The latest TransUnion Industry Insights Report found that 80 million consumers held a vehicle lease or retail installment contract as of the close of 2016. Analysts determined the figure marked the highest level TransUnion has observed since at least the third quarter of 2009, as approximately 4.3 million additional consumers last year took out what can be clearly classified as vehicle financing.
However, SubPrime Auto Finance News asked TransUnion’s Jason Laky to consider whether the funds consumers are using to acquire a vehicle are coming from other sources such as personal loans, which reached a new milestone at the conclusion of 2016 with total balances topping $100 billion for the first time ever.
Laky is senior vice president and automotive and consumer lending business leader for TransUnion, so his jurisdiction is both the auto finance and personal loan markets. Laky approached this difficult question by first explaining the primary reasons personal loans exist.
“For the prime or better consumers, the biggest use of the personal loan but not the only one is debt consolidation,” Laky said. “A lot of lenders are promoting to use a personal loan to pay off credit cards or other high interest loans you have at a lower interest rate and a predictable monthly payment that an installment gives.
“The second use that’s more prevalent in the non-prime and subprime areas where consumers don’t have as much financial security, those loans tend to be used for more immediate needs, whether it’s large repairs or a bridge loan for some education, something like that. The loan sizes are a little smaller and the use tends to be much more utilitarian,” he continued.
Laky explained that TransUnion’s data cannot shed specific light on what purpose consumers use personal loans; if they are in fact the monies used by a consumer to make the necessary down payment for an auto finance company to complete underwriting of the contract. But Laky also acknowledged there has been rumblings of this practice happening more often.
“One thing we’ve certainly started to pay attention to is we have heard it mentioned out the marketplace this idea of using the personal loan to make the down payment or to cover negative equity,” Laky said. “We don’t see in the TransUnion credit file the actual use of the personal loan. We don’t know where the funds go, but it’s certainly a possibility.
“We’ve heard a couple of lenders mention that it may be going on out there. It’s certainly something we may go ahead and look at studying,” he continued. “From a lender’s perspective, I’m sure that whenever you have a consumer that takes out a personal loan in order to cover some gap in the auto financing, it’s probably a flag that’s a higher risk consumer than maybe you think.”
The amount of risk finance companies, banks and credit unions are already holding in the auto finance market still is growing significantly. TransUnion reported total auto financing balances climbed to $1.11 trillion at the close of 2016. Analysts indicated the total balance grew 8.3 percent during 2016, slower than the average growth rate of 11.0 percent between 2013 and 2015.
The average vehicle financing balance per consumer also rose slightly to $18,391, up from $18,004 in Q4 2015.
“For the second consecutive quarter, total auto balances had a year-over-year growth rate below 10 percent, reflecting the slower growth that we are seeing in new car sales,” Laky said in a news release from TransUnion.
“In the third quarter, auto originations declined year-over-year for the first time in six years,” he continued. “Prime plus and super prime originations continued to grow in Q3 2016, indicating lenders are beginning to shift their focus away from the riskiest segments, where we’ve seen strong competition among lenders that has put pressure on risk adjusted margins.”
TransUnion determined that originations declined 0.8 percent to 7.46 million in Q3 2016, down from 7.52 million in Q3 2015. Subprime originations experienced the largest decline (down by 3.2 percent), and prime plus (up 1.8 percent) and super prime (up 1.7 percent) originations grew in the third quarter of 2016.
Analysts went on to mention the auto delinquency rate reached 1.44 percent to close 2016, a 13.4-percent increase from 1.27 percent rate in Q4 2015. They added auto delinquency is at its highest level since the Q4 2009 reading of 1.59 percent.
More details about personal loans
As mentioned previously, TransUnion’s Industry Insights Report confirmed personal loans reached a new milestone at the end of last year with total balances topping $100 billion for the first time ever. While younger consumers have played a major role in the growth of these lending products, analysts found that, contrary to popular belief, mature borrowers are leading the charge on these loans.
TransUnion added that total personal loan balances grew $14 billion between year-end 2015 and year-end 2016, reaching $102 billion. The number of consumers with a personal loan continued to climb steadily and ended 2016 at the highest level since at least Q3 2009. In Q4 2016, 15.82 million consumers had a personal loan.
TransUnion noted baby boomers comprised 32.8 percent of all consumers with a personal loan when 2016 ended, followed by Gen X (31.6 percent) and millennials (26.6 percent). In Q4 2013, millennials were just 23.5 percent of personal loan users, but their share has grown over the past three years to reach 26.6 percent at the end of 2016.
“There is a perception that personal loan growth has been driven by younger consumers, but our data clearly indicate that these loans are appealing to older borrowers,” Laky said in the same release. “We believe some of this growth is occurring because interest rates may be lower than other type of loans for certain baby boomer segments.”
Analysts went on to mention the personal loan delinquency rate was 3.83 percent in Q4 2016, the highest Q4 reading since Q4 2013 and up from 3.62 percent in Q4 2015. Originations, viewed one quarter in arrears, declined for the second consecutive quarter. Originations dropped 5.7% from 3.75 million in Q3 2015 to 3.54 million in Q3 2016.
“We’ve observed a decline in non-prime lending that we attribute to mid-year FinTech funding challenges and regulatory uncertainty in advance of the election,” Laky said. “We believe that the personal loan market is stabilizing, and have seen balances grow across risk tiers through the end of the year.”
Reasons that S&P Global Ratings analysts expected to see when comparing December U.S. auto loan ABS performance against the previous month surfaced again, according the firm’s latest report released on Wednesday.
Analysts found that collateral performance in the U.S. prime and subprime auto loan asset-backed securities (ABS) sectors for December were mixed compared with November.
“As expected, seasonal factors caused losses and delinquencies to rise month-over-month, but recoveries did improve slightly,” analysts said. “On a year-over-year basis, both sectors continued to demonstrate weakness with delinquencies and losses increasing and recoveries declining for the prime sector.
However, the modified subprime composite, which excludes large deep subprime pools, reported year-over-year stability in delinquencies and recoveries,” they continued.
According to a report published by S&P Global Ratings, prime net losses increased month-over-month to 0.76 percent in December from 0.70 percent in November. The report mentioned the previous year’s reading stood at 0.58 percent.
In fact, the firm pointed out that December’s loss rate of 0.76 percent is the highest since January 2011.
“We attribute most of the year-over-year uptick in losses to a couple of regional banks whose auto loan ABS transactions we began rating in 2014 becoming a slightly larger share of the prime index,” S&P Global Ratings analysts said.
S&P Global Ratings credit analyst Amy Martin elaborated about that point further.
“Also, not only do these issuers have slightly higher losses than the more-established prime securitizers, but their 2015 securitizations are experiencing weaker performance than their 2014 deals,” Martin said.
The report showed the subprime net loss rate increased to 8.52 percent in December from 8.44 percent in November and 7.76 percent in December 2015. Analysts explained this 76-basis-point year-over-year increase in losses is due to lower recoveries and deep subprime finance companies representing a greater share of the subprime index.
Therefore, as a supplement to its subprime index, S&P Global Ratings reiterated that the firm created the modified subprime index, which excludes certain high-loss deep subprime issuers — DRIVE, ACA and Exeter Automobile Receivables Trust.
Looking at that adjusted view, the report indicated the modified subprime net loss rate increased only 26 basis points year-over-year to 7.00 percent in December, up from 6.74 percent in December 2015.
Analysts went on to note that prime recoveries in December climbed on a monthly basis to 51.97 percent from 50.04 percent in November but softened from 53.56 percent in December 2015.
Subprime recoveries moved higher month-over-month to 39.94 percent in December from 33.97 percent in November and 39.66 percent in December 2015.
“November’s low recovery rate was due to a large deal reporting a low recovery rate in its first month,” analysts said.
The report also provided an update on average collateral trends in prime and subprime auto loan ABS. S&P Global Ratings observed that prime securitizations in 2016 had the highest percentage of used vehicles at 34 percent since it started tracking this metric.
Repossession and skip-tracing services provider Loss Prevention Services (LPS) announced on Thursday that the company has chosen MBSi Corp. as its assignment and compliance management solution.
Throughout the year, LPS said it will transition its assignment management platform to Recovery Connect (RC), MBSi’s next generation assignment platform.
In addition to adopting Recovery Connect, LPS also has chosen to adopt MBSi’s Compliance Made Easy (CME) suite of compliance platforms, as well as MBSi’s full vendor compliance management services.
The company explained this decision allows LPS to integrate assignment and compliance management into one system so clients can gain added transparency and analytics for improved results.
LPS said it strives to maintain the highest compliance standards in the industry, both internally and with its national vendor base. With this announcement, the company added that goal has been taken to a new level.
LPS highlighted the combination of RCM and CME not only provides line-of-sight into the compliance status of each agent, but also ties compliance standards down to the assignment level to ensure that vetted, trained, and qualified agents service each assignment.
In addition to improving compliance for its vendors, LPS will now be able to provide its clients with real-time transparency and data analytics. With RCM Recovery data, condition reports and client updates will be instantly available to LPS clients, providing the critical information and analytics necessary to make timely decisions regarding collateral.
“We have partnered with the MBSi team and their RCM & CME products to move Loss Prevention Services and the industry forward,” said David Cowlbeck, president and chief executive officer of LPS who noted that he has spent more than 20 years in the industry using every system, including proprietary internal systems.
“MBSi’s progressive solutions facilitate our vision of utilizing the latest technology to make the collateral recovery process more productive for our clients and vendors,” Cowlbeck said. “We look forward to continuing our quest to be a consultative resource to lenders and the agencies we work with to provide excellence in service, compliance and growth.”
Cort DeHart, manager of corporate strategy for MBSi, elaborated more about the background between the two companies.
“I have had the good fortune to work with David for many years, and am very excited to be able to offer these products to LPS,” DeHart said.
“David and his team at LPS understand and appreciate the vital role that technology can play in running a recovery business,” DeHart went on to say. “We look forward to providing LPS with the right set of tools to do the job they do best.”
In addition to adopting the MBSi solutions, LPS also has chosen to increase training and education for all of its internal employees and vendor network. LPS picked Recovery Industry Services Co. (RISC).
RISC offers CARS (Certified Asset Recovery Specialist) training program that can allow LPS to provide its agents with continual education on the ever-changing compliance requirements of the vehicle repossession industry.
Because MBSi is fully integrated with RISC, LPS said it will be able to verify CARS certification in real time on every assignment.
The auto finance default rate reported by S&P Dow Jones Indices and Experian for December fell in line at nearly the same reading as what analysts reported at the close of each of the previous two years.
Data through December included in the S&P/Experian Consumer Credit Default Indices showed the auto rate at 1.03 percent, which was 3 basis points higher than the previous month.
At the close of 2015, the auto default rate stood at 1.04 percent. When 2014 finished, the reading was 1.02 percent.
For reference, the auto loan default rate at the close of 2009 when the nation still was gripped in the Great Recession was 2.67 percent, which was the third-highest reading ever recorded by S&P and Experian going back 10 years.
Turning back to the latest data, the nation’s composite rate — a comprehensive measure of changes in consumer credit defaults — ticked up 2 basis points in December compared to the previous month to land at 0.89 percent.
The bank card default rate registered in at 2.95 percent, up 14 basis points from November.
The first mortgage default rate came in at 0.71 percent, edging 1 basis point higher versus November.
Analysts noted four of the five major cities saw their default rates increase in the month of December.
Miami posted the largest increase, reporting in at 1.53 percent, up nine basis points from November.
Chicago and Los Angeles both reported two basis point increases from November at 0.98 percent and 0.72 percent, respectively, in December.
Dallas saw its default rate increase, up 1 basis point to 0.67 percent.
New York was the only city reporting a default rate decrease of 4 basis points from November to settle at 0.87 percent.
S&P and Experian found that Miami’s default rate of 1.53 percent in December set a 30-month high, unseen since June 2014.
Upon further analysis of Miami's default rate composition, Miami's first mortgage default rate in December is considerably higher than the South’s first mortgage default rate and the national first mortgage default rate. David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, explained that it’s worth noting that the South’s first mortgage default rate is higher than the national default rate.
“National average consumer credit default rates continue at low levels in an improving economy” Blitzer said. “Auto and light truck sales were up each month since August as automobile consumer credit defaults held steady.
“Bank card sector defaults ticked up slightly in the last two months, reversing five months of flat to down reports,” he continued. “This may reflect rising retail since the spring and larger consumer credit extensions in October and November.
“Mortgage default patterns are also stable,” Blizter went on say. “This favorable picture is likely to be tested by rising interest rates; home mortgage rates rose by three-quarters of 1 percent since Election Day.”
Blitzer closed by circling back to the geographic segment of the latest data.
“Consumer credit default rates and economic conditions vary across the country,” he said. “Among the five cities reported on each month, Miami has a larger and increasing first mortgage foreclosure rate.
“Home prices in Miami, as in most cities, have recovered from the financial crisis. However, Miami home prices, as measured by the S&P CoreLogic Case-Shiller Home Price Index, as of October 2016 were 22 percent below their December 2006 peak, while nationally, home prices have recently surpassed the pre-crisis peak set in July 2006,” Blitzer continued.
“Florida also lags national trends in other measures — it is among the five states with the most foreclosures in 2016,” he added.
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
With the staff at SubPrime Auto Finance News fresh for 2017, we gathered up some noteworthy announcements that arrived while we celebrated the close of a great year with family and friends.
Among some of the highlights that came during the past few days included an update on defaults, an acquisition by RouteOne and TransUnion settling with the Consumer Financial Protection Bureau in an agreement set to cost the credit bureau nearly $20 million.
First, here is the latest default information stemming out of the S&P/Experian Consumer Credit Default Indices generated by S&P Dow Jones Indices and Experian.
Data through November indicated auto financing defaults recorded a 1.00 percent default rate in November, down 8 basis points from October.
The auto finance default rate hasn’t been that low since last July when S&P and Experian pegged it at 0.93 percent.
Analysts determined the latest composite rate — a comprehensive measure of changes in consumer credit defaults — remained unchanged on a sequential basis as both the October and November readings stood at 0.87 percent.
First mortgages also came in flat in November, holding at 0.70 percent. S&P and Experian added the bank card default rate rose 5 basis points in November compared with from the previous month to settle at 2.81 percent.
S&P and Experian noticed three of the five major cities saw their default rates decrease in the month of November.
Dallas posted the largest decrease, reporting in at 0.66 percent, which was down 10 basis points from October.
New York saw its default rate decrease by 2 basis points to 0.91 percent in November, and Chicago reported a decrease to 0.96 percent, down 1 basis point from the previous month.
Los Angeles watched its default rate increase, up 8 basis points to 0.70 percent.
Miami's default rate spiked to 1.44 percent, up 38 basis points in November and setting a 12 month high. The default rate increase of 38 basis points is unmatched in Miami since January 2013.
David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. explained a historical review of Miami's basis points movement in November shows increases since 2005, suggesting a seasonal up-trend in defaults for the month of November.
“Recent data paint a picture of a strong economy, and lower consumer credit defaults reflect this,” Blitzer said. “Default rates are modestly lower than a year ago, even as continued strength in home sales, auto sales and retail sales are supporting expanded use of consumer credit.
“Money market rates rose after Election Day, the Fed raised the target range for the Fed funds rate (in December) and has indicated that further increases lie ahead. The favorable default trends are likely to be tested in 2017 as interest rates rise,” he continued.
Among the five cities regularly tracked in this report, Blitzer reiterated Miami has consistently shown the highest default rate.
“One factor may be that home prices rising in Miami and mortgages are the largest portion of the city composite rate,” he said. “While Dallas home prices are rising faster than Miami, Dallas prices fell far less in the housing bust and have rebounded to new all-time highs.
“Miami home prices remain more than 20 percent below the highs set in 2006,” Blitzer went on to say.
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
TransUnion’s CFPB settlement tops $15M
TransUnion said in a filing with the Securities and Exchange Commission that the credit bureau agreed to settle with the CFPB stemming from a civil investigative demand (CID) the regulator delivered back on Sept. 14, 2015.
TransUnion explained in the filing posted on Dec. 29 that that the CID was focused on common industry practices relating to the advertising, marketing and sale of consumer reports, credit scores or credit monitoring products to consumers by the company’s consumer interactive segment.
In connection with the agreed settlement, TransUnion indicated that it has executed and delivered a “stipulation and consent to the issuance of a consent order,” pursuant to which TransUnion will accept the issuance of a consent order by the CFPB requiring TransUnion to:
• Implement certain agreed practice changes in the way TransUnion advertises, markets and sells products and services offered directly to consumers, including more robust disclosures regarding the nature of the credit score being provided as well as confirming consumer consent if the product or service is being sold through the use of a negative option feature (such as a trial period becomes a recurring paid subscription unless the consumer affirmatively cancels their registration).
• Develop and submit to the CFPB for approval a comprehensive compliance plan detailing the steps for addressing each action required by the terms of the consent order and specific time frames and deadlines for implementation.
TransUnion acknowledged that it will incur a one-time charge of approximately $19.4 million in the fourth quarter of 2016, consisting of the following:
— Approximately $13.9 million for redress to eligible consumers.
— A civil money penalty to be paid to the CFPB in the amount of $3.0 million.
— Current estimate of $2.5 million for additional administrative, legal and compliance costs we will incur in connection with the settlement.
“The CFPB is expected to recommend the aforementioned settlement to the director for final approval,” TransUnion said in the filing signed by senior vice president Mick Forde about the agreement reached on Dec. 22.
RouteOne acquires MaximTrak
In a deal effective as of Dec. 20, RouteOne acquired the assets of MaximTrak and its related business in a move that means MaximTrak will operate through its wholly-owned subsidiary RouteOne Holdings.
The company insisted the acquisition will bring together two long-time partners to deliver a seamless vehicle F&I sales process.
Executives explained the vehicle purchase process has undergone fundamental changes in recent years, and will continue to do so with increasingly rapid speed. Consumers and dealers alike expect consistency and seamless transition across all physical and digital sales channels.
As a result, both RouteOne and MaximTrak have been pursuing aggressive strategies to innovate the sales process on behalf of their respective customers. RouteOne and MaximTrak’s complementary strategies have now come together to deliver on the vision of a complete sales and F&I solution that meets OEM, dealer and consumer needs — any time, any place, and on any device.
While reiterating MaximTrak will be operated by RouteOne Holdings, a wholly-owned subsidiary of RouteOne, officials mentioned MaximTrak leadership and team members remain in place and continue to operate from the MaximTrak offices in Pennsylvania.
RouteOne and MaximTrak employ approximately 400 people with offices in Michigan, Pennsylvania and Canada, as well as local staff in major markets. Directly and through partnerships, RouteOne and MaximTrak have customers in the U.S., Canada, Puerto Rico and Mexico.
“RouteOne has had a long and successful relationship with MaximTrak, and we share very similar cultures, values and DNA,” said RouteOne chief executive officer Justin Oesterle. “We are excited to have made this acquisition happen as we believe it creates significant value for all our customers at the OEM, finance source, provider, and dealer levels.
“It also creates strategic and economic value for RouteOne’s owners: Ally, Ford Credit, TD and Toyota Financial, all of whom supported the investment,” Oesterle continued.
“I, and the entire RouteOne team welcome MaximTrak to the family. We look forward to doing great things together for the industry,” he went on to say.
The companies added RouteOne and MaximTrak product integration began prior to the acquisition and will now be further developed and strengthened on an expedited basis.
MaximTrak was founded in 2003 by the Maxim family.
“The entire MaximTrak team is excited and energized by the growth opportunities that this transaction represents for our customers, employees and key stakeholders. Like RouteOne, MaximTrak is an established, innovative leader in the F&I space,” MaximTrak president Jim Maxim Jr. said.
“Where RouteOne excels in the finance elements of F&I, we excel in the “I” side of the equation and in developing technologies that optimize the dealership process and ultimately dealer profitability through F&I product sales,” Maxim continued. “Together, with our combined scale, talents and product line-ups, we will be able to provide a complete digital workflow from initial customer contact and first pencil to finance, aftermarket and eContracting across online, mobile and in-store channels.
“With that, our emphasis will be on helping our customers deliver a buying experience they control and one that consumers actually want,” he added.
Casual observers might panic when they see TransUnion’s expectations for 2016 to close with a 7.0 percent year-over-year increase in the 60-day delinquency rate along with that reading set to approach the highest level in eight years by the time 2017 finishes.
However, TransUnion’s Jason Laky is confident that finance companies and close watchers of the auto finance market will examine TransUnion’s 2017 consumer credit market forecast that was released on Wednesday and not only won’t panic, but will use the projections to reinforce portfolio examinations.
“Obviously when you start to see delinquencies go up a little bit, it’s good to be concerned,” Laky told SubPrime Auto Finance News during a phone conversation ahead of the forecast release. “It’s good for every lender to take a look at their portfolio and see if the delinquencies they’re experiencing are in line with expectations.
“Generally, we’ve said for the past few years that lenders are continuing to buy deeper and make more subprime loans,” continued the senior vice president and automotive and consumer lending business leader for TransUnion. “You would expect that as lenders make more subprime loans their portfolios and subsequently the entire industry’s portfolio would experience higher delinquencies.
“It’s a little harder for us to see this part of it but hopefully lenders are making up for it through higher interest rates or higher payments to overcome any delinquencies their getting,” Laky went on to say.
TransUnion indicated that the auto delinquency rate is projected to close 2017 at 1.40 percent, the highest level since 1.59 percent that analysts reported at the end of 2009. TransUnion expects the auto delinquency rate will reach 1.36 percent in Q4 of this year, a 7.0-percent year-over-year increase from 1.27 percent registered in Q4 2015.
“Greater access to auto loans for non-prime consumers suggests that lenders have made deliberate decisions to accept more risk from non-prime loans in their portfolio,” Laky said in a news release that accompanied the TransUnion forecast. “An increase in delinquency is the natural consequence of that strategy.
“If lenders are compensated for the additional risk in the portfolio, a modest increase in delinquency should not disrupt the auto finance market. We do not expect to see a surge in auto delinquency unless there is an economic shock,” he continued.
During our conversation, Laky mentioned that as of the third quarter, TransUnion’s data showed just a 12-basis-point rise in the rates for 60-day delinquencies into the 90-day rate when finance companies move into the charge-off and recovery processes. He explained why a sharp jump in that metric reinforces the general assessment of TransUnion’s forecast.
“One of the things I think lenders learned through the recession is how to better pick who they lend to from a subprime perspective. Lenders have gotten much better at using data and analytics both at origination and through servicing and collections,” Laky said.
“As a result, the most sophisticated lenders can make decisions at origination that flow through into possibly higher delinquencies but then not all the way through to higher charge-offs. They can assess those consumers that it may be they get a little bit late but then they’re likely to catch up,” he continued.
“The strength in the economy certainly helps prevent these delinquencies from rolling through all the way to charge-offs,” Laky went on to say. “When we have a good economy, many of these borrowers, including subprime borrowers, are employed and getting paid on a regular basis. Even though they may have trouble managing their debts on occasion, they still need their cars to get to work. Even if you do get behind a little bit, you do find ways to make things work out to get caught back up on your payments so you’re continuing to get to your jobs and the things you need to support whatever lifestyle you have.”
In Q3 of this year — the latest data TransUnion has available — there were 74.8 million active auto finance accounts. Non-prime customers — individuals with a VantageScore 3.0 of 660 and below — grew 7.5 percent to 25.1 million auto accounts in Q3, up from 23.3 million in Q3 of 2015.
“We’re hitting our stride in terms of employment and wage gains in the economy. We’re adding 100,000 to 200,000 jobs per month and wage gains are at 2 percent to 3 percent per year. Those things are really good. It’s really good for subprime auto lending,” Laky said.
“Even though (new-vehicle sales) might slow down, there’s still a good market for used and a lot of folks who are coming back into the market who are now employed after being in a period of unemployment or shifting jobs into something that’s right for them, they may tend toward used or maybe non-prime or subprime credit. I think there’s still room for growth in subprime,” he went on to say.
As the annual growth rate of new vehicle sales is expected to taper and interest rates are expected to rise, TransUnion expects vehicle sales to still grow, but at a lower rate than experienced in recent years. Analysts added that growth in average auto balance per consumer is expected to slow to levels last observed in 2011.
The average balance is projected to grow at a 2.4 percent rate between year-ends 2015 and 2016, compared to the 3.1 percent growth rate between Q4 2014 and Q4 2015 and 4.0 percent growth between Q4 2013 and Q4 2014. Average auto balances are expected to reach $18,435 in Q4 of this year and $18,840 in Q4 of next year.
“Average auto balance growth began to slow at the beginning of 2016, and we expect this more moderate growth to continue through 2017 if wage growth continues,” Laky said.
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.
As Fitch Ratings shared its latest update on the auto ABS market, analysts at the Federal Reserve Bank of New York indicated 3.6 percent of auto financing contracts stood at 90 or more days delinquent at the end of September.
Meanwhile, total outstanding auto balances jumped by $32 billion year-over-year during the third quarter.
What’s making these New York Fed observers uneasy, however, is how they’ve determined the overall delinquency rate “masks diverging performance trends” across the two types of finance sources. According to these experts the primary difference is operations that book lots of subprime paper and ones that often do not.
In a blog post titled, “Subprime Auto Debt Grows Despite Rising Delinquencies,” analysts Andrew Haughwout, Donghoon Lee, Joelle Scally, and Wilbert van der Klauuw wrote, “It’s worth noting that the majority of auto loans are still performing well — it’s the subprime loans that heavily influence the delinquency rates. Consequently, auto finance companies that specialize in subprime lending, as well as some banks with higher subprime exposure are likely to have experienced declining performance in their auto loan portfolios.”
The New York Fed contingent explained the 90-plus day delinquency rate for finance company contracts worsened by a full percentage point during the past four quarters, while delinquency rates for bank and credit union auto paper have improved slightly.
“An even sharper divergence appears in the new flow into delinquency for loans broken out by the borrower’s credit score at origination,” these analysts said. “The worsening in the delinquency rate of subprime auto loans is pronounced, with a notable increase during the past few years.”
Haughwout, Lee, Scally and van der Klauuw closed their post with this conclusion.
“The data suggest some notable deterioration in the performance of subprime auto loans. This translates into a large number of households, with roughly 6 million individuals at least 90 days late on their auto loan payments,” they wrote.
“Even though the balances of subprime loans are somewhat smaller on average, the increased level of distress associated with subprime loan delinquencies is of significant concern, and likely to have ongoing consequences for affected households,” they added.
Fitch: Losses inch higher for U.S. subprime auto ABS
Losses fell for U.S. prime auto ABS while subprime losses continued their slow climb, according to the latest monthly index results from Fitch Ratings.
Analysts found prime auto loan ABS annualized net losses declined on a monthly basis in October, while subprime losses rose 32 basis points to 9.61 percent. Fitch pointed out subprime annualized net losses remain within levels recorded earlier this year.
Fitch reported subprime annualized net losses crept up 3 percent month-over-month in October and were 19.4 percent higher on an annual basis. The 9.61 percent rate recorded in October was the highest since 9.74 percent spotted in February.
Despite the small increase in losses during October, analysts noticed the pace of monthly increases slowed versus the prior four months. Subprime annualized net losses so far in 2016 have ranged from a low of 6.32 percent in June to a high of 9.74 percent in February, and continue to trend higher this year consistent with prime index trends.
Speaking of prime, Fitch indicated annualized net losses in that sector declined to 0.68 percent in October, down 2 basis points versus the prior month but were still 27 percent higher versus October 2015.
In terms of delinquency, Fitch said prime 60-day delinquencies declined to 0.68 percent in October, improving 2.7 percent month-over-month. However, the rate spotted in October was 27 percent higher year-over-year.
In subprime, delinquencies stood at 5.07 percent in October, virtually unchanged from 5.05 percent recorded in September and 11 percent higher on a yearly basis.
When assessing the broad impact, Fitch mentioned wholesale vehicle values continued to decline over the past month.
“This is translating to lower recoveries for auto ABS as auto values move off peak rates recorded earlier this year,” analysts said while referencing that the Manheim Used Vehicle Value index declined to 126 in October, down from 126.9 in September to the lowest level since June.
“The index is still at solid levels overall in 2016, and recent declines have been minimal,” Fitch added.
Analysts went on to say, “Most vehicle segments are experiencing lower values with rising depreciation, including trucks and SUVs which have been very strong in 2016 but come down off recent highs. The fall months are typically the weakest period of the year as dealers look to clear their lots to make way for the new incoming 2017 models.”
Fitch closed by touching on what the latest data might do to its ratings.
“The performance declines still have no adverse effect on ratings performance in 2016,” analysts said. “Fitch upgraded 67 classes of subordinate notes in 2016 through late November, down slightly from 77 last year.
“Looking ahead, Fitch has a positive rating outlook for the prime sector and stable outlook for subprime ratings despite recent loss increases,” analysts added.
Fitch’s auto ABS indices total $97 billion of outstanding securitized collateral, of which 59 percent is prime and the remaining 41 percent is subprime collateral.
To all the auto financing executives and experts who came to Las Vegas for Used Car Week, we thank you for making this year’s SubPrime Forum and Re3 Conference the most engaging and successful industry gatherings Cherokee Media Group has hosted.
For segments of the auto financing community that couldn’t join us, here are some of the many highlights from the events:
—SubPrime Forum presenting sponsor Digital Recognition Network kicked off the discussion with an insightful and thought-provoking presentation by chief executive officer Chris Metaxas, who explained how critical location data can be not only during the recovery process, but also to enhance underwriting. Imagine knowing if the applicant actually spends significant time near the home and work addresses noted in the paperwork. Mitigating risk on the front end can help reduce the risk on the back end, according to DRN’s top executive.
—Experian Automotive’s Melinda Zabritski returned to the SubPrime Forum to share third-quarter data that was finalized just before she traveled to Las Vegas. Zabritski gave a rundown of the Q3 data that Experian will widely distribute soon in a presentation you can watch here.
—Whether it was during a presentation or networking times, the result of this year’s presidential election percolated throughout the session ballrooms and Used Car Week exhibit hall. Chris Stinebert, who oversees the American Financial Services Association, gave a wide-ranging recap of what’s ongoing within the Capitol Beltway. Stinebert touched on how regulations associated with auto financing, healthcare, taxes and more are likely to be modified when President Trump enters the White House. A portion of what Stinebert shared can be viewed here.
—And speaking of regulations, another cohort of auto finance executives and managers completed the National Automotive Finance Association’s Consumer Credit Compliance Certification Program in Las Vegas. More than 90 individuals finished the in-depth training offered by the NAF Association and orchestrated by Hudson Cook partners Patty Covington and Eric Johnson. It’s a program I’m looking to complete, too, as I detailed previously here and here. Throughout both the SubPrime Forum, which was put together in collaboration with the NAF Association, as well as the Re3 Conference sponsored by MBSi Corp., the importance of having trained employees and compliant service providers kept being repeated often by experts and other leaders in the field. The NAF Association is hosting another opening session of the certification program on Feb. 2-3. More details can be found at nafassociation.com.
—Cort DeHart of MBSi led one of the highest-attended sessions within the auto finance space. The Re3 Conference panel discussion focused on improving recoveries took on even higher importance as delinquencies and defaults tick higher as regulatory compliance demands intensify at an even greater rate.
—Along with the sessions already available online that I previously mentioned, Auto Remarketing senior editor Joe Overby also hosted several sessions that might be of interest to auto finance executives, too. Joe connected with Steve Kapusta of SmartAuction about how the wholesale market continues to evolve. Furthermore, our friends at the National Independent Automobile Dealers Association — who also played a huge role in making Used Car Week successful — recorded select sessions throughout Used Car Week, and those videos will be available online soon.
—You also might be able to see who from your firm — or the competition — traveled to Used Car Week via the wonderful photo gallery assembled by Cherokee Media Group photographer Jonathan Fredin, whose collection of images can be viewed here.
In summation, to the all of the attendees of Used Car Week, a sincere thank you for carving out time on your busy calendars to travel to Las Vegas — in some cases for the fifth, sixth or umpteenth time in 2016. We hope you found the content to be informative and useful, the resort to be comfortable and enjoyable and the networking time to be fruitful and productive. Mark your calendars now as the next Used Car Week returns to southern California; this time at the La Quinta Resort & Club, a Waldof Astoria Resort, in La Quinta, Calif., on Nov. 13-17, 2017.
Happy Thanksgiving to you and your family and friends!
Nick Zulovich is senior editor of SubPrime Auto Finance News and BHPH Report and can be reached at nzulovich@cherokeemediagroup.com.
