On Thursday, the Consumer Financial Protection Bureau (CFPB) took action against Experian and its subsidiaries for what regulators said was “deceiving” consumers about the use of credit scores it sold to consumers.
The CFPB said Experian claimed the credit scores it marketed and provided to consumers were used by lenders to make credit decisions. The regulator found lenders did not use Experian’s scores to make those decisions.
The CFPB ordered Experian to “truthfully” represent how its credit scores are used. Experian must also pay a civil penalty of $3 million.
“Experian deceived consumers over how the credit scores it marketed and sold were used by lenders,” CFPB director Richard Cordray said. “Consumers deserve and should expect honest and accurate information about their credit scores, which are central to their financial lives.”
Experian, based in Costa Mesa, Calif., is one of the nation’s three largest credit reporting agencies. Experian markets, advertises, sells, offers and provides credit scores, credit reports, credit monitoring and other related products to consumers and third parties.
As finance companies know, credit scores are numerical summaries designed to predict consumer payment behavior in using credit. Many lenders and other commercial users consider these scores when deciding whether to extend credit.
The CFPB emphasized no single credit score or credit scoring model is used by every lender.
In addition to the credit scores that are actually used by lenders, the regulator said several companies have developed so-called “educational credit scores,” which lenders rarely, if ever, use. These scores are intended to inform consumers.
The CFPB recapped Experian developed its own proprietary credit scoring model, referred to as the “PLUS Score,” which it applied to information in consumer credit files to generate a credit score it offered directly to consumers. The PLUS Score is an “educational” credit score and is not used by lenders for credit decisions.
From at least 2012 through 2014, the CFPB charged that Experian violated the Dodd-Frank Wall Street Reform and Consumer Protection Act by “deceiving” consumers about the use of the credit scores it sold.
“In its advertising, Experian falsely represented that the credit scores it marketed and provided to consumers were the same scores lenders use to make credit decisions,” the CFPB said. “In fact, lenders did not use the scores Experian sold to consumers.
“In some instances, there were significant differences between the PLUS Scores that Experian provided to consumers and the various credit scores lenders actually use. As a result, Experian’s credit scores in these instances presented an inaccurate picture of how lenders assessed consumer creditworthiness,” the CFPB continued.
The regulator went on to state Experian also violated the Fair Credit Reporting Act, which requires a credit reporting company to provide a free credit report once every 12 months and to operate a central source — AnnualCreditReport.com — where consumers can obtain their report.
Until March 2014, the CFPB found that consumers getting their report through Experian had to view Experian advertisements before they got to the report. The regulator said this practice violates the Fair Credit Reporting Act prohibition of such advertising tactics.
Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB is authorized to take action against institutions engaged in unfair, deceptive, or abusive acts or practices, or that otherwise violate federal consumer financial laws. Under the consent order, Experian must:
—Pay a $3 million penalty: Experian must pay a civil money penalty of $3 million to the bureau’s civil penalty fund.
—Truthfully represent the usefulness of credit scores it sells: Experian must inform consumers about the nature of the scores it sells to consumers.
—Put in place an effective compliance management system: Experian must develop and implement a plan to make sure its advertising practices relating to credit scores and on Internet webpages that consumers access through AnnualCreditReport.com comply with federal consumer laws and the terms of the CFPB’s consent order.
The full text of the CFPB’s consent order against Experian is available here.
The Consumer Financial Protection Bureau (CFPB) recently released a report detailing the problems in the credit reporting industry that the bureau said it has uncovered and corrected through its oversight work. Since launching its supervision of the credit reporting market, the CFPB has identified significant issues with the quality of the credit information being provided by furnishers and maintained by credit reporting companies.
The report outlines the actions that the CFPB has taken to address these ongoing problems, such as fixing data accuracy at credit reporting companies, repairing the broken dispute process and cleaning up information being reported.
“Since we began our oversight work, the CFPB has been uncovering and correcting problems in the consumer reporting industry,” CFPB director Richard Cordray said. “Because of our work, important improvements are being made. Much more work needs to be done but our corrective actions are leading to positive changes that are benefiting consumers all over the country.”
The CFPB maintained that consumer reporting companies are businesses that track information about a consumer, including credit history, deposit account history and other consumer transactions. The agency insisted such companies, which include what are popularly called credit bureaus or credit reporting companies or agencies, play a key role in the consumer financial services marketplace and in the financial lives of consumers.
For example, officials pointed out the reports sold by the three largest consumer reporting companies — Equifax, Experian and TransUnion — are used in determining everything from consumer eligibility for credit to the rates consumers pay for credit. The consumer reporting companies receive their information from furnishers, including both banks and nonbanks.
“Inaccurate information can lead to inaccurate reports, and consumer and market harm,” the CFPB said.
Consumers continue to complain about the credit reporting industry in high numbers. The bureau has handled approximately 185,700 credit reporting complaints as of Feb. 1.
“Consumers have said that when they dispute an item on their report, nothing changes even though federal law requires the consumer reporting company to conduct a reasonable reinvestigation and update the file to reflect any necessary changes or delete the item,” the bureau said.
“Consumers also frequently complain of debts already paid showing up on their report as unpaid and information that is not theirs being included in their report negatively affecting their credit scores,” the regulator added.
In 2012, the CFPB became the first federal agency to supervise all sides of the credit reporting market, which includes the consumer reporting companies and providers of consumer financial products or services, many of whom furnish or use consumer reports. In 2013, the CFPB published a bulletin warning that the agency would hold furnishers accountable for their legal obligation to investigate consumer disputes forwarded by the consumer reporting companies. The bulletin also reminded companies that they must review all relevant information provided with the disputes, including documents submitted by consumers.
The CFPB added that it has also made efforts to educate the public about the importance of checking their credit reports, what to look for in their reports, and how to dispute mistakes. As outlined in its special edition of Supervisory Highlights, because of these widespread issues, CFPB supervision has aimed its work at:
—Fixing data accuracy at consumer reporting companies: Early on, examiners found that one or more of the consumer reporting companies lacked good quality control to check the accuracy of their consumer records. The CFPB directed them to make necessary changes, and they did.
In recent exams, examiners have found that quality control programs have been instituted that include tests to identify whether reports are produced for the wrong consumer and whether reports contain mixed-up files. The companies are also taking better corrective actions when mistakes are identified, and making system improvements to prevent the same mistakes from happening again.
—Repairing broken dispute processes at consumer reporting companies: CFPB examiners discovered that one or more consumer reporting companies were not following federal requirements that said they must send a notice with the results of disputes to consumers. They also found one or more consumer reporting companies failing to consider documentation provided by the consumer on a disputed item.
The CFPB directed these companies to improve their dispute investigation systems. Now, continued monitoring has shown that the consumer reporting companies have improved processes for investigating disputes and are improving response letters to consumers.
—Cleaning up information from furnishers: Through earlier reviews at banks and nonbanks, CFPB examiners found widespread problems with furnishers supplying incorrect information to the consumer reporting companies. The CFPB directed them to take steps to address these problems, such as maintaining evidence that they are accurately handling disputes and conducting reasonable investigations.
Since then, the bureau indicated several furnishers have dedicated more resources to ensuring the integrity of the information. This effort includes better investigations and handling of disputes, notifying consumers of results, and taking corrective action when inaccurate information has been supplied. Importantly, though, examiners continue to find numerous violations at one or more furnishers, particularly around deposit account information.
The CFPB went on to mention its approach when examining the credit reporting activities of supervised entities is just like its approach to examining other activities of supervised entities. Supervision includes a review of compliance systems and procedures, on-site examinations, discussions with relevant personnel and requirements to produce relevant reports. The Fair Credit Reporting Act governs how companies handle consumers’ information.
When examiners find violations of law, they direct the companies to change their conduct and remediate consumers. When appropriate, the CFPB’s supervisory activity also results in enforcement actions, such as the action against the furnisher Wells Fargo Bank for failing to update or correct inaccurate, negative information reported to credit reporting companies about student loans.
The latest edition of the CFPB's Supervisory Highlights that focus on credit reporting is available here.
In an action one of the credit bureaus acknowledged through a filing with the Securities and Exchange Commission, the Consumer Financial Protection Bureau confirmed on Tuesday that it took action against Equifax, TransUnion and their subsidiaries for what they regulator deemed to be “deceiving consumers” about the usefulness and actual cost of credit scores they sold to consumers.
The CFPB asserted the companies also lured consumers into costly recurring payments for credit-related products with “false promises.”
The CFPB ordered TransUnion and Equifax to “truthfully represent” the value of the credit scores they provide and the cost of obtaining those credit scores and other services. Between them, TransUnion and Equifax must pay a total of more than $17.6 million in restitution to consumers, and fines totaling $5.5 million to the CFPB.
“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” CFPB director Richard Cordray said. “Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”
The CFPB determined that TransUnion — since at least July 2011 — and Equifax (between July 2011 and March 2014) violated the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act by:
— Deceiving consumers about the value of the credit scores they sold: In their advertising, bureau officials insisted TransUnion and Equifax falsely represented that the credit scores they marketed and provided to consumers were the same scores finance companies typically use to make credit decisions. They stressed that, in fact, the scores sold by TransUnion and Equifax were not typically used by finance companies to make those decisions.
— Deceiving consumers into enrolling in subscription programs: In their advertising, the regulator said TransUnion and Equifax falsely claimed that their credit scores and credit-related products were free or, in the case of TransUnion, cost only “$1.” In reality, the CFPB determined consumers who signed up received a free trial of seven or 30 days, after which they were automatically enrolled in a subscription program. Unless they cancelled during the trial period, consumers were charged a recurring fee — usually $16 or more per month. This billing structure, known as a “negative option,” was not clearly and conspicuously disclosed to consumers.
The bureau added that Equifax also violated the Fair Credit Reporting Act, which requires a credit reporting agency to provide a free credit report once every 12 months and to operate a central source — AnnualCreditReport.com – where consumers can get their report.
Until January 2014, the bureau found consumers getting their report through Equifax first had to view Equifax advertisements. The CFPB said this practice violates the Fair Credit Reporting Act, which prohibits such advertising until after consumers receive their report.
More details of enforcement action
Under the Dodd-Frank Act, the CFPB reiterated that it is authorized to take action against institutions engaged in unfair, deceptive, or abusive acts or practices, or that otherwise violate federal consumer financial laws. Under the consent orders, TransUnion and Equifax must:
— Pay more than $17.6 million in total restitution to harmed consumers: TransUnion must provide more than $13.9 million in restitution to affected consumers. Equifax must provide almost $3.8 million in restitution to affected consumers. The companies must send notification letters about the restitution to affected consumers.
— Truthfully represent the usefulness of credit scores it sells: TransUnion and Equifax must clearly inform consumers about the nature of the scores they are selling to consumers.
— Obtain the express informed consent of consumers: Before enrolling a consumer in any credit-related product with a negative option feature, TransUnion and Equifax must obtain the consumer’s consent.
— Provide an easy way to cancel products and services: TransUnion and Equifax must give consumers a simple, easy-to-understand way to cancel the purchase of any credit-related product, and stop billing and collecting payments for any recurring charge when a consumer cancels.
— Pay $5.5 million in total penalties: TransUnion must pay $3 million to the Bureau’s civil penalty fund. Equifax must pay $2.5 million to the bureau’s civil penalty fund.
There is, admittedly, some “unease” about the health of the new-vehicle market in 2017, Scotiabank said in an analysis.
Along with somewhat disappointing third-quarter earnings from an automaker, increases in repossessions and subprime auto finance delinquencies have spurred this concern in recent weeks, the company said.
But it may be misplaced, some argue.
“We believe these developments are a reflection of the increase in number of vehicles being financed, and not a sign of weakening demand,” Scotiabank senior economist and auto industry specialist Carlos Gomes said in a news release.
“We maintain our view that replacement of an aging fleet combined with rising incomes and improving household balance sheets are likely to lift U.S. new vehicle sales to new heights in 2016 and 2017,” he said.
And the fears of risks from the subprime auto finance market may be misplaced, as well.
Experian’s State of the Automotive Finance Market indicates that subprime auto loans were down 4.5 percent year-over-year in the third quarter, with deep-subprime loans falling 2.8 percent. The latter was at a five-year low.
Meanwhile, prime buyers represented close to 60 percent of auto loans for the quarter and the volume of these loans to these buyers was up 2 percent.
“For anyone making doomsday predictions about a subprime bubble in the auto industry, Q3 2016 provides a stark reality check,” Melinda Zabritski, Experian’s senior director of automotive finance, said in a news release. “This quarter’s report shows that lenders are reducing the percentage of loans to the subprime and deep-subprime risk tiers while increasing the percentage to consumers with good credit.
“The most important takeaway here is to understand the market reality and not to be led astray by rumors or unsubstantiated facts. By doing so, lenders, dealers and consumers are able to make smarter decisions and more easily explore financing programs and other opportunities available to them.”
Financing gains ground
As Gomes alluded to, financing is becoming a bigger part of the auto sales process.
Consider this: Combined new- and used-car sales are up 2 percent year-to-date and should end up beating the 57 million full-year sales last year, according to Scotiabank. But that trails the 60 million annual sales typical for 2001 through 2006. And the average of 54 million-plus during the current economic expansion is about 8 percent softer than the prior decade’s annual sum.
But the overall market is now leaning more heavily toward new than it has in the past. Used vehicles have accounted less than 70 percent of total sales the past two years, down from a 77-percent peak in 2008 and 2009.
“This trend has been accompanied by increased vehicle financing and has been facilitated by improving credit availability,” Scotiabank said the report.
And finance is gaining a bigger foothold in both new- and used-car sales.
The report points to Experian data indicating that the portion of new cars that are financed is now more than 86 percent, compared to below 80 percent just nine years ago.
Meanwhile, 56 percent of used cars are financed, up from 50 percent.
All told, two-thirds of car purchases involve financing. A decade ago, it wasn’t even 60 percent.
Scotiabank forecasts that 38 million vehicles will be financed this year, versus 34 million in 2007.
Look at overall health
With more vehicles being financed, it’s natural that repossessions and delinquencies would increase.
“Given the growth in automotive lending, there should not be a surprise that the number of repossessed vehicles and delinquencies are on the rise,” Scotiabank argues. “However, the key metric that analysts and commentators should focus on to gauge the health of the industry is not the absolute level of repossessions or delinquencies, but the trend of the overall loan portfolio.”
And that, the company suggests, is a relatively one, with credit quality strong.
A chart in the report citing company reports and Scotiabank Economics show that repossessions are in the neighborhood of 1 percent of total loans, versus upwards of 3 percent-plus near the recessionary years.
Meanwhile, delinquencies of 90 days or longer are less than 1.5 percent, versus rates higher than 2 percent in recessionary years.
And while subprime delinquencies have increased as of late, the comparison to the housing market implosion is perhaps not an apt one
For starters, auto loans aren’t a large portion of overall household debt. Just 9 percent, in fact, versus the 74 percent mortgages commanded before the crisis, Scotiabank said.
And subprime car loans have an even smaller slice of the pie.
“In addition, subprime auto loans represent only 2.5 percent of overall household debt, pointing to only a limited negative impact on overall household credit quality,” Scotiabank said.
“In fact, lenders have already been scaling back subprime auto loans since mid-2015, and much of the lending growth has been in the prime and super prime categories over the past year,” it continued. “This suggests that the possible risks emanating from subprime auto loans are likely overstated.”
Part of the dialogue happening at the recent SubPrime Forum during Used Car Week stemmed from whether or not finance companies — especially ones that specialize in subprime paper — were tightening their underwriting.
Furthermore, companies such as Consumer Portfolio Services had just discussed why their originations dipped during the third quarter.
Well, Experian’s latest State of the Automotive Finance Market report showed that perhaps underwriting in the subprime space is, in fact, tightening.
Experian’s Q3 data released on Monday indicated that financing extended to consumers in the subprime tier fell 4.5 percent from the previous year, and contracts to deep-subprime consumers dropped 2.8 percent to the lowest level on record since 2011.
Looking specifically at used-vehicle loans, analysts noticed that the subprime sectors saw an even larger decrease.
Financing to consumers with deep-subprime credit dropped by 5.3 percent to 5.11 percent; the lowest Experian has seen on record since tracking began in 2007.
Meanwhile, Experian senior director of automotive finance Melinda Zabritski — who discussed some of the Q3 data during the SubPrime Forum — pointed out that newly originated financing to prime borrowers jumped 2 percent to encompass nearly 60 percent of contracts financed in Q3.
“For anyone making doomsday predictions about a subprime bubble in the auto industry, Q3 2016 provides a stark reality check,” Zabritski said in a news release issued on Monday.
“This quarter’s report shows that lenders are reducing the percentage of loans to the subprime and deep-subprime risk tiers while increasing the percentage to consumers with good credit,” she continued. “The most important takeaway here is to understand the market reality and not to be led astray by rumors or unsubstantiated facts.
“By doing so, lenders, dealers and consumers are able to make smarter decisions and more easily explore financing programs and other opportunities available to them,” Zabritski went on to say.
The report also determined that average credit scores for both new and used vehicle loans are on the rise.
For new-vehicle contracts, the average credit score climbed two points to 712 in Q3, marking the first time average credit scores for new-vehicle loans rose since hitting a record high of 723 in Q2 2012.
For used-vehicle contracts, the average credit score jumped five points to 655.
Experian reported that 30-day delinquencies were flat year-over-year, at 2.36 percent. However, 60-day loan delinquencies were up slightly, moving from 0.67 percent in Q3 2015 to 0.74 percent in Q3 2016.
Beyond the subprime data, Experian highlighted that credit unions continued to gain market share as consumers search for low interest rates
Perhaps the biggest shift from Q3 2015 to Q3 2016 was the growth in market share for credit unions. Credit unions grew their share of the total loan market from 17.6 percent in Q3 2015 to 19.6 percent in Q3 2016.
For new-vehicle contracts, credit unions grew their share by 22 percent, going from 9.9 percent in Q3 2015 to 12 percent in Q3 2016.
According to the report, interest rate increases played a key role in helping boost credit union share. Interest rates for the average new-vehicle loan went from 4.63 percent in Q3 2015 to 4.69 percent in Q3 2016.
“Credit unions typically have the most competitive interest rates, so any time rates jump overall, it’s a natural reaction for credit unions to see a rise in their market share,” Zabritski said. “With vehicle prices and loan dollar amounts rising, car shoppers are looking for any relief they can get. Credit unions’ traditionally lower rates are obviously an attractive option.”
Other key findings for Q3 2016 included:
• Total open automotive financing balances reached a record high of $1.055 billion.
• Used-vehicle contract amounts reached a record high of $19,227, up by $361.
• The average new-vehicle contract amount jumped to $30,022 from $28,936.
• Share of new-vehicle leasing jumped to 29.49 percent from 26.93 percent.
• The average monthly payment for a new-vehicle contract was $495, up from $482.
• The average new-vehicle lease payment was $405, up from $398.
• The average monthly payment for a used-vehicle contract was $362, up from $360.
• The average contract term for a new vehicle was 68 months.
FactorTrust vice president of auto finance Scott Brackin viewed the move made by Carvana to launch a prequalification financing program as more than just a lever the online auto retailer is pulling to turn used vehicles.
What piqued Brackin’s interest is how Carvana has rolled out this program by providing customers personalized financing terms without impacting their credit scores.
“A person’s credit score is their gateway to financial success,” Brackin said. “With various important situations in life that can affect consumers' credit scores, such as student loans, mortgages and even rental applications and cell phone contracts, it is vital for consumers to be aware of these elements and make smart purchasing decisions.
“I applaud Carvana for realizing the need for a solution that puts the consumer first and has no burden on credit scores,” he went on to say. “I’m impressed by its ongoing commitment to helping consumers make more informed purchases and transforming the automotive space.”
Last week, Carvana rolled into its 17th market: Cincinnati. This is the eighth new market for the company this year, including the move to fellow Buckeye city Columbus late last month.
And now, Carvana is broadening its financing capabilities.
As the first auto retailer to integrate an online, real-time prequalification program into the car-buying experience, Carvana continues to lead the charge to modernize and disrupt the auto industry.
The retailer explained that by answering 10 basic questions, customers can instantly view personalized financing options and exact payment terms for which they prequalify across all 4,700 vehicles available on Carvana.com, all without suffering a hard inquiry on their credit history. Hard inquiries can lower credit scores by up to five points and remain on a person's history for up to two years.
“When it comes to any financial decision, it's imperative consumers shop around to ensure they receive the best interest rate,” said Carvana chief executive officer and co-founder Ernie Garcia, who along with FactorTrust's Brackin is part of the long list of executives and experts involved in Used Car Week, which runs Nov. 14-18 at the Red Rock Resort and Casino in Las Vegas.
“Our main focus is on consumers, with the goal to bring transparency back into the antiquated car buying process,” Garcia continued. “We believe consumers should have the ability to shop around and inquire about financing options to help them better understand life events without negative effects on their credit.”
Carvana referenced AutoTrader’s 2016 Car Buyer Journey that indicated 88 percent of vehicle buyers use the Internet to shop. As the industry continues to shift online, Carvana has been trying to be a leader in the space, providing a platform where buyers can qualify for financing and complete the purchase with completely signed contracts in as little as 11 minutes, with delivery arriving as soon as the next day.
FactorTrust is looking for finance companies to add another consumer definition to their lexicon, encouraging lenders to examine the underbanked population with a new lens.
FactorTrust is advocating that the 113 million U.S. consumers with FICO credit scores currently below 700 should be recognized as CreditClimbers — consumers determined to improve their credit scores in order to advance their situation and access more credit options.
“Lenders must adjust their perception about the underbanked and no-score consumers,” FactorTrust chief executive officer Greg Rable said. “There are 26 million U.S. adults who have no credit history with the Big 3 bureaus. This is a massively underserved population that, when taking alternative credit data into account, deserve credit options."
FactorTrust’s data demonstrates these Americans indeed are striving for a better financial standing,” Rable continued. “Using alternative credit data, lenders can grow their business by strategically evaluating and marketing to CreditClimbers.”
While the percentage of unbanked consumers has decreased over the past five years, the number of underbanked consumers has remained relatively stable, according to the FDIC. Rable insisted the historical perception that the underbanked are all risky customers has harmed both consumers and finance companies, impeding industry and economic growth.
“Every time a CreditClimber does something positive, they deserve to improve their credit score,” he said. “The problem is that the vast majority of these customers and their credit performance are simply unrecognized and untracked by the Big 3 bureaus.
“We’ve seen people improve their credit scores — at every scoring level — by having alternative credit data factored in during the underwriting process. More data is better for both the consumer and the lender,” Rable went on to say.
Along with being ranked as one of the country’s fastest-growing private companies by Inc., FactorTrust this week hired Barbara Sinsley as general counsel and chief compliance officer.
FactorTrust indicated Sinsley will provide the company with legal and regulatory guidance and manage its internal and external compliance programs and products.
The company went on to mention Sinsley's 26 years of experience perfectly aligns with FactorTrust’s efforts to provide finance companies with the most up-to-date and effective regulatory compliance information and solutions. She has extensive experience working with regulators such as the Consumer Financial Protection Bureau, the Federal Trade Commission and attorneys general.
Prior to joining FactorTrust, Sinsley practiced with Barron & Newberger, where she made a name for herself through intelligent representation of servicers, creditors, debt collectors and debt buyers, focusing on improving compliance management systems.
“We are confident Barbara will be instrumental in expanding our footprint as a trusted partner to lenders, helping them stay compliant amidst ongoing industry changes and ultimately helping underbanked consumers get the credit they deserve,” FactorTrust chief executive officer Greg Rable said.
“Barbara is a highly accomplished attorney who has managed complex compliance issues, and her insight and comprehension of the regulatory environment will be a true asset to the company as we continue to develop our line of regulatory products,” Rable continued.
Meanwhile, FactorTrust highlighted it was the only private, alternative credit bureau to make the Inc. 5000 list as it was also ranked the eighth-fastest-growing financial services firm in Georgia.
The current year has brought tremendous growth for FactorTrust due to industry growth and better recognition of the impact of alternative credit data for assessing the creditworthiness of underbanked consumers. Part of the growth has been a result of the compliance needs set forth by a proposed rule from the CFPB.
To date, the company has doubled its employee base and released two new products, LendProtect ATR and LendProtect MLA, which both focus on lender compliance. Additional product launches are planned for later this year.
“Our ability to thrive in a competitive market is grounded in our team’s foresight and aptitude for understanding our customers’ needs and innovating to meet those needs,” Rable said.
“In a highly regulated market, it’s imperative that both lenders and service providers stay nimble. This ability to pivot not only benefits lenders, but offers consumers better credit options, as well.”
This marks the third Inc. 5000 ranking for FactorTrust, which is in good company. Inc. reported this year represented the most competitive crop in the list’s history. The average company on the list achieved an astounding three-year growth rate of 433 percent.
Indiana Members Credit Union chief executive officer Ron Collier explained how this segment of auto financing providers can become “elitist” if all they do is book vehicle installment contracts with consumers whose FICO scores are 800 or higher.
Perhaps credit unions aren’t originating contracts only with super-prime consumers, since the latest TransUnion data showed credit unions grew their auto membership by 9.8 percent year-over-year from the first quarter of this year compared to the first quarter of last year.
In addition, TransUnion indicated that in 2010, only 49 credit unions issued more than 10,000 auto loans during the year. In 2015, analysts determined 126 credit unions were issuing more than 10,000 auto loans annually.
TransUnion shared those data points earlier this week from Las Vegas when the credit bureau hosted its annual credit union seminar, which included participants from leading credit unions across the country. TransUnion arranged for SubPrime Auto Finance News to speak with a couple of them — Collier, as well as Mike Long, who is executive vice president and chief credit officer from the University of Wisconsin Credit Union.
“The word subprime is kind of an unusual term for credit unions because we have members. I think we know our members a little bit better,” said Collier, who oversees an institution of more than 115,000 members who mainly are employed in the medical and education fields based in Indianapolis.
“We still have kind of a traditional field of membership at our credit union. We know when negative things are happening in the medical or educational fields and allow for that,” Collier continued. “We try to strengthen a loan if a member has some bruised credit by getting a little bit more of a down payment or cosigner. That’s the method that we use. We look at the relationship they’ve had with us in the past.
“I’m not sure what the industry definition of a subprime loan is, but I can tell you that we have tried very hard to help members with credit below what we used to,” he went on to say. “It has been a strategy of ours. You can kind of become an elitist lender if you’re not careful, only making loans to those with great credit when people who have run through a little bad times. If you look at the whole relationship and the entire person, you can probably help them if they’re willing to help themselves, too.”
Indiana Members Credit Union does not participate in indirect auto financing, but Collier estimated auto constitutes about 20 percent of the entire credit portfolio the organization has — components that include mortgages and credit cards. Blossoming relationships with Indianapolis-area dealerships as well as a partnership with Enterprise Car Sales fuels the auto origination pipeline for Indiana Members Credit Union.
When noting the credit union’s work with dealers, Collier said, “10 years ago, we didn’t do any of this. Now it’s extremely important to us, now and in the future.”
For University of Wisconsin Credit Union, auto financing is an integral part of the organization, too. Long highlighted that the credit union does participate in indirect financing thanks to a relationship with CUDL, administrators of one of the largest lending service networks for credit unions in the United States.
Through CUDL, University of Wisconsin Credit Union can reach more than 150 dealerships in the Badger State, and Long indicated that has helped the institution gain a top-two market position in Madison, the state capital and home to the large public university. He added that the credit union that boasts more than 214,000 members also generates originations in nearby Milwaukee, a much larger market.
As a result, Long acknowledged that members who might have subprime credit end up in the application process.
“I think credit unions are really uniquely positioned to serve their members with enhanced credit products, especially members who have gone through difficult times,” Long said. “That’s one of their priorities is trying to figure out how to serve as many members as they can with the products they desire.
“If you look at how we buy credit, it’s not just a score. It’s not just a calculation. We’re trying to look at the overall relationship with the credit union, (to) analyze their ability to repay and their length of membership with us,” he continued.
“Sometimes, bad things happen to good people. We try to find ways to serve those members at an affordable price with the products they want. We can’t always meet that need depending on their unique circumstance, but it’s certainly something we aspire to every day,” Long added about its indirect lending capabilities.
Why credit unions gravitate to auto
Credit unions experienced a year-over-year member growth rate of 6.35 percent at the beginning of 2016, according to TransUnion’s analysis. Auto financing is part of the reason why.
“I think it’s been well studied that auto loans and checking are entryways into getting the total financial wallet of a member,” Collier said. “We’re very persistent. We pay off a lot of car loans that our competitors make. We’re a traditional credit union in that we do it with rate. We also have a lot of money to lend. We have experienced good growth in our automobile portfolio. That’s what is important.”
Long shared his assessment in light of the TransUnion data shared about how many credit unions now surpass the 10,000-contract threshold annually.
“It’s interesting to observe the growing auto portfolios for credit unions, especially for those lenders who participate in indirect lending,” Long said. “The more open field of membership certainly has helped to facilitate the acquisition of new members through that channel. It’s not so much about trying to qualify for membership as long as you live in the community where the credit union is. Many times members are eligible from that standpoint.
“Certainly from a supply standpoint, credit unions, at least our credit union specifically, has plenty of money to lend,” he continued. “Our members continue to bring us savings as they look for safety as they try to leverage their assets in different ways. We try to put that money to work in whatever loan we can. Auto lending has certainly been a focus of ours, as indicated in the survey.
"Those third-party relationships enabling us to have the technology in order to facilitate those transactions makes it much easier for us and gives us a lot of creditability when we go talk to the dealership about why they would want to do business with us," Long went on to say.
Younger consumers turning to credit unions
TransUnion found that in the first quarter of 2016, credit union membership grew at more than three times the rate of credit activity among consumers across other lender types such as regional banks or finance companies.
According to TransUnion data, 25 percent of credit union members in Q1 of this year were millennials. In Q1 2013, millennials made up only 20 percent of credit union membership. Millennial growth for non-credit unions grew at a slower pace, up to 25 percent in Q1 2016 from 23 percent in the first quarter of 2013.
Nidhi Verma, senior director of research and consulting for TransUnion, explained this movement is indicative of credit unions’ strategic focus on millennial growth.
“Millennials are an important set of borrowers for credit union growth,” Verma said. “Credit unions are actively building their millennial membership, and in fact have experienced growth in this segment every quarter since 2010.
“Millennials are likely candidates for new mortgages and other credit products as they age, offering credit unions a way to further their market share,” she continued.
The research findings were coupled with a survey of 96 credit union executives, which gathered insights on key industry issues.
The survey revealed that auto loans rank at the top for credit union executives in terms of loan growth, focus and opportunity during the next 12 months.
The survey found that 42 percent of credit union executives reported an overall year-over-year member growth rate higher than 5 percent. In particular, credit union memberships via mortgage origination have increased in recent years. In Q1 2016, credit unions had 3.8 million mortgage members, an increase of 4 percent from 3.67 million in Q1 2015.
Compared to five years ago, credit union mortgage memberships have grown 13 percent from 3.29 million in the first quarter of 2011.
“The data show that credit union membership rates are growing much faster than the overall credit-active population,” Verma said. “Credit union executives are strategically focused on gaining membership growth through mortgage originations, as well as offering products such as credit cards to their existing member base.”
General Motors Financial previously discussed how its subprime exposure would be declining as the finance company continues its strategy pivot to prime paper as the parent automaker’s captive provider.
The company’s second-quarter financial statement reinforced the approach as GM Financial reported that it originated $1.614 billion in subprime contracts during Q2 — deals with consumers with FICO scores of 620 and lower. That Q2 amount constituted 18 percent of its quarterly originations. For comparison, GM Financial indicated 20.6 percent of its originations a year earlier fell into subprime, a figure that amounted to $1.698 billion.
“Despite the competitive environment, GM Financial did maintain credit and pricing discipline,” president and chief executive officer Dan Berce said when the company discussed its results last week.
The company reported that its total retail loan originations came in at $4.2 billion for the quarter that ended June 30, compared to $4.1 billion for the quarter that wrapped up on March 31 and $4.3 billion in the year-ago quarter.
GM Financial highlighted that its retail loan originations at the halfway point of 2016 stood at $8.3 billion, compared to $8.4 billion at the midpoint of last year.
The company’s outstanding balance of retail finance receivables was $30.9 billion on June 30. GM Financial determined the subprime loan portfolio represented approximately 16 percent of its earning assets, down from 19 percent when 2015 closed.
“We expect that subprime mix to continue declining with growth in our commercial, lease and prime portfolios in North America,” GM Financial executive vice president and chief financial officer Chris Choate said.
On the leasing side, GM Financial mentioned Q2 operating lease originations climbed year-over-year to $6.5 billion, up from $5.6 billion in the year-ago quarter. During Q1, the finance company produced $6.8 billion in operating leases.
Through six months, GM Financial posted $13.3 billion in operating lease originations, up from $8.6 billion a year earlier.
All of that activity helped GM Financial to generate $189 million in net income, a $3 million rise year-over-year.
The company’s net income at the 2016 midpoint came in at $353 million, up $17 million compared to the same juncture a year ago.
“GM Financial again reported strong operating results, earning $266 million in pretax income in our second quarter. Importantly, we continued expansion of our captive presence with GM customers and dealers,” Berce said.
The company added that the outstanding balance of commercial finance receivables was $9.4 billion when the second quarter closed, up from $9.2 billion a quarter earlier and $7.8 billion a year earlier.
As far as how that consumer paper is performing, GM Financial noted retail finance receivables 31 to 60 days delinquent constituted 3.4 percent of the portfolio as of June 30, down from 3.6 percent a year earlier. Accounts more than 60 days delinquent represented 1.5 percent of the portfolio, down from 1.6 percent when last year’s Q2 finished.
The company indicated its annualized net charge-offs were 1.7 percent of average retail finance receivables for the second quarter, up from 1.6 percent for the quarter a year earlier. For the first six months of 2016, annualized retail net charge-offs stood at 1.8 percent, down from 1.7 percent a year ago.
“The credit performance we're seeing does reflect the portfolio mix shift to prime,” Berce said. “In fact, the subprime portion of our portfolio, defined again as FICO scores less than 620, is now 55 percent of the North America portfolio compared to 71 percent a year ago.
“Recovery rates for the quarter were 55 percent, slightly higher seasonally than the March quarter, but down from 59 percent a year ago. We do expect recovery rates to continue to trend down throughout 2016,” he continued.
GM Financial added its total available liquidity stood at $15.4 billion as of June 30, consisting of $3.1 billion of cash and cash equivalents, $10.7 billion of borrowing capacity on unpledged eligible assets, $0.6 billion of borrowing capacity on committed unsecured lines of credit and $1.0 billion of borrowing capacity on a junior subordinated revolving credit facility from GM.
