Make it 13 quarters in a row during which the average amount consumers had remaining on their vehicle installment contract moved higher year-over-year.
TransUnion's Industry Insights Report indicated that auto loan debt per borrower jumped 4.1 percent from $16,410 in the second quarter of last year to $17,090 in Q2 of this year.
On a quarterly basis, TransUnion reported auto loan debt increased 1.35 percent from $16,862 in the first quarter. TransUnion automotive vice president Peter Turek pointed out that auto loan balances rose in every state year-over-year during the second quarter.
Among the biggest U.S. cities, Houston and Phoenix saw the largest yearly auto loan debt rises of approximately 6 percent. Houston's average auto loan debt increased to $21,690, the highest such number of all major markets.
“The numbers reflect a continued healthy marketplace,” Turek told SubPrime Auto Finance News this week. “There’s competition amongst the manufacturers, auto lenders and dealers. It’s great, healthy competition. I think in the end it benefits all of those stakeholders, especially consumers, the folks who drive those vehicles every day and make the payments.
“What we’re observing is the fact that there is more recent originations,” he continued. “As consumers over the past several quarters have demonstrated, auto sales have been booming and related financing has been booming so we have a lot more auto loans on the books that are recent that have higher balances. That’s what’s driving the higher average balance across all age groups and the industry.
“In addition, when you think about what was going on a couple of years ago, consumers were deleveraging so we were talking about how average balances were going down quarter-over-quarter,” Turek went on to say. “Now we’re in the 13th consecutive quarter where there has been an increase in auto loan debt. I would say that’s primarily from increasing auto sales and more, and more consumers buying automobiles and financing them.”
In a new view of the data, TransUnion also noticed that auto loan debt increases for different age groups remained in a tight range, though changes observed for borrowers ages 40 to 49 were noteworthy. These borrowers saw the largest yearly percentage increase — up more than 5 percent — while also having an average auto loan debt level nearly $1,000 higher than the next age group.
“We’re pleased to offer this slice of data. We think it gives some value around what consumers in different age groups are doing. It’s not really surprising. I think some of it is intuitive. When you think about the ages of people when they’re the most credit active is typically between ages 40 and 60,” Turek said.
TransUnion recorded 62.3 million auto loan accounts as of the second quarter, up from 58.2 million a year earlier. Viewed one quarter in arrears (to ensure all accounts are included in the data), new account originations increased to 6.20 million in the first quarter of this year, up from 5.82 million in the same period last year.
Not Alarmed by Q2 Delinquency Uptick
Auto delinquencies rose slightly in the second quarter because there’s more paper on the streets nowadays, but TransUnion analysts don’t think the trends are necessarily bad for the industry.
According to TransUnion, the auto loan delinquency rate — the ratio of borrowers 60 days or more delinquent on their vehicle installment contracts — increased to 0.95 percent in Q2, up from 0.87 percent a year earlier.
However, TransUnion pointed out that auto delinquencies dropped on a quarterly basis from 1 percent in the first quarter of this year.
Turek explained that the latest delinquency rate remains below the Q2 average of 1.05 percent observed between 2007 and 2014.
Since 2007, Turek noted, the auto loan delinquency rate has reached as high as 1.59 percent (in Q4 2008), while its low was observed in Q2 2012 at 0.86 percent.
"Auto lending remains similar to what we have observed during the last several quarters,” Turek said. “Delinquency rates remain relatively low while auto loan balances keep rising — both metrics aided by increasing auto loan originations.
"In fact, there are 4 million more auto loan accounts in the marketplace than we observed just last year. This means with more auto loans in the marketplace and a delinquency rate ticking higher, we now have several thousand more delinquent accounts than at the midpoint of 2013,” Turek went on to say.
TransUnion indicated that all but six states experienced an increase in their auto loan delinquency rates between Q2 of last year and Q2 of this year. The largest delinquency increases occurred in Alaska, Michigan, Montana and Nebraska.
The largest declines occurred in Hawaii, South Dakota and Oregon.
The subprime delinquency rate (those consumers with a VantageScore 2.0 credit score lower than 641 on a scale of 501-990) increased from 4.12 percent in the second quarter of last year to 4.61 percent in Q2 of this year.
Turek also noted the share of non-prime, higher risk loan originations (with a VantageScore 2.0 credit score lower than 700) grew by 56 basis points (from 33.80 percent in Q1 2013 to 34.36 percent in Q1 2014). This percentage is still lower than what was observed seven years ago near the beginning of the recession (38.98 percent in Q1 2007).
Turek said observers should not read too much into the numbers because “4.61 percent of 1,000 is different than 4.61 percent of 1 million. I’m not suggesting it’s not a reason for concern. But I think when you think about the number of loans that are entering into 30-day delinquency, they’re not flowing through. Even though we still have a low delinquency rate overall, the number of new originations has certainly increased the frequency of delinquency. But we’re not seeing them translate into significant losses.
“As you look at that across the industry, you would interpret that as it’s pretty healthy. People are continuing to buy cars. They’re continuing to finance cars. It seems to be working right now, just in a very healthy way,” he continued.
"It will be interesting to see if lending to the subprime segment of the population continues to grow and what, if any, the impact will be on the overall delinquency rate,” Turek went on to say. “Historically, increased subprime lending pushes the overall delinquency rate higher. This is not necessarily a bad thing for the auto ecosystem — consumers find reliable transportation for work, lenders actively minimize the risk, and dealers sell more cars.”
Auto Finance: A Self-Managing Industry
SubPrime Auto Finance News also gathered Turek’s perspective on what’s been the talk of the summer — a perceived bubble inflating in connection with subprime vehicle financing. Like many other observers, Turek shook off thoughts that subprime auto finance is traveling down the same tracks as mortgages that derailed the economy into the Great Recession.
“When you think about what auto lenders do, they manage risk,” Turek said. “Where we are in the current business cycle we are seeing some tremendous growth since 2010 and 2011. Some of the growth is slowing so auto sales are slowing year-over-year. There’s going to be lenders that adjust where they buy to get more volume. There’s going to be more subprime lenders in the marketplace. And then there’s going to be consumers who feel more comfortable taking on a loan.
“When all of those factors combined come together in terms of the ecosystem, there’s going to be increases in delinquency. What we’re seeing is a return to this healthy competition. Delinquency is still, compared to other periods of time, really low, even in the subprime space,” he continued.
Turek also pointed to how finance companies cater their underwriting and analysis quite different between any auto or mortgage business it might conduct.
“Most of the time a vehicle is a shorter term piece of collateral. It’s not an appreciating asset. It’s a depreciating asset,” Turek said. “There’s a lot of that analysis that goes into the financing of that vehicle. It’s an interesting topic, but when you look at the numbers and peel them back, the industry has a way of self-managing itself when it comes to cost and things that impact the industry.
“When you look back at gas prices spiked, there were some lenders that had a lot of SUVs in their portfolio. They were able to account for those potential loan losses if one of those vehicles went bad because of gas prices or their values went sharply down,” he continued.
“Values and depreciation are priced into the loan,” Turek added. “I really don’t see that there is a subprime bubble. When you look at our data and delinquency, I think we’re returning to pretty healthy numbers.”
One of the marketing hooks that subprime finance companies of all sizes often use contains the pitch about how consistent payments can lead to steady reporting to credit bureaus and eventually the possible healing of the borrower’s profile.
Hudson Cook partner Jean Noonan emphasized the recent enforcement action against First Investors Financial Services Group reinforces the responsibilities finance companies take when providing this service.
Last month, the Consumer Financial Protection Bureau said First Investors Financial Services Group failed to fix known flaws in a computer system that was providing inaccurate information to credit reporting agencies. The consent order signed by the finance company included a $2.75 million fine.
Noonan told SubPrime Auto Finance News last week that the regulatory moves bureau officials made shows how seriously the CFPB is taking strict compliance with the furnisher’s rule under the Fair Credit Reporting Act.
“As we can see by reading the consent decree, given the relatively small numbers of consumers effected given the overall size of the portfolio, there was no allegation of any consumer injury whatsoever. And yet, the CFPB still asked for a pretty steep civil penalty of $2.75 million,” Noonan said.
“Now $2.75 million against a company that’s not in the top 50 originators of auto finance contracts, that’s a pretty sizeable sum, especially without an allegation of consumer injury,” she continued. “Now they talk about potential consumer injury but there’s no evidence that they cite at least. I think that’s a very sobering fact for the industry.”
Part of that sobering fact is just because a finance company has a service provider whose job is to provide the technological backbone for accurate credit reporting doesn’t lift the institution from feeling the brunt of responsibility when problems arise. CFPB director Richard Cordray reiterated that point immediately after the bureau made the consent order public.
“Today’s action sends a signal to all companies that supply information to the credit reporting agencies that they must have sound practices in place that protect consumers,” Cordray said. “You cannot pass the buck on this responsibility. Using a flawed computer system purchased from an outside vendor does not get you off the hook for meeting your own obligations.”
Noonan acknowledged the bureau’s stance places finance companies into a difficult position if a problem is detected.
“What do you do if you discover a glitch in your system? You can continue reporting it while you work diligently to fix the glitch. Or you can cease reporting. One thing that we learn from this consent agreement is that you really must cease reporting the inaccurate information until you get the glitch fixed,” Noonan said.
“It can be a problem, especially in the subprime area because a lot of subprime creditors and subprime customers count on that regular reporting of credit information,” she continued. “Sometimes a subprime creditor will say one of the benefits is that we report to credit bureaus and if you make payments on time you’ll be able to rebuild your credit history or to build it in the first instance if you don’t have one.
“That’s important to consumers. Stopping reporting can be a problem for consumers but you really have two bad choices in that instance,” Noonan went on to say. “If you have promised consumers that you’re going to report, and you have to cease reporting because you have a glitch in your system, then the CFPB is going to be on your case either way.”
In order to avoid the wrath of the CFPB as much as possible, Noonan and Hudson Cook are stressing a point they often make to their clients — and one Cordray hammered, too.
Finance companies must keep close tabs not only on their service providers but also complaints that might be arriving. Noonan shared that a client recently detected a problem when several discrepancies arrived in a short time. The problem was corrected and the accurate consumer information was sent to credit bureaus within two weeks thanks to “around the clock work,” according to Noonan.
“Credit reporting is a complicated business,” she said. “It’s not rare for discrepancies to happen. That means you’ve got have a good audit system so that you know you’re reporting accurate information. You’ve got to do great complaint monitoring.”
Noonan finished her assessment by touching on two final points other finance companies can learn from the action taken against First Investors Financial Services Group.
“Keeping a close tab on service providers is always a very important lesson to take to heart. The consent agreement indicated that First Investors was using a service provider. Even if it is a service provider with a great reputation, you still have to be sure that the service is complying with a creditor’s legal obligations. In this case, that’s to furnish accurately,” Noonan said.
“What this consent agreement teaches us — and I think we’ll be seeing other consent agreements with similar issues — is that you’ve got to be very on top of things so that if through misfortune you have a discrepancy, that you detect it, fix it and you get that fix locked in and you get the information corrected for the consumer,” she added.
Manheim chief economist Tom Webb regularly tries to take questions connected to current events when he closes his monthly Auto Industry Brief. The August edition contained questions that likely came from a busy F&I manager.
The questioner arrived at the query after reading that household debt levels shrank in the second quarter.
“That’s not the sense I get from reviewing our customer credit apps, nor is it consistent with the large amount of new paper we are sending to lenders every month,” the individual told Webb. “What gives?”
Webb began his response by acknowledging total outstanding debt (mortgages, home equity loans, student loans, auto loans and credit cards) did, in fact, decline by $18 billion in the second quarter, according to Federal Reserve information.
But it was a tale of two cities — mortgage lending fell to a 14-year low, while auto lending hit an eight-year high,” Webb said.
In light of those figures, Webb tried to give more perspective beyond the broad figures.
“All in all, the state of household finances is solid. Lower debt levels, low interest rates and modest income growth have pushed debt servicing costs down to levels not seen in over 30 years,” Webb said.
“Nevertheless, there is still a very broad swath of the country that lives paycheck to paycheck and where debt servicing costs eat up the majority of income,” he continued. “Those stories are always lost in the aggregate averages.”
With this F&I manager evidently busy with applications, the situation reinforced Webb’s position about how the availability of vehicle financing is one of the facts supporting the sustained rebound of auto sales — both new and used.
“There is no way to overstate the important role that favorable retail financing conditions have played in supporting used-vehicle sales and residual values throughout this recovery,” Webb said. “And, unlike times in the past when aggressive new vehicle financing hurt used-vehicle residuals by switching customers from a used purchase to a new one, this time the financing deals are being used to support higher average new-vehicle transaction prices.
“In addition, today, the great financing deals are also available for used vehicle purchasers,” he added.
After taking his turn refuting this summer’s much-discussed New York Times series that attempted to convey a subprime auto finance bubble inflating, Webb did describe what he called the “fantasy” portion of vehicle financing. He pointed out current conditions of financing availability likely won’t continue into perpetuity.
Webb insisted it is fantasy “to assume that retail credit conditions will continue to get better, loans will get longer, and that there will be no downside.
“When rates rise — and they will — the market’s all-consuming ‘search for yield’ will abate,” he continued. “And, when that happens, lenders will no longer be awash with funds and, thus, will become more restrained. It is also fantasy to assume that the lengthening of loans that has already occurred is not a negative.
“In addition to increasing the severity of loss on the few repos that do occur, extended terms can also negatively impact customer satisfaction when owners find it difficult to trade out of their ride when they want,” Webb went on to say.
As CNW Research noticed both sequential and year-over-year increases in approvals for subprime vehicle financing so far this month, two Equifax economists took their turn to again reiterate how a bubble is not forming in that segment, contrary to the connection some observers are making to the mortgage meltdown.
In a white paper released on Monday, Equifax explained the three critical components to the bubble formation in the mortgage space going into the recession. Those elements included:
— Rising asset prices (home prices) fueled speculation in residential real estate.
— New-home construction was at all-time high for a sustained period and exceeded population growth.
— The share of mortgages originated to subprime credit borrowers was rising at a time when home purchases were at record levels.
Equifax chief economist Amy Crews Cutts and deputy chief economist Dennis Carlson pointed out in the white paper that as the number of borrowers who were well-qualified to finance a home purchase did not rise in tandem, the credit bubble was fueled by inappropriate lending, which in turn fed the asset bubble.
“While there are always key differences in the housing market compared to the auto market, including housing as a potentially appreciating asset versus an auto that is likely a depreciating asset, the Equifax expert acknowledged there are some similarities in factors that indicate some “effervescence” such as quickly rising sales of new vehicle and an even faster rate of increase in auto lending.
“But looking closely at those similar factors, we see that the auto market of today is just now recovering to pre-recession levels and, unlike the mortgage market immediately prior to the recession, the auto market was not in the same frenzied state at that time,” said Crews Cutts and Carlson, who noted that new-vehicle sales reached their peak level in the first quarter of 2000 and averaged 16.96 million units for the six-year period ending December 2005.
Crews Cutts and Carlson began their white paper titled, “Not Yesterday’s Subprime Auto Loan,” by reiterating the importance subprime financing is to the future of consumers who have damaged credit profiles. The Equifax economists noted the positive consumer ramifications well known to finance company executives at institutions that specialize in subprime contracts such as the importance of quality transportation to enhance employment opportunities and how steady payment performance can possibly lead to a rise toward prime status.
“If a borrower with subprime credit obtains a loan from a financial institution that reports the complete payment histories of their clients to the national credit reporting agencies, and that borrower makes timely payments on that loan and other credit obligations, then over time that borrower’s credit score will likely improve, possibly enough to qualify for prime credit terms,” Crews Cutts and Carlson said.
“If, however, the subprime-score borrowers are precluded from mainstream sources of credit, it becomes more difficult for those borrowers to improve their credit scores,” they continued. “Auto financing in the subprime segment adds to the benefits by enabling credit-worthy consumers to obtain reliable transportation and acquire a valuable, albeit depreciating, asset.”
Adding to the importance and value of subprime auto financing, Crews Cutts and Carlson emphasized that the lending landscape today is not the same as it was in 2007 when experts contend the economy ran into its worst tailspin since the Great Depression.
“Lending in the heyday of the credit boom often greatly underweighted any consideration of credit worthiness outside of a credit score. However, credit scores are predicated on lending underwriting standards being maintained as they were during the reference period used to create them — that is, they explicitly assume that lenders will verify the collateral, capital, and capacity of borrowers just as they always have,” the Equifax economists said.
“Lending has returned to the ‘good old days,’ both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased,” they continued. “Specifically, in the subprime auto lending segment most lenders are now verifying incomes today on all loans.
“Given this, loans originated with a 620 credit score today are likely to perform very differently from loans originated with a 620 credit score in 2007, when the loans were likely granted without full underwriting,” Crews Cutts and Carlson went on to say.
And CNW’s data showed the modest increases the industry is currently generating. According to the firm’s August issue of its Retail Automotive Summary, subprime contract approvals are up 5.18 percent in August compared to July and 9.91 percent higher versus the same month last year.
Equifax closed its white paper by pointing out that subprime vehicle financing needs to be monitored carefully, especially given the risk finance companies take providing loans to borrowers in the subprime space.
“The evidence does not support that there is a bubble forming in the auto lending space,” Crews Cutts and Carlson said “It is also beneficial to consider than an unmet need is being satisfied.
“Assuming originations and loan performance in the space remain as they are today, this may benefit the overall economy, as well as the individual participants, in the long run,” they added.
The complete white paper from Equifax is available here.
Dealer solutions provider Autosoft now offers convenient access to credit report and compliance services within its Web-based FLEX F&I application because of a new a partnership with 700Credit.
On Monday, executives highlighted this partnership can help dealers quickly complete the entire sales process without leaving Autosoft’s FLEX F&I application — in most cases while a customer sits across the desk. Sales personnel can pull credit and comply with mandatory state and federal requirements using 700Credit’s credit reports product and the included compliance safeguard features.
“At Autosoft, we’re always looking for ways to make our customers’ jobs easier,” Autosoft senior vice president of business development Christopher Morris said of the new integration.
“Convenience and cost-savings are important to our customers, so we’re happy to offer a fairly priced service that saves time and steps for our dealerships,” Morris continued. “More importantly, 700Credit provides our FLEX F&I users with a simple, efficient and effective means for ensuring compliance with federal and state laws that many dealerships may not even realize they are required to follow.”
With just a few mouse clicks, FLEX F&I users can:
— Gain access to credit reports and credit scores (FICO and Vantage) from the leading national credit repositories, Equifax, Experian and TransUnion. The Vantage Score is a new generic credit scoring model that provides accurate scores for potential buyers who use credit infrequently and more credit-worthy borrowers from a broad population.
— Access a credit report summary that helps dealers and lenders analyze the most significant factors in a consumer’s credit file.
— Quickly comply with the U.S. Patriot Act by screening customers against the U.S. Treasury’s Office of Foreign Assets Control (OFAC) for every commercial transaction at a dealership.
— Prevent identify theft and comply with the new Fair and Accurate Credit Transactions Act “Red Flag” identify theft program with a turn-key solution that can automatically alert the dealer to potential identity theft Red Flags and offers verification options at the point of sale.
— Stay in compliance with federal and state adverse action laws and regulations. 700Credit can either print an adverse action notice for a dealer to provide to the customer or send it automatically on the dealer’s behalf within 30 days of the original application.
— Receive an automatically generated Risk-Based Pricing Score Disclosure Exception Notice each time a credit report is retrieved.
— Use Prospect Prescreen to gain a unique insight into a customer’s credit profile from basic deal information — and without needing a Social Security Number or permission — enabling a more informed conversation with consumers during the sales process
“The integration with Autosoft's FLEX F&I application gives dealerships complete, instant access to our credit reporting and compliance solutions. 700Credit managing director Kenneth Hill said of this new offering.
“In today's market, the ability to save time and not have to worry about the legal ramifications of various regulations brings dealers peace of mind while increasing profitability,” Hill continued.
Hill added 700Credit is offering Autosoft’s FLEX F&I customers preferred, pay-as-you-use pricing for its credit reporting and compliance services.
Hill highlighted a wide array of compliance issues dealers must track during a recent webinar hosted by SubPrime Auto Finance News. The recording of that webinar can be viewed in the above window.
Near-term predictions made this week by Moody's Investors Service fall in line with ongoing lending cycle points noticed by veteran finance company executives such as Credit Acceptance’s Brett Roberts and Brad Bradley of Consumer Portfolio Services.
Moody’s analysts indicated in a new report that they do not expect losses of U.S. subprime auto loans to reach crisis levels. The firm acknowledged delinquencies have risen over the last few years, but they remain below the levels at the height of the financial crisis and have started to moderate.
Moody's senior vice president Mack Caldwell elaborated about that stance in the report, titled, “U.S. Subprime Auto Loan Delinquencies, Still Below Post-Crisis Highs, Reflect Typical Credit Expansion.”
Caldwell said, “Subprime auto lenders have already started to rein in lending to weaker credit-quality borrowers. Barring an imprudent expansion in lending to subprime borrowers, delinquencies will not increase to crisis levels.”
During their most recent quarterly conference calls, both Roberts and Bradley talked about the industry cycles both have seen in the subprime financing space. The finance company leaders each told Wall Street observers that their underwriting practices haven’t loosened in an attempt to chase volume — practices sometimes leveraged by other well-established institutions as well as start-up operations.
Bradley explained this is the third cycle of ups and downs in the subprime space since he’s been associated with CPS. Bradley also referenced what he called the second cycle — the span going into the last recession that he believes was “dominated by large banks.”
The CPS chairman, president and chief executive officer said, “Those large banks were able to compete very aggressively on price, caused a lot of independent players to really work hard and cut price and maybe buy more aggressively. All of those companies did just fine. We all went through it. I don't think anyone really particularly went out of business for credit reasons. A couple of people went out of business because they ran out of funding. That's a very distinct difference.”
Bradley went on to mention how much better finance company leadership is now as compared to lending cycles past.
“Almost all of the companies today are being run by people who have been in the industry for 25 years, as opposed to the first cycle where a bunch of the companies were run by people who had been in the industry for 5 minutes,” Bradley said.
“And so as much as you will have a few companies that don't do it particularly right, and a few of them fall on their face for a variety of different reasons, by and large the industry as a whole should do just fine,” he continued. “It’s run by better people. You’re going to have a few fall out, much like in the first cycle. But in terms of seeing this industry fall apart in any grand scale, it’s sort of hard to figure out why people would think that. It's run by more seasoned executives. There is no pricing pressure from banks.
“And in fact, we are sitting in one of the most favorable environments we possibly could be in,” Bradley went on to say.
In this week’s report, Moody’s emphasized the increase in financing to subprime customers marks the return to a typical consumer lending cycle. In recent months, Moody's contends that banks and other non-traditional finance companies have started to pull back from lending to subprime borrowers, which has eased pressure on the smaller finance companies that traditionally finance subprime auto loans.
With less competitive pressure, Caldwell insisted finance companies can target higher-credit-quality borrowers.
“Lenders have become more cautious, as evidenced by the rising credit scores of borrowers buying used vehicles," Caldwell said. “Subprime interest rates are also rising, a sign that lenders have a lower risk appetite.”
That slackening appetite is part of the typical cycle Roberts stressed to the investment community that he’s seen, as well. The Credit Acceptance CEO was asked to elaborate how contracts the competition might be adding to its portfolio might be influencing his company’s bottom line.
“The returns that we try to make, our target returns are quite a bit higher than the target returns of a lot of the companies we compete with,” Roberts said. “If everything goes according to plan, the profit per deal that we shoot to achieve is typically quite a bit higher in terms of returns. You can look at the other public companies that are out there that are auto finance companies, and compute their returns, and you can corroborate what I'm saying.
“But then usually there's a part of the cycle where things don't go according to plan,” he continued. “And because we have a nice margin of safety built into our business model, we typically do OK during those periods. There are other companies that operate with razor thin margins that don't do as well. We would expect it to play out the same way this time.”
Moody’s pointed out that delinquencies have risen with each full origination year since 2010. Analysts insisted the economic recovery and pent-up demand for vehicles spurred lenders to increase their loan volumes by extending credit to weaker borrowers.
Moody's vice president and senior analyst Peter McNally, a co-author of the report, also mentioned competition among finance companies increased to accommodate the pent-up demand, causing institutions to loosen underwriting standards.
“The potential for profits from subprime lending attracted banks, credit unions and captive finance companies, which typically do not focus heavily on subprime borrowers,” McNally said. “The average credit score on both used- and new-vehicle loans had declined and loan terms had lengthened, increasing the period in which a borrower could default.”
Moody's closed its report by noting analysts continue to be concerned over the long term about the operational risk in asset-backed securitizations backed by subprime auto loans from smaller lenders, which the firm’s ratings reflect.
“Increasing origination levels for small, niche players strain their ability to manage loan and transaction cash flows if they do not also increase servicing capacity, which can ultimately lead to higher losses,” McNally said.
“Higher loan losses can cause a financially strapped lender to lose investor confidence and funding, increasing the securitization’s losses if the servicer fails and a servicing transfer disrupts collections and loss remediation efforts,” he added.
Moody’s Analytics senior director Cristian deRitis chimed in this week, refuting the notion that rising auto lending volume is creating a bubble similar to the one that burst in the mortgage space and sent the U.S. economy into recession.
deRitis insisted that credit quality is better today than prior to the recession, or at any time since the American Bankers Association began tracking delinquency rates for auto loans in 1980.
“Borrowers of all credit profiles are taking out larger loans than they did in 2009,” deRitis wrote in a blog post on Moody’s website. “Improved consumer balance sheets and confidence offer one possible explanation. Consumers owe less now than they did during the recession, so they can afford to take on more debt. Another reason is supply: More lenders are more willing to provide credit than they were in 2009.”
The total amount outstanding in finance companies’ auto portfolios climbed above $900 billion earlier this year, according to Equifax. deRitis cited many other Equifax figures in his analysis, touching on the rise of contracts to subprime borrowers and acknowledging how that typically generates industry apprehension.
“The critics’ concerns notwithstanding, it is difficult to view the increased availability of credit as a negative,” deRitis said. “The steady availability of credit is a major reason for the auto industry’s growth over the past few years, while other sectors such as housing and retail sales have struggled.
“Nonetheless, if the Great Recession taught us anything, it is the danger of complacency,” he continued. “Just because consumers can afford to take on more debt does not mean they should. Today's record low delinquency rates can quickly accelerate.”
But again referencing Equifax data, deRitis pointed out payment performance has improved with each passing month since delinquency rates peaked in 2009.
“The fact that this is true across all stages of delinquency (30, 60, 90 and 120 days past due) is particularly encouraging,” he said.
The Moody’s analysts emphasized that instances of fraud and questionable financing practices that’s been highlighted in media reports this summer need to be addressed before they become systemic issues.
“Yet in some respects, auto lending is a victim of its own success,” deRitis said. “While auto credit contracted during the Great Recession, it was the first consumer credit sector to fully recover.
“Unlike private label mortgage-backed securities, the market for securities backed by auto loans did not collapse, continuing to function throughout the recession,” he continued. “Although significant, the losses suffered by auto finance companies and banks were tolerable and did not alter the shape of the financial system.”
deRitis reiterated the point made by dealers and finance companies to regulators — that access to reliable transportation is critical to securing and retaining employment to generate steady income.
“For some, the ability to purchase a vehicle meant the difference between keeping a job and unemployment,” deRitis said. “Tightening compliance and increased education are important to insure that borrowers are qualified and understand their loans, as is punishing unscrupulous dealers and lenders.
“But restricting credit too severely has its own consequences and will ultimately push consumers into the shadow banking system with little if any regulatory protection,” he continued.
“Without financing to support sales, the industry's recovery would have been far slower with more severe job losses,” deRitis went on to say. “The market may have overshot in the opposite direction recently, providing too liberally. But to borrow an automotive metaphor, it is easier to tap the brakes and correct imbalances than to try and move the industry out of a ditch with the parking brake of credit fully engaged.”
The next time subprime consumers show up at your dealership or their loan application arrives at your finance company’s underwriting department, their FICO score might be higher if much of what triggered their soft credit profile is delinquent medical debt.
FICO recently announced that the new FICO Score 9 introduces a more nuanced way to assess consumer collection information, bypassing paid collection agency accounts and offering a sophisticated treatment differentiating medical from non-medical collection agency accounts.
Officials explained this enhancement will help ensure that medical collections have a lower impact on the score, commensurate with the credit risk they represent.
FICO insisted these enhancements help finance companies because they result in greater precision.
At the same time, the company pointed out the median FICO score for consumers whose only major derogatory references are unpaid medical debts is expected to increase by 25 points.
FICO highlighted that it used sophisticated modeling techniques to make the new FICO Score 9 more predictive of a consumer’s likelihood to repay a debt than previous versions. This latest version of the FICO Score — the industry-standard measure of U.S. consumer credit risk — can capture recent consumer behavior to give finance companies better risk assessments across the credit lifecycle and all credit products.
The company said FICO Score 9 will be available to finance companies through the U.S. credit reporting agencies starting this fall.
FICO Score 9 also can supports the desire of finance companies to better assess the risk of consumers with limited credit history — so-called thin files.
In the model development process, FICO data scientists represented a consumer’s repayment behavior in degrees of risk. For example, instead of classifying a consumer as someone who paid or didn’t pay her bills in absolute terms, the various degrees of the consumer’s payment history have been quantified.
The end result is a score with an improved ability to assess the risk of thin files, according to FICO.
“FICO Score 9 uses a more refined treatment of consumers with a limited credit history and those with accounts at collection agencies, so that lenders can grow their credit and loan portfolios more confidently,” said Jim Wehmann, executive vice president for scores at FICO.
“By applying innovative predictive modeling techniques on recent data to capture consumer credit behavior, FICO Score 9 will extend FICO’s leadership in providing the credit score that most accurately and fairly defines U.S. consumer credit risk,” Wehmann continued.
FICO Score 9 can assess consumer credit risk on all credit product lines — mortgages, auto loans, credit cards and personal loans — and can be used across the entire customer credit lifecycle, starting with marketing/pre-screen, originations and account management, all the way through early-stage collections.
Wehmann mentioned FICO’s innovative, multi-faceted modeling approach can incorporate a more exhaustive characteristic selection process to build a score that is even more effective across a wide variety of situations. He added this approach also uses the Multiple Goal Scorecard technology of FICO Model Builder, which balances a traditional risk metric evaluating all accounts with one evaluating originations risk across all product lines, such as mortgages, credit cards or auto loans.
Wehmann went on to stress FICO Score 9 will also be the most consistent FICO score across all three credit bureaus. This generation of the FICO score uses the same development window across the three different credit bureaus to generate scores that will be as consistent as possible.
“The advances in FICO Score 9 provide significant incentives for lenders to upgrade from earlier versions of the FICO Score,” Wehmann said.
“U.S. lenders can more consistently and precisely assess new applicants and existing accounts with a more robust credit score built on the most current credit data available, while minimizing operational hurdles associated with adoption and compliance. We stand ready to help lenders make that upgrade as smoothly and quickly as possible,” he went on to say.
Wehmann also pointed out future scores in the FICO Score suite will build on FICO’s deep expertise in analyzing a broad spectrum of data types, as well as its keen understanding of client needs and consumer behavior. These scores will be developed to reliably assess the creditworthiness of even more people.
FICO noted 90 percent of all U.S. consumer lending decisions use the FICO score as 25 of the largest credit card issuers, 25 of the largest auto finance companies and tens of thousands of other businesses rely on the FICO score for consumer credit risk analysis and federal regulatory compliance.
A new TransUnion analysis found that the reporting of rental payment information to the credit bureaus in a manner similar to other financial obligations could have a positive effect for the majority of subprime consumers' credit.
Analysts found the subprime segment of the population, those consumers who may be viewed as higher credit risks, could experience positive effects with only one month of on-time rental payment information.
The findings were unveiled in June at the National Apartment Association's Education Conference & Exposition in Denver.
The analysis found that approximately eight in 10 subprime consumers (79.1 percent of those with a VantageScore 2.0 credit score lower than 641 on a scale from 501 to 990) experienced an increase in their score one month into their new apartment lease.
Nearly 41 percent of subprime consumers saw their VantageScore increase by 10 points or more after one month, according to the report.
“Following the mortgage crisis during the last recession, home ownership rates have declined to 20-year lows as many consumers choose to rent. In fact, there are now 40 million American renter households in 2013, which is up nearly 5 million since 2007," said Tim Martin, executive vice president at TransUnion.
“Despite millions more renters, most rental payment histories are not provided to credit bureaus, and renters looking to improve their credit standing cannot do so. To that end, TransUnion is introducing ResidentCredit, a newly-expanded service that encourages property managers to report the payment performance of their apartment residents."
The TransUnion ResidentCredit service is a relatively simple process.
Property managers can submit data about their residents to TransUnion each month, reporting the amount and timeliness of their last payment, and any balance owed. This rental payment information will appear on their consumer files alongside their other financial obligations such as auto loans, credit cards and student loans.
TransUnion's research also compared the credit score impact of being a first-time homebuyer (where the mortgage payment is reported to the credit bureaus) versus being a renter (where the apartment rental payment is not reported).
The research found that, on average, those who became first-time home buyers in early 2012 experienced a 5.2 percent increase in their credit score over the next year. However, the average renter actually saw a slight decline (down 0.4 percent) in credit score during this same timeframe.
In addition to the potential positive impact already described for subprime renters, TransUnion's analysis found that the majority of the overall renter population could also benefit from having their rental payments reported via ResidentCredit.
Nearly seven in 10 renters (66.7 percent) in the analysis experienced positive or neutral VantageScore credit score changes after just one month. Nearly two in 10 renters (18.8 percent) saw a 10-point increase to their score or better in the first month.
Martin pointed out how the positive impact for consumers can help them in other areas — including vehicle financing.
"We believe reporting rental payment performance is simply the right thing to do for apartment residents and the apartment rental industry," Martin said.
"Renters will be able to build positive credit history, gain access to more financial products, and most importantly, help them recover from the housing market crash,” he continued.
“At the same time, property managers will have more certainty about residents' payment history and will get to recognize on-time payments, which should help improve future payment performance and lower the need for costly evictions,” Martin went on to say.
To support this positive industry-wide initiative, TransUnion will charge no fees to report rental payment information via ResidentCredit.
In addition, TransUnion ResidentCredit is credit bureau agnostic. If the property manager who furnishes the data requests it, TransUnion will share the information reported with other national credit reporting companies to be included in their consumer credit files and scores.
Hyundai Capital America declared this week that it’s now the first captive auto finance company to provide free FICO scores to customers as part of the FICO Score Open Access Program.
Hyundai Motor Finance and Kia Motors Finance will offer free FICO scores to new customers enrolling in the new 2014 College Grad Programs.
Officials indicated customers participating in these programs will start receiving their FICO scores from HMF and KMF on a quarterly basis, beginning this fall.
In addition to receiving their FICO scores, HMF and KMF customers also will be given online access through the respective websites to tools to help them understand and track their FICO scores. These tools will include the top two factors currently affecting the customers; individual FICO scores, as well as provide educational content to help customers understand their credit score.
“We’re continuously looking for ways to deliver added benefits to our customers,” said Tim Devine, senior vice president of sales, marketing, insurance and servicing for Hyundai Capital America.
“We’re proud to offer customers in our college grad programs free access to their FICO scores,” Devine continued. “It’s a meaningful way for us to help make buying or leasing a car as transparent and customer-friendly as possible. It’s a fantastic way for us to demonstrate how we value their business and want to continue serving their needs for years to come.”
Jim Wehmann, executive vice president of scores at FICO, cheered the move the captive made.
“For many college grads, a car is their first major purchase,” Wehmann said. “We applaud Hyundai Capital America for helping college grads understand how to build a strong foundation for their financial house by giving them free FICO scores as well as information that will help them better understand and manage their financial health.”
