President Obama highlighted the move made by Ally Financial on Monday to offer its auto finance customers free access to their FICO score as a means to better understand their credit health.
Obama mentioned the development during an event at the Federal Trade Commission highlighting the administration’s BuySecure initiative, which was launched last year to safeguard Americans’ financial security.
Finance company executives indicated the Ally effort will begin with a pilot program in February and a full launch this summer. The FICO Score will be available to customers who use Ally Auto Online Services or the Ally Auto Mobile Pay app.
“Efforts such as the BuySecure initiative help to drive awareness of the resources available to help consumers manage their financial matters, and we commend the White House for their attention to these issues. Having free and easy access to your FICO Score is one simple measure for consumers to continually monitor their credit health and track improvements, as well as a means to know early if your credit profile has been compromised,” said Ally chief executive officer Michael Carpenter.
“We are pleased to offer this information at no cost to approximately 2 million of our auto consumers later this summer,” Carpenter continued.
According to the third-quarter data available from Experian Automotive, Ally stood slightly ahead of Wells Fargo as the top auto finance market holder, possessing 5.56 percent of the market. Looking at just new-model financing, Ally holds 7.31 percent of the market. The institution’s portfolio also represents 4.41 percent of outstanding used-vehicle installment contracts.
FICO Scores will be available to Ally's auto consumers who have an online account profile at https://www.ally.com/auto. Customers can register for an online account profile at any time on Ally’s website.
Officials mentioned that the process will begin next month with a pilot program for a limited number of customers.
In addition to this resource, Ally also offers free financial education via its Wallet Wise program online at http://www.allywalletwise.com/ or through local community in-person sessions. All consumers can take the online curriculum at any time, free of charge. Ally also offers a Financial IQ quiz for consumers to test their knowledge of key topics on the Wallet Wise website.
"Access to your FICO Score is the latest addition to the free resources Ally makes available to our customers to help them get educated on their personal financial matters," said Jeffrey Brown, president and chief executive officer of Ally's Dealer Financial Services business.
“Ally has worked to advance consumer financial education for many years and since 2011, more than 61,000 consumers have taken our Wallet Wise financial literacy curriculum on the topics of credit, budget, banking and investing, and auto financing,” Brown continued. “We continue to believe that consumer education about financial matters is among the best defense."
FICO is a registered trademark of Fair Isaac Corp. in the United States and other countries.
With the new- and used-car market booming, it seems subprime buyers are getting a piece of the pie — and many of these consumers are using credit unions to fund these vehicle purchases.
TransUnion released the results of an October survey of 142 credit union executives, and responses flowed in that illustrated the current health of auto loans as well as room for growth in the coming years.
In fact, TransUnion analysts believe auto loans will afford credit unions the most loan growth opportunities in 2015.
According to the survey, 46 percent of responders chose auto loans as the top growth opportunity for the next year; mortgage loans followed with 22 percent. And 84 percent of responders ranked auto loans as one of the top three areas for growth.
According to TransUnion data, auto loans for subprime consumers have jumped by nearly 7 percent in the last year.
Take Q2 results, for example.
Auto loans for subprime customers grew from 8.65 million in Q2 of 2013 to 9.24 million in Q2 2014.
Delinquency rates, or accounts 60 or more days past due, have also risen for subprime auto loan borrowers, growing 11 percent in this same timeframe from 4.73 percent to 5.26 percent.
That said, delinquency rates remain low and should be expected to rise slightly with loan spikes.
And though the bump in subprime loans is promising, TransUnion pointed out rates still remain way under pre-recession rates.
In Q2 of 2008, there were 11.78 million subprime auto accounts on the books, TransUnion reported.
That said, industry experts remain positive.
“While auto loan performance in the last few years has been strong across the board, it is clear that credit union executives continue to value these loans going forward over other growth areas such as mortgages, credit cards and home equity lines of credit,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit. “Overall delinquency levels for auto loans remain low and demand for autos is high, so the reasoning makes sense. In the longer term, we might anticipate greater focus on mortgage and HELOC growth as home values continue their upswing, but for now the auto loan is king.”
The survey also found that even though delinquency rates are low, credit union execs “remain prudent regarding member credit risk.”
According to the survey, over half of the respondents rated credit risk as one of the top three challenges for credit unions to meet loan growth goals over the next year.
Following credit risk cited as challenges for the credit unions today were competition from other lenders as well as regulation that could have an impact on their loan growth goals.
And it seems the credit unions are worried about one element of credit risk, in particular: student loan debts.
According to the survey, approximately six in 10 credit union execs are at least a little concerned about their members’ student loan debts and home equity line of credit (HELOC) with other financial institutions.
But with more credit union members growing, student loans are bound to remain an issue going forward.
The survey showed that membership for most credit unions grew over the past 12 months.
In fact, 61 percent of credit unions have seen up to 5 percent spikes in volume, while more than a quarter have reported increases of more than 5 percent.
And with this spike in membership comes a boost in confidence among credit union management.
According to the survey, seven in 10 credit union executives believe they are more capable of competing with traditional banks today than they were five years ago.
And more than half of the respondents believe their capability to compete with traditional banks has improved in just the last year alone, Transunion reported.
“Results from our study and our daily interactions with credit unions from across the country lead us to believe that this industry is in a position to achieve and maintain substantial growth,” said David Dodson, vice president of credit unions at TransUnion. “Using new technologies and risk management strategies will be among the catalysts to help credit unions make great strides in building their books of business in 2015.”
TransUnion Purchases Analytics Company L2C
In other news from TransUnion, it has also been ramping up its data offerings with the recent acquisition of L2C, a predictive analytics company.
"We are committed to leading the industry with highly predictive risk solutions, and joining forces with L2C is a big step forward," said Chris Cartwright, president of TransUnion's USIS division. "L2C data is a great addition to our alternative data array. When combined with other data such as rental information and our CreditVision suite of services, it allows us to offer lenders a more complete and accurate picture of non-traditional and underbanked consumers, helping these people get the credit that they deserve."
L2C analytical models are used to grow portfolios in traditionally financially underserved consumer populations.
"L2C's ability to provide predictive scores on more than 90 percent of consumers without a credit score will be an excellent complement to TransUnion's robust solutions," said Mike Mondelli, CEO of L2C. "Our real-time and off-line behavioral insights afford some of the most sophisticated lenders in the U.S. market an ability to expand their customer base. Now, as part of a growing set of expanded TransUnion data capabilities, thousands of TransUnion customers will be able to access L2C models for improved acquisition, segmentation, and retention decisions."
If you set your automated news alerts or RSS feed to “subprime” or “subprime auto finance,” you’re likely to find news stories that fit in one of two camps: A) subprime auto financing is heading down a dangerous path akin to the mortgage crisis of the late 2000s, or B) those fears are perhaps unwarranted.
An analysis from Equifax suggests that case B is the more likely outcome; or as the company suggests in a recap of its National Consumer Credit Trends Report, “a bubble is not occurring in that (subprime auto finance) space.”
“Auto sales continue to soar, crossing the 17.4 million mark on an annualized basis for new cars and light trucks in August,” Amy Crews Cutts, senior vice president and chief economist at Equifax, said in the recap.
“The abundance of high-quality vehicles for sale, the attractive financing options available, and the ever-increasing age of cars on the road today have created an environment that makes it easy for consumers to say ‘yes’ when it comes to purchasing a new or used car,” she added. “Importantly, auto loan originations to borrowers with subprime credit scores remain stable, providing additional evidence that a bubble is not occurring in that space.”
Consider these points shared by Equifax, as reported earlier in SubPrime Auto Finance News.
The total balance of newly originated subprime auto loans stood at $70.7 billion in August, a level representing an eight-year high and 27.8 percent of the total balance of new auto loans. That’s a slight increase in share from the previous year.
However, the credit agency determined serious delinquencies represented 1.05 percent of total balances outstanding in August, a decrease of 8 percent from same time a year ago.
And to Crews Cutts’ point on the stability of origination volume to subprime borrowers, there have been 3.9 million new loans so far this year given to subprime borrowers (Equifax Risk Score of 640 or lower). That comprises 31.2 percent of all auto loan originations, a share that is down slightly year-over-year.
So why, then, has there been so much mainstream media coverage suggesting the opposite?
Gary Hughes, general manager of automotive services for Equifax, said that the coverage has been in reaction to consistent year-over-year gains in new-vehicle sales and “natural inclination” by news outlets has often been to compare it to the real-estate, given how recently that occurred.
“However, I think what we’re seeing is that one of the big issues here is you’ve got a situation that’s very different than the real estate market … there are a couple of elements that we feel are very different from the real estate market,” Hughes told us in a recent interview.
“No. 1 is that even though balances continue to increase on number of loans financed, we’ve seen that you’ve got low interest rates and you’ve got serious delinquency rates that are actually holding and not increasing,” he said. “The amount of due diligence that lenders are being required to do as part of their business practices, as well as what regulatory agencies are requiring of them is also being implemented in these (loans). So, you don’t have the case (similar to) the no-doc mortgages that occurred back in the heyday of the real-estate lending.”
Hughes added: “Also, what you’re finding is that it’s a different type of asset, where the assets — the automobiles — are not depreciating in value or equity at an accelerated rate the way that the real estate market did at the time.”
Given those key differences, Equifax analysts “don’t feel that a bubble or a collapse is imminent,” Hughes said.
More Responsible Lending
When asked if he believes lenders or even borrowers have learned from previous crises or become responsible, Equifax auto finance leader Lou Loquasto pointed to the technology that has allowed lenders to conduct more effective due diligence.
For instance, he mentioned Equifax tools that allow for employer and income verification at the time of approval, assuaging worries over whether or not the customer can repay the loan and decreasing the likelihood of inflated or deflated income stated by the consumer
“They can verify that information upfront, which makes the loan risky at that point,” Loquasto said.
Hughes added: “And there’s more transparency in the process for both the lender and the consumer, which we think is a big difference, as well.”
Vehicle Quality Impact
Going back to one of points of insight from chief economist Crews Cutts, greater volumes of higher-quality vehicles is also playing a role in the credit market.
Hughes noted that vehicles these days go about 11.8 years before they are scrapped. This gives shoppers the chance to find strong-quality cars in various age segments and “degrees of use.”
Brett Collett — strategic account executive for Equifax — pointed out that with the higher volumes of off-lease vehicles amid leasing’s comeback, there are more available cars in the 3-year-old ballpark that are well-maintained.
“When you have a well-maintained car, lenders are more apt to (agree to) extended terms on those,” he said. “The value of the car, as we know, with supply being depressed, has stayed high relatively speaking versus historical.
“With those coming back in, the values will go down a little bit, but again, you won’t see the tremendous drop that you saw in the mortgage area,” Collett added. “And with delinquencies so low, lenders are more apt to be more aggressive and be more competitive with this market.”
Hughes boiled it down like this: the cars are lasting longer, there are a lot coming off lease and being well-maintained, and interest rates are low.
Plus, Hughes added, “With the cars lasting longer, it allows the lenders to write different terms and potentially more aggressive terms. And they’re very comfortable doing that as long as they can be empowered with the information they need to make those smart lending decisions on the candidates and the vehicles, being able to measure some of that vehicle information with the consumer’s information at the time of lending approval.
“That’s what we’re seeing a lot of right now: a real drive to move as much of that information on the consumer’s performance up to the point of application, so that the lenders can make a go/no-go decision early on, and if it doesn’t appear to fit, allowing that dealer to go and fit that consumer into a vehicle and/or a financing package that’s more successful for both of them,” Hughes said.
Upgraded Efforts by Regulators
The point Hughes referred to earlier in this story about ramped-up regulatory efforts on due diligence was particularly evident in an exclusive from Reuters on Sunday.
Citing a “person familiar with the matter,” Reuters said that banks are being prompted by U.S. regulators to provide more information on their exposure in auto finance. The news outlet’s source indicated that in addition to requesting information regarding loans within a respective finance company’s consumer auto lending portfolio, regulators are requesting details on loans given by these companies to fellow auto lenders.
Reuters’ report did not indicate which (or how many) regulatory agency is at the center of these requests, but it did note that there are at least one, according to Reuters’ source.
SubPrime Auto Finance Editor Nick Zulovich contributed to this story.
According to the credit reporting agencies, roughly 56 percent of Americans have what can be categorized as nonprime to subprime credit. A recent Equifax report indicated that only 44 percent of Gen Y customers have prime credit, while the rest suffer under the blanket definition of nonprime.
But there’s a catch.
These figures are skewed by the high number of Gen Y borrowers with thin files and high student loans. In other words, everyone gets lumped into the same category no matter what the reason.
This has created a bit of confusion among dealerships in differentiating actual nonprime customers with those who simply look nonprime on paper. As a result, it’s brewed up a perfect storm of discontent among Gen Y auto buyers who loathe the idea of spending hours trapped inside a dealership awaiting credit approval.
Even Gen X customers are growing tired of the same old worn out methods of buying cars. As a result, there’s been a spike in the growth of online services geared at helping buyers through the experience with as little pain as possible.
Old Ways Die Hard
Recently, Penske Automotive Group announced plans to compete with CarMax for the lion’s share of the new market of online used-car sales. Nonprime car shoppers represent the group most likely to benefit from this move, both in time saved and the volume of lending terms granted.
Meanwhile, still stuck in the primordial muck and unwilling to take that first evolutionary step forward are the old-fashioned car dealers of the world. For these dinosaurs, the idea of adapting their way of doing business is about as unthinkable as a T-Rex sprouting wings and taking flight. Their collective mindset expresses one simple, dangerous thought: Gen Y customers will have to adapt to their antiquated methods, or take it elsewhere.
This lack of willingness to evolve — to work out ways of bringing speed and ease to auto buying transactions — isn’t surprising. These voices of the past have been wielding the “if it doesn’t fit, force it” mindset for ages.
But where will these same creatures of habit be a few years down the line when allegations of “strong arm” sales tactics arise from agencies like the Consumer Financial Protection Bureau, filed by customers who felt coerced into buying something they couldn’t afford — all because of a lack of a streamlined, efficient process?
It’s an attitude of defiance and resistance we’ve all seen before.
Back in the old days when menu selling was first introduced, many reacted as if the sky was falling. It was as if they couldn’t wrap their heads around the concept.
They had trouble comprehending why anyone in their right minds would want to embrace a culture of transparency in auto sales.
Change didn’t happen overnight. But before long, those who implemented menu selling realized previously unseen levels of product penetration and before long, there was no looking back.
Current Landscape
Fast-forward to today, where we find ourselves at a similar crossroads — introducing even more new-age concepts that will no doubt turn all those dealerships still clinging to their tried and true methods on their backs.
Making it easier for customers to purchase, regardless of whether they’re prime or subprime, is no longer an issue of “if” but a question of “when?”
Efficiency is the driver of sales. Reducing the time a customer spends buying a car doesn’t just mean profits earned this month or this quarter, but years on down the line, as well.
On the other hand, taking too long to complete the F&I process can result in a lost sales, reduced profits, eroding customer loyalty and legal scrutiny.
Savvy dealers such as CarMax and Sonic Automotive know this. They have seen the pot of gold at the end of the rainbow, and they’re lunging for it, willing to make adaptive changes in order to gain market share.
Although that share today only represents 11 percent, that figure is growing. With more available resources than ever before, car buyers are flocking to the likes of these transparent dealers in the hopes of finding the best deals possible in the shortest amount of time.
Chief among the efforts of the likes of CarMax and Sonic is the understanding that individual customers are more than simply a beacon score. These guys “get it.”
Which leads to the obvious question: if the giants of the auto industry are giving in to customer demand because they see it as a profitable pursuit, shouldn’t this concept cause the doubters to sit up and take notice?
The Bottom Line
Dealerships today can no longer classify buyers as nonprime or subprime based on their beacon scores alone.
Today, a 640 score could represent 10 different variations of credit history. With a growing number of lenders changing their methods to examine individual circumstances — such as thin or nonexistent credit files — the onus is now on dealerships to do the same.
How is this accomplished?
First, by admitting that a change is necessary. Next, it requires the implementation of a streamlined process by which the issue of credit approval is broached long before a customer decides on a particular car.
By getting all those ducks in a row, and by landing customers on cars they can actually qualify for, dealerships can slash away at the extensive amounts of time nonprime customers have to spend on the lot.
In order to make it all come together, dealerships must take a long hard look at their processes and ask themselves some difficult questions.
• Are they adding unnecessary time by landing customers in cars before asking prudent fact-finding questions that can give insight into the buyer’s creditworthiness?
• Is the sales staff trained on the best methods of obtaining standard credit criteria?
• Can methods be employed to bring F&I into the process sooner, rather than later?
• What steps are being taken to understand customer budgets against lender guidelines?
There’s an irony present throughout all of this.
As recently as five years ago, dealers across the country swore up and down they’d never put their inventories on third-party websites. One look around at sites like AutoTrader.com or TrueCar.com shows a very different story today.
Perhaps in another five years, it will be commonplace for dealerships to adapt their processing strategies in a manner conducive to a more streamlined, painless in-dealership experience.
The race begins today. Those who aren’t already toeing the line will be left behind in the dust kicked up by the competition.
Rebecca Chernek, who founded Chernek Consulting in 2001, has nearly three decades of dealership experience ranging from working with her father at their family-owned dealerships in Have De Grace, Md., to district manager for the AutoNation division of the JM&A Group. She can be reached at (404) 276-4026 or via email at [email protected].
Pre-qualified monthly payment marketing technology provider DriveItNow now offers dealer website hosts a comprehensive and compliant credit services solution for their customers. Officials highlighted the six major capabilities of this solution — DriveItNow’s Credit Center.
The company explained that since most consumers finance or lease their vehicles, today’s dealer websites provide a variety of what officials described as “disjointed and often conflicting” credit-related services. These services can include items such as a “get pre-approved” product, generic payment calculators, a search-by-payment option, trade-in valuations and full credit applications that require personal information.
DriveItNow president Tarry Shebesta pointed out these services are usually from different vendors that require the shopper to provide their information multiple times.
“DriveItNow’s Credit Center ties all auto finance-related services together through one simple-to-integrate website widget,” Shebasta said. “Online shoppers can easily access what they need in one place without having to provide personal information or complete multiple forms.”
At the core of the Credit Center platform is DriveItNow’s patent-pending pre-qualification payment quoting technology. Shebesta indicated that real monthly payments are quoted using the dealer’s finance company programs and the consumer’s actual credit bureau, without requiring a Social Security Number or date of birth or affecting the consumer’s credit score.
“Other industry services that quote monthly payments and finance rates are not always accurate or compliant and are not based on the consumer’s actual credit bureau,” Shebesta said. “Those services display best-case scenarios which may give shoppers an unrealistic expectation of what they can actually afford to buy.”
Shebesta also mentioned the Credit Center integration is simple, totally customizable and can give website providers that offer SEO/SEM services additional keyword marketing opportunities.
DriveItNow also displays fully compliant disclosures and works with compliance experts to ensure dealers comply with federal rules and regulations of the Fair Credit Reporting Act and Consumer Financial Protection Bureau.
DriveItNow’s Credit Center services include:
• Short-form finance application with instant pre-qualification
• Pre-qualified monthly payment buttons on vehicle inventory
• Shop-by-payment functionality
• Trade-in equity calculation
• OEM loan and lease special promotions
• Real-time “soft pull” full credit bureau reports
Shebesta also noted all Credit Center services can be accessed from various links throughout a website, within email marketing campaigns or social media.
“Other industry vendors are trying to play catch up as we continue to lead in this market segment,” Shebesta said. “Our 14 years of online experience as a direct-to-consumer finance company, and dealer, gives us the advantage in knowing what engages online shoppers. We don’t rely on surveys or focus groups.”
A mobile version of these services is also available and is compatible with responsive website platforms.
DriveItNow’s Credit Center is available to dealers, OEMs, classified and finance portals and website vendors.
For more information, visit www.DriveItNow.com or call (800) 223-4882, ext. 10.
One of Used Car Week’s presenters and the sponsor of the SubPrime Auto Finance Executive of the Year award — Black Book Lender Solutions — finalized the integration of its vehicle valuation data into three more providers of loan origination systems used by finance companies.
Recent integrations announced on Monday include Credex, Compass Technologies and FNI (Financial Network Inc.).
Executives highlighted this continued expansion of Black Book data throughout industry loan origination systems is designed to allow lending decisions to be made in less time and with lower costs, thus accelerating the approval process.
The company insisted these operational efficiencies, combined with the risk management benefits of Black Book Lender Solutions insight, is meant to help finance companies remain competitive and focused on profitable growth opportunities.
Many of today’s leading finance companies are leveraging vehicle values from Black Book Lender Solutions, with data that is fully integrated into loan origination systems powered by some of the most notable providers, including defi SOLUTIONS, Fidelity, Crif Lending Solutions, Argo Data Resources Corp, Meridian Link, Allied Business Solutions and Megasys.
“Black Book’s footprint continues to expand in this segment of the industry as loan origination system providers respond to customer demand to have access to our values,” said Jared Kalfus, vice president of data licensing for Black Book.
“Today’s most profitable companies leverage tools and resources that provide smarter and faster decision-making, along with operational efficiencies,” Kalfus continued.
Credex Systems president Lloyd Wright pointed out that efficiency and speed of approval can greatly impact his customers’ ability to compete and realize larger profit potential.
“With Black Book vehicle value data fully integrated into the loan origination system, lenders can reduce application errors and streamline the entire approval process for clients entering their portfolio,” Wright said.
Stephanie Alsbrooks, chief executive officer of defi SOLUTIONS, indicated her clients “love the speed and accuracy advantage they get with ease of access to Black Book industry leading data.
“Coupled with our defi Solutions configurable rules, Black Book data allow customers to automatically call the value data at any point in their process from application to funding,” Alsbrooks continued.
Jeremy Engbrecht, president of the CRIF Select division, CRIF Lending Solutions, declared that Black Book is one of the most accurate vehicle evaluation tools on the market.
“Streamlining the lending process is paramount for lenders to capture more business in today’s evolving market,” Engbrecht said. “Time is money, especially in the auto industry, which is why we are proud to integrate our CRIF ACTion loan origination technology platforms for direct and indirect auto lending with Black Book.”
Besides presenting the winner of the SubPrime Auto Finance Executive of the Year winner, Black Book will have a major presence at the SubPrime Forum, which is set for Nov. 10 through 12 at the Red Rock Casino, Resort and Spa in Las Vegas.
Kalfus will be joined by colleague Susan Hughes for a session titled, “2014: A Year of Records.” This general session presentation will be devoted to examining the many record-breaking events that took place during 2014 and discussing how those events and trends will continue to impact the industry in 2015 and beyond.
This session will take place Nov. 11 at 11 a.m. during the SubPrime Forum, which is presented in partnership with the National Auto Finance Association. The forum begins Nov. 10 with registration and a welcome reception before launching into a full day of events on Nov. 11, followed by a half-day of sessions on Nov. 12.
For a full schedule of events, visit http://subprime.autoremarketing.com/agenda, and be sure to register for the event by Oct. 10 to save $200 off of your registration fee. And once you’re registered, don’t forget to make your hotel reservations at the Red Rock Casino, Resort and Spa in Las Vegas. The exclusive conference rate of $195/night is available only through Oct. 17.
CNW Research contends subprime approvals are moving higher this month at a pace possibly even better than what the exact figures indicate.
According to the firm’s latest Retail Automotive Summary, subprime approvals so far this month are registering 17.7 percent higher than September of last year. On a month-over-month basis, the increase is about a third of a percentage point; CNW pinpoints it at 0.34 percent.
“While the latter figure doesn’t seem like much, it reveals a strong but measured approach to providing loans to these folks,” CNW president Art Spinella said.
And perhaps more validity to Spinella’s assertion arrived via assessments made by Cristian deRitis, senior director at Moody's Analytics. deRitis joined Used Car Week speakers Lou Loquasto and Jennifer Reid for a webinar orchestrated earlier this week for the Consumer Bankers Association.
“As we’re thinking about these credit-challenged borrowers, consumers with credit scores below 660, the profile of these borrowers might be somewhat different than what we had prior to the recession or housing boom,” deRitis said.
“Today, we have borrowers with low scores as the result of mortgage foreclosure or the result of the housing collapse. Therefore, these are borrowers who are otherwise good credit but because of that mortgage foreclosure they have a very low credit score,” he continued.
“From a lender’s perspective, they still may be good borrowers to lend to, borrowers who will pay regularly on time,” deRitis went on to say.
Having a healthy stream of subprime borrowers likely will aid CBA member institutions to meet their objectives they shared during the webinar. A total of 68 percent of bank leaders who joined Moody’s and Equifax for the session said they expect overall auto loan and lease originations to continue to rise slowly during the next year.
That sentiment coincides with what the majority of webinar participants said was the biggest challenge going into next year. While 37 percent pointed to maintaining or increasing margins, 44 percent cited the goal of keeping growth at current rates.
Loquasto closed the webinar with a parting thought not only for commercial banks, but also any finance company that has its hand in vehicle lending.
“We consider the first approach to continuing these growth rates that we’ve had for the last few years — without having to buy deeper or give up yield — is to use the available data to better understand at a micro-level your market and different credit segments,” said Loquasto, who is part of the stable of experts who will be on hand for the SubPrime Forum, which runs during Used Car Week at the Red Rock Casino, Resort and Spa in Las Vegas.
The SubPrime Forum, an event orchestrated in partnership with the National Automotive Finance Association, is set for Nov. 10 through 12. More details and the conference agenda are available at subprime.autoremarketing.com.
In a monthly-payment driven world, leasing is on the rise to points never seen before, especially for contracts connecting new vehicles and consumers with prime credit. But Swapalease.com executive vice president Scot Hall gave the industry a question to ponder. What if finance companies considered leasing used vehicles — in particular, certified pre-owned models — to subprime consumers, particularly ones who are on the higher-end of the non-prime category?
Used-vehicle leasing still remains a small part of the industry’s book of business. Experian Automotive indicated used-vehicle leasing constituted just 3.19 percent of the entire leasing market in the second quarter, down slightly year-over-year. CNW Research determined there have been 692,218 used leases originated through the first eight months of this year. CNW’s data showed there were 705,180 used-car leases written through August 2013. In eight months of 2012, there were 705,027 used leases.
While those metrics all show slight softening for used-vehicle leasing, Hall again reiterated the potential that’s out there stemming from two key ingredients:
— Continuing rise in off-lease wholesale volume based on contracts written in the past two years.
— A population that has bruised credit but still the ability to make monthly payments.
“It would be a great thing for the entire leasing market overall, and looking more holistically, the entire auto industry overall. There are a lot of people who are going to be considered subprime that are still able to make a monthly payment, and they’ve just had a few hiccups and aren’t bad people at the end of the day,” Hall told SubPrime Auto Finance News during a recent phone interview.
“I think a lot of people lose sight of the fact that leasing is simply an alternative form of financing. You may choose to do a long-term installment loan; you may choose to do a short-term lease. But they’re all just options as a way to pay for that vehicle,” he continued.
“Why there hasn’t been more focus on subprime in the leasing segment, specifically, in the past? Frankly, that seems a little bit unusual that hasn’t been explored further,” Hall went on to say.
Hall also mentioned how the latest metrics from Swapalease.com shows the demand for leasing from subprime consumers.
Swapalease.com reported lease credit approvals during the month of August came in at 85.7 percent, the highest monthly level of 2014 and besting July’s rate of 81.0 pecent.
August marked the second straight month of improving lease credit approvals, and well above the 70-percent mark considered healthy on the Swapalease.com marketplace.
After dipping into a year-to-date average low of 64.5 percent in June, the annual tally is now up to 68.5 percent. The company believes a rise in subprime shoppers weighed down the credit approvals rate in 2014, as more shoppers in this credit profile have applied for a lease.
“We deal with a lot of different leasing companies, some directly, some indirectly. Each of those leasing companies has a little bit different credit process,” Hall said. “In most scenarios, the individual applying for credit is going to know within one or two business days if they’ve been approved to take over a lease. Some leasing companies as a result of not having as much focus on the lease-transfer process may take a little bit longer. It’s going to be a combination of notified directly or notified by mail. Really no differently than if they were looking into a loan or a lease initially at the dealership level.
“When we have a client who contacts us … it’s not uncommon for someone to think they don’t have the credit to do this,” he continued. “We don’t want to simply sign them up for our service and charge them a membership fee, knowing they don’t have a lot of chance for success to take over a lease. Instead, we want to push them over to our partner, ConsumerDirect.com.”
Swapalease.com works to help subprime shoppers elevate their credit profile through a program called Smart Credit and sponsored by ConsumerDirect.com.
“It’s a process and service that can help an individual learn more about what needs to be done to improve their credit and rebuild their credit and point them in the right direction,” Hall said.
Once these shoppers revitalize their credit they can re-enter the Swapalease.com marketplace and reapply for a lease assumption.
“We definitely have had success stories. At the end of the day, it’s a matter of severity,” Hall said. “Prime credit by most definitions is a 700 credit score and higher. Of course the higher the number, the better the credit. Anybody south of 700 in that range is going to be considered subprime.
“Generally speaking when someone has a score of 675, what they need to do to clean up their credit history and their portfolio is a lot less cumbersome than someone who might have a score in the high-500 range,” he continued.
“There’s really not a one-answer-fits-all. Depending on what someone has done in the past or more accurately what someone has not done in the past. It may take them longer to clean up that credit view,” Hall went on to say.
While Hall acknowledged it’s going to take quite an industry shift for leasing associated with subprime consumers or used vehicles to hit level experienced with new vehicles and prime customers, Hall insisted the potential is there to expand on the numbers seen by Experian and CNW.
“You’re going to have different levels of credit enter the market when you have that kind of growth,” Hall said.
Staff Writer Joe Overby contributed to this report.
Black Book isn’t just pitching its products and services to finance companies nowadays. Its analysts and staff are trying to emphasize to executives and managers who watch loan-to-value ratios and overall portfolio status about how much risk is building and how important it is to watch how long it will take for a borrower to return to an equity position.
In light of Experian Automotive highlighting second-quarter data that showed 24.1 percent of all new-vehicle loans and 14.1 percent of all used-car contracts contained terms ranging from 73 to 84 months, Black Book took a closer look at comparative collateral data in order to drill deeper into this trend. The company recently leveraged its Collateral Insight Engine technology to compare two different vehicles based on the exact loan terms of 72 months, 5-percent interest and a 120 percent loan-to-value ratio.
Based on the data from the example, Black Book indicated one vehicle achieved a positive equity position in just 37 months, a whole 15 months earlier than the other vehicle (at 52 months).
What’s more, the first vehicle had approximately $3,000 more equity by the 24th month versus that of the second.
Black Book vice president of analytics Anil Goyal explained to SubPrime Auto Finance News during a recent phone interview that knowing the potential loss-given default provides the ability for finance companies to become more competitive with their portfolios while mitigating risk.
Additionally, Goyal pointed out that positive equity will pinpoint those loans that are less likely to default, giving finance companies yet one more data point to differentiate two loans that look otherwise identical.
“As trends have emerged in the lender community, this risk is even more heightened with longer terms,” he said. “You’ve got to have an analysis on when that vehicle is going to come into an equity position. The longer it takes, the longer you’re exposed to market conditions where the trends could change and the vehicle depreciates much faster.”
Goyal emphasized the two aspects when finance companies assess risk. The first is the frequency of default, “which is really indicated by the credit score and you can factor that into your price and get paid for that risk,” according to Goyal.
The other element he mentioned is severity of default.
“When someone doesn’t pay,” Goyal said, “what’s the equity on that loan? How much balance is remaining? What can you recover out of that when you repossess that vehicle?”
Goyal stressed that these two risk-assessment factors are heightening nowadays because of finance companies stretching terms.
“Basically the lenders are trying to provide that monthly payment that the customer can afford,” said Goyal, who joined Black Book in a full-time role back in July after serving in a variety of consulting functions for the firm along with positions at Bank of America and Citigroup.
“But the key risk that’s evolved in this is that you’re going to be underwater for a longer period of time because the equity takes much longer to build up,” he continued. “Meanwhile, you’re having this addition trend of vehicle values softening and getting more toward the pre-recession time frame. You’ve got this double whammy. You’ve got the equity under water and not building as quickly and at the time vehicle values depreciating more.”
During the recent interview, Goyal offered another hypothetical example with some figures involved. He explained that with a typical 36-month loan, a borrower will have paid about 30 percent of that principle balance in a year. If the term is 84 months, the borrower only paid down about 10 percent of that principle balance following a year of payments.
“If the value depreciated anywhere from 25 to 45 percent from that original retail price to that wholesale value in that 12-month period, you’re significantly underwater with that 84-month loan,” Goyal said. “That’s why we think it’s so important to monitor that and put that into your analysis as a lender to make sure you are appropriately accounting for that risk up front as well as in your portfolio evaluation.”
Yet another piece of the puzzle to consider: The kind of vehicle that’s being attached to the contract. Goyal noted that currently values of compact pickups and SUVs are holding strong. A couple of years ago, it was entry-level cars that held that distinction, but Goyal indicated that values for those kinds of units are softening because the supply of those vehicles is on the rise.
Goyal closed his conversation by mentioning that watching the portfolio isn’t just an important chore for the underwriting and recovery departments at finance companies. He stated it’s also important for marketing divisions to watch these trends, too, so they can approach current loan holders with new opportunities if they currently are in a positive equity position.
“We are able to tell lenders when a loan is going to be in an equity position, how long is it going to take to get there and for lenders to be able to account for that throughout the life cycle as well as what’s my portfolio looking like and how does that impact loss forecasting,” Goyal said.
“We are constantly watching these trends,” he continued. “But as the market evolves these trends will change. That’s what we emphasize monitoring your portfolio is very important from a collateral viewpoint,” he added.
In light of the Consumer Financial Protection Bureau handing out stern enforcement actions connected with credit bureau reporting, the ranking member of the U.S. House Financial Services Committee now is joining the regulatory fray.
As the chairman-elect of the American Bankers Association attempted to assure the subcommittee about how the industry is committed to consistent, accurate credit reporting, Rep. Maxine Waters released a proposal that would make “sweeping” reforms to the nation’s consumer reporting system.
Waters, a California Democrat, explained her draft proposal, entitled the “Fair Credit Reporting Improvement Act of 2014,” will enhance requirements on the consumer reporting agencies (CRAs), and furnishers that provide information to these CRAs, to guarantee consumers have the capacity to ensure that the information on their credit reports is accurate and complete.
Waters noted her proposal comes in the aftermath of a number of recent court cases, news reports and studies that have detailed the significant problems and flaws in the current consumer reporting system, including the CFPB penalizing First Investors Financial Services Group.
“Credit reports are no longer just used exclusively by lenders in making a credit decision. More and more, credit reports are used in a variety of ways, from employment decisions, to determining a consumer’s ability to rent a home, buy a car, or purchase insurance,” Waters said.
“A person’s credit report is too important in determining access to a wide array of opportunities for these reports to contain inaccurate and incomplete information,” she continued. “This proposal addresses many of the flaws with the existing consumer reporting system, by making common-sense changes that enhance consumers’ rights, create more transparency over the consumer reporting and credit scoring process, and increase the accountability of credit reporting agencies, furnishers and companies that develop credit scoring models and formulas.”
According to the Federal Trade Commission, one in five, or roughly 40 million consumers, have had an error on one of their credit reports. The lawmaker said about 10 million consumers have errors that could increase the cost of credit available to them.
The draft proposal would make several reforms to the Fair Credit Reporting Act. Key provisions include:
— Providing relief to millions of borrowers who were victimized by predatory mortgage lenders and servicers, by removing adverse information about these residential loans that are found to be unfair, deceptive, abusive, fraudulent or illegal.
— Ending the unreasonably long time periods that most adverse information can remain on a person’s credit report, shortening such periods by three years.
— Giving consumers the tools to “truly” verify the accuracy and completeness of their credit reports, by mandating that furnishers retain all records for as long as adverse information about these accounts remains on a person’s credit report.
— Eliminating punitive credit scoring practices by removing fully paid or settled debt from credit reports, including medical debt, which has been found not to be a reliable predictor of a person’s creditworthiness.
— Giving distressed private education loan borrowers the same chance to repair their credit as federal student loan borrowers, by removing adverse information when delinquent private education loan borrowers make consecutive on-time monthly payments for a certain period of time on their loans.
Waters also mentioned the draft proposal also restricts the use of credit reports for employment purposes, which employers are increasingly using to screen qualified job applicants despite a lack of adequate data to show that a person’s credit is predictive of their job performance.
She pointed out the proposal also sets a dollar amount that a consumer can be charged to buy their credit score from CRAs, while also requiring CRAs to provide consumers with a free annual credit or educational credit score upon a consumer’s request.
“Over 10 years ago, Congress tried to strengthen consumer protections, but our consumer reporting system still has a number of systemic flaws. I believe we must take action to end the heartache that has plagued millions of consumers who have been unable to obtain a job, go to college, or buy a car because of their credit score,” Waters said.
“Many of these problems have stemmed our country’s economic growth. This draft proposal attempts to meet our obligation to ensure that consumers who have fallen victim — or fallen on hard times — are not deprived of the chance to achieve the American Dream,” she went on to say.
What Industry Is Already Doing
John Ikard is ABA chairman-elect and chief executive officer of FirstBank, headquartered in Lakewood, Colo. Ikard told House subcommittee members about how banks and other finance companies work diligently to provide accurate information to credit bureaus, which provides tremendous value to consumers and institutions alike.
“For consumers, credit reports provide a compilation of their historical performance on obligations which enables them to shop around for credit from any lender knowing that all lenders have a similar base of detailed information,” Ikard said.
Without these reports, consumers would have to provide extensive documentation lender by lender or be limited to a financial institution that they had previously done business with. Thus, credit reports open up the options for consumers and ensure that they can shop around in a very competitive market — nationwide — for the best loan or account that serves their needs. The greater efficiency and competition means better deals and lower prices for consumers,” he continued.
Ikard emphasized how important credit bureau reports are in the underwriting process, especially if the finance company hasn’t worked with this potential borrower previously.
“Banks benefit because an accurate understanding of a credit applicant’s credit history means they are better able to predict who is likely and unlikely to repay a loan, allowing them to make better decisions on whether to grant credit and at what price. Credit reports have proven to be good predictors of how consumers will manage their finances in the future,” Ikard said. “The ability to make more accurate decisions helps lower their costs, which helps to lower prices for consumers.
“Accuracy within credit reports is critical, of course, to ensure that customers are evaluated and extended loans based on the history of their individual performance,” he continued.
And if there are errors in a person’s credit file?
“Inaccurate reports undermine the value of the system,” Ikard told lawmakers. “An inaccurate report could prevent a qualified borrower from getting the credit that they deserve by making them look less creditworthy. An inaccurate report that is missing negative information could also make a borrower eligible for credit that they are ill prepared to handle. Thus, accurate credit reports ensure that credit is extended to deserving borrowers.”
Ikard wrapped up his prepared testimony in front of the committee by stressing how critical of a resource credit reports are and how they’re just as important to banks and finance companies as they are to consumers.
“Having such an efficient system is critical to credit availability for all deserving borrowers and is a key driver of economic growth, competition, lower prices and better deals for consumers,” he said. “Because the benefits to both customers and lenders are so large, it is in the best interests of both parties to ensure that credit reports are as accurate as possible.
Banks have invested heavily in systems and processes to report accurate data and contribute to this important public good. The system would be unworkable without accurate information that all parties can rely upon,” Ikard continued.
“Having an effective dispute mechanism is critical to this process. But any process can also be abused. Repeated unfounded disputes absorb resources that hurt everyone,” he went on to say. “Changes can be made that would help to stop such abuses without hurting legitimate claims to correct errors.”
