steve Chaouki from TransUnion.

Tracey shared one other element he noticed that made this year’s conference unique.

“We had a lot more funders than we’ve had in the past, which is an indication that the market is hot. There’s a lot of money out there,” Tracey said. “You could conclude that there is a lot of money in the marketplace chasing deals so there is a lot of pressure on the finance companies to lower rates or take riskier transactions in order to get the money on the street.

“Generally, those dynamics when there is a lot of money flowing into the market and the competition increases and there is a need for volume, we’ve reached the peak of the cycle and some of the negatives in the marketplace — delinquencies, losses, repos — those trends start to take over,” he continued. “Then, the market slows down a bit because people become spooked.

“The funders are there, and that’s good. But it also creates an environment that people need to be cautious of,” Tracey added.

CNW: Subprime Approvals Climbing in June

BANDON, Ore. - 

With the firm’s Jitters Index improving significantly during the first part of month, CNW Research is expecting subprime vehicle financing approvals to climb both month-over-month and year-over-year in June.

According to its June Retail Automotive Summary, CNW is seeing this month’s subprime approvals rise by 2.23 percent above the same period last year. The firm also is noticing that approvals for consumers with damaged credit history is up by 2.03 percent in June versus the previous month.

Adding to the positive trends for the auto financing sector is CNW’s Jitters Index producing one of the largest declines in recent months.

CNW president Art Spinella explained the Jitter Index — a measurement of home-centric issues among key-market consumers — saw a dramatic plunge in the opening weeks of June. Compared to May, the index fell more than 3 percent – the largest month over month decline in more than two years.

On a year-over-year basis, the index declined by 4.4 percent — a near record for annual declines, according to CNW.

“Consumers are picking up the pace when it comes to consideration of making a new-vehicle purchase,” Spinella said.

“While concerns about gasoline prices and child’s education saw increases versus year ago, the other major issues including food prices all registered declines,” he continued. “That doesn’t mean consumers are necessarily thrilled with the current state of the economy as it impacts them, however.”

The overall Jitters Index reading came in at 7.37, which is still higher than the level seen during depths of the recession. The latest reading is also nearly double the January 2007 figure of 3.84.

March Subprime Vehicle Loans Total $13.1B


Equifax determined the total dollar amount for subprime vehicle financing originated in March surged higher than any single month going back seven years.

Credit bureau analysts found that subprime auto loans in March came in at $13.1 billion, marking an 8.8-percent increase year-over-year. Equifax had to go back to March 2007 to find a figure that high. That’s when the market generated $12.5 billion in subprime paper in a single month.

SubPrime Auto Finance News caught up with Lou Loquasto, Equifax’s auto finance vertical leader, on Tuesday to get more information about why the subprime figure climbed so high.

“It’s a continuation of portfolios doing really well both from a frequency of default standpoint and also when there are repossessions. Loss severity has been low because the used-car market has been so strong. That’s the two best scenarios — fewer defaults, and when there are defaults, you get more money back for the car,” Loquasto said.

“You’ve also got this hyper-competitive environment out there,” he continued. “A lot of banks that we talk to, a lot of traditionally prime lenders, they notice low delinquencies, and they notice shrinking yields in prime and superprime so it’s natural for them to migrate downward, especially now as lenders are getting more sophisticated. When they do migrate downward a little bit, they’re doing it with their current customers. If you’re a bank or credit union, they’re actually building into their models a little more leniency when they are lending to their own customers because they know that overall they will perform better than a customer that doesn’t do business with the bank or credit union.”

Loquasto also referenced the retail sales performance the industry posted back in March.  CNW Research indicated that retail used vehicle sales jumped almost 50 percent month-over-month in March as severe weather conditions eased. 

“We had kind of a perfect storm of a lot good trends all hitting at the same time,” Loquasto said.

While the total dollar amount of subprime financing is at historic highs, Equifax indicated the average loan amount per customer remains lower than the high point established seven years ago. The March level came in at $17,360, much higher than the low point of $14,563 set in March of 2010, but still below the March 2007 reading of $19,292.

Loquasto doesn’t expect lenders will be pushing individual vehicle loans to subprime customers to levels close to $20,000 for a couple of reasons.

“One, income really isn’t growing for these customers so lenders are pretty disciplined when it comes to things like payment-to-income ratios. That’s why I don’t think you’re going to see a dramatic increase in subprime average loan size,” he said.

“Even to mitigate that payment-to-income ratio to keep payments affordable, lenders are more likely as you’ve seen to increase term length than they are the loan size for customers,” he continued.

Equifax’s data showed that the significant amount of vehicle loans — especially to subprime buyers — continues to fall in the range between $10,000 and $15,000. Loquasto emphasized that’s what differentiates vehicle lending from mortgages.

“Auto might have gotten a little aggressive before the crisis,” Loquasto said. “Back then auto lenders still weren’t giving someone a $30,000 car when they couldn’t afford it. By comparison (mortgage companies) were giving someone a $400,000 house when they couldn’t afford it.

“It goes back to overall affordability. Since incomes haven’t increased significantly for customers in this segment, the customers and the lenders are trying to keep loans with their budgetary constraint,” he continued. “They’re buying used cars for the most part. Even the used cars they’re buying now ranging from $10,000 to $15,000 is an upgrade from the 10-, 12- or 14-year-old vehicle they were driving.

“Customers and lenders are doing a good job of staying within budgetary constraints and not trying to get a customers into a $25,000 car when they can only afford a $15,000 car,” Loquasto went on to say.

And one more point about affordability. Loquasto mentioned the workforce solutions division at Equifax is becoming busier as more lenders are using more sophisticated tools to verify income. Equifax currently obtains income and other employment data from 80 percent of Fortune 500 companies, according to Loquasto.

“As we continue to grow our workforce solutions database, and we continue to increase the number of customers that we can tell lenders this is exactly how much this customer makes, it gives lenders more confidence in that affordability component,” he said.

“To a large degree, lenders are more confident that income number they’re underwriting off of is a reliable number versus in the past you’re having to either trust the dealer or having to get paystubs every time,” Loquasto went on to say.

Loquasto wrapped up his conversation with SubPrime Auto Finance News by giving an overall assessment of the market as it nears the second half of the year.

“What jumped out at me is kind of the stabilization of things,” Loquasto said when reviewing all of the March data. “If you look at the swings from 2005, 2006 and 2007 to down being down in 2008, 2009, 2010 and 2011 to being back up in 2012 and 2013, now we’re seeing just a nice steady consistent lending environment.

“Sure, it’s hypercompetitive and we’ve got losses that are historically low and the used-car market that’s historically high. But it seems like a lot less volatility in how the lenders are doing business,” he added.

CarMax’s Special Subprime Portfolio Nears $30M


During the first quarter of its 2015 fiscal year, CarMax Auto Finance originated $20.5 million of loans — representing 0.8 percent of retail unit sales for the timeframe — through its program for customers who typically would be financed by the company’s third-party subprime providers.

As of May 31, the company tabulated that a total of $29.6 million of loans had been originated through its special subprime financing program.

“We’ve always talked about the fact that we want to make sure our customers have access to credit at all kinds of different scales of credit. And if you look at our applicant flow, we’re still at 90 percent of our applicants are getting approval of some kind,” CarMax president and chief executive officer Tom Folliard said during the company’s conference call last week.

Folliard also reported that Q1 income at CarMax Auto Finance increased 8.7 percent to $94.6 million, driven by an increase in average managed receivables, partly offset by a lower total interest margin.

The company’s average managed receivables grew 20.1 percent to $7.39 billion as CarMax Auto Finance total loan originations have grown in recent years, according to the company.

Folliard also pointed out the total interest margin — which reflects the spread between interest and fees charged to consumers and the company’s funding costs — declined to 6.7 percent of average managed receivables in the first quarter from 7.2 percent in the first quarter of the last fiscal year.

Investment analysts wanted to know more details on the impact this subprime program might have on the performance of CarMax Auto Finance.

“At this point it’s little early in the process with the subprime and the expected losses are still high,” CarMax executive vice president and chief financial officer Tom Reedy said. “It’s actually a little bit of a drag on CAF earnings, but it’s nothing material. We have to reserve 12 months of losses out the gate as we originate those loans. And with those loans having a higher expected loss rate than our regular portfolio, until we start building up a critical mass, it’s actually going to be a little bit of a drag on our earnings, but it’s very minimal and nothing to report.

“As we go forward, it may have some impact on the loss provision, our average contract rate and the overall allowance,” Reedy continued. “And to the extent that it does become something that merits calling out, we’ll give you that color.”

Whether it’s through its own program or third-party financing, CarMax executives are seeing some slowdown in the amount of subprime paper that’s going into portfolios connected by vehicles retailed by their company.

“We told you last year at this time that our subprime providers had got a little more aggressive,” Folliard said. “We told you in the third quarter that they had pulled back a little bit. It was 21 percent last year when we thought people would be a little bit more aggressive, and we saw a little pull back. We were flat in the fourth quarter. We’re slightly down in this quarter. It’s not that surprising based on what we have told everybody.

“But in terms of where it comes out long term, it’s not really within our control,” Folliard added.

Later during the conference call, Reedy offered his assessment of subprime financing behavior.

“Subprime penetration is going to be a combination of factors driving it. One is the credit coming through the door, and then another is the behavior of the other lenders in the system,” Reedy said. “Over time we worked to try to build, as Tom mentioned, a broad spectrum of lenders so that customers have access to credit and I think we are very happy with the partners we have today. We’ve got nothing but praise for them.

“You look at cash penetration, it was flat. Subprime was down a little bit. We did see a lift in sales that were funded by sources outside of our system. We did see a lift in sales funded by our Tier 2 partners which means they stepped up and took some customers that they may have declined in the past. So Tier 3 behavior is going to be a combination of what’s coming through the door and what makes it down to them, and finally their behavior and their credit appetite,” Reedy continued.

“Our stores’ ability to convert ones we have approvals to work with and the higher, the better the quality of approval, in other words the lower the down payment, the better chance we have a conversion,” Reedy went on to say. “So I would expect over time those things are going to be constantly moving as lenders continue to tweak their scorecard and make adjustments based on the performance of the portfolio that they have originated.”

Equifax, NIADA Execs Discuss Subprime Credit Availability


Equifax shared some details of a recent conversation the credit bureau had with the National Independent Automobile Dealers Association leading up to NIADA’s annual convention in Las Vegas. They touched on a wide array of issues, including access to financing for subprime borrowers.

Jennifer Reid, senior director of product marketing at Equifax, chatted with Scott Lilja, senior vice president of member services, to discuss the many challenges facing today’s independent dealers.

Reid: What obstacles and challenges do today’s NIADA members face?

Lilja: One challenge that's come up over the last five years has been access to clean, retail-ready inventory. When new car sales dropped off the cliff in '08 and '09, trade-ins fell, so there was no leasing activity — no off-lease returns. Leasing dried up and finance companies became very conservative and less aggressive in the leasing market. Used-vehicle valuations dropped, which put dealers underwater when those leases were turned in.

We saw a dearth of available inventory in auctioneering and dealer-to-dealer wholesale activity. So, dealers were really struggling to find the cars their customers wanted. It's starting to come back slowly this year, and by the end of the year, we'll have about 2.5 million off-lease units coming back. Next year, that will ramp up to about 3.5 million, followed by 4.5 million by 2016. New car sales have come back, increasing trade-in activity.

Reid: What about franchise dealer activity in the used retail market?

Lilja: Franchise dealers have really stepped up their activity around the older retail vehicles — five-year, 70,000-mile units. Used cars went from being a “stepchild” at new-car dealerships to a real ramp-up in activity and support in the last four to five years. Many of their new-car customers took a major hit in their credit profiles during the last downturn, so they migrated to older used cars. Using inventory management tools, many new-car franchise dealers woke up to the sizable gross margins in this segment. With all the transparency on the Internet about new-vehicle pricing, it has become very difficult to stop the erosion in new-car retail margins.

Reid: Has access to quality auto-finance resources improved?

Lilja: It's improved with the independent subprime providers. But the big national providers have pulled back and are much more selective and targeted as to who they’ll do business with. Here, Equifax dealer tools can help with risk mitigation, turning auto-finance paper more quickly, and potentially attracting additional auto finance resources to a dealership.