Charlie Wise acknowledged banks, credit unions and finance companies kept coming to him and his TransUnion colleagues asking about the risks associated with consumers — particularly millennials — holding student loan debt.
The volume of inquiries prompted TransUnion to examine the issue, and the project findings are “good news” for the auto finance market, according to Wise.
Despite an unprecedented rise in student-loan balances over the past decade, a new TransUnion study found that student loan obligations have not inhibited younger consumers’ ability to access and repay other consumer credit categories such as auto loans and mortgages when compared to their peers without student loans. Wise noted the conclusions are contrary to the popular belief that burgeoning student debt is hampering access to credit for young adults.
“This is good news, particularly for auto lenders,” Wise told SubPrime Auto Finance News in advance of the study release on Wednesday.
“Not only should they be not necessarily scared of millennials with student loans, but this is actually a credit hungry group. This people are more credit active than those without student loans. All things being equal, they actually perform better because there have lower delinquency rates,” continued Wise, co-author of the study and vice president in TransUnion’s Innovative Solutions Group.
“For those looking to grow and looking to particularly grow with a millennial population and a population, this is really good news. It allows you to identify and potentially go after that student loan cohort rather than worry or be concerned about lending to them,” Wise went on to say.
TransUnion determined consumers ages 18 to 29 with a student loan in repayment generally are able to gain access to new loans and perform as well or better on those new loans as similarly aged consumers without student loans. Furthermore, the study found that in only three to six years, student-loan consumers in their 20s have been observed to pass similarly aged consumers without a student loan in overall loan participation rates on mortgages, auto loans and credit cards.
The results from the study were revealed at TransUnion’s Financial Services Summit in Chicago, which included more than 275 senior-level financial services executives from across the globe.
“Going to school impacts young consumers' access to credit; while in school, students may be less likely to have a job and generate the income necessary for loan approval. However, most catch up once they leave school — and their ability to catch up has not changed over the past decade,” said Steve Chaouki, executive vice president and the head of TransUnion’s financial services business unit.
“Our study demonstrates that consumers in their 20s with student loans in repayment — that is, once they finish school — are in fact able to access credit at levels similar to or better than their peers who do not have student loans,” Chaouki added.
The study found that in the years after they start repaying student loans, those consumers have similar new mortgage activity to, and higher new auto and credit card open rates than, their peers without student debt.
Rapid Rise in Student Loans
Wise admitted the study’s findings may come as a surprise because of the rapid rise in student loan balances.
According to TransUnion data, the percentage of consumers ages 20 to 29 with a student loan has skyrocketed from 32 percent in 2005 to 52 percentat the end of 2014. In the last five years alone, student loan balances have increased from $589 billion in Q1 2010 to $1.1 trillion in Q1 2015.
The share of student loans in relation to other products such as mortgages, credit cards and auto loans as part of a the overall loan “wallet” for consumers ages 20-29 has also grown dramatically — increasing from 12.9 percent in 2005 to 36.8 percent in 2014, an increase of 186 percent.
“We wanted to do a study to answer that question because everyone seemed to have that opinion that student loans really are a burden on younger consumers,” Wise said. “If the answer is they’re right, it would be good to confirm that. If it’s not right, it would be good to cut through those misconceptions.”
Student Loan Study Background
TransUnion observed, on a depersonalized basis, borrowers with student loans who entered repayment from three different timeframes: Q4 2005, Q4 2009 and Q4 2012. Student loans generally enter repayment status six months after students graduate or otherwise end their studies.
In other words, students graduating in May or June usually begin to make payments on their student loans in the fourth quarter of the year in which they graduate.
The study looked at the performance of consumers ages 18 to 29 on mortgages, credit cards and auto loans in the 24 months following the beginning of their student loan repayment. These consumers were compared to control groups of similarly aged persons who had no student loans during those same time periods. The study also controlled for differences in credit-score distributions between the student loan and control groups, as well as age distribution.
“We looked at three distinct timeframes to get a better sense of the student loan picture,” Wise said. “We believe most people would agree that 2005 was a ‘normal’ year, in that the economy was strong and credit was readily available to younger borrowers.
“In other words, it is fair to use 2005 as a baseline for comparison. Q4 2009 was in the immediate aftermath of the financial crisis, while Q4 2012 represented the most recent data available for observing trends over an ensuing two years,” he continued.
Delinquencies Lower, Participation Higher
The results from the study showed that the changing economy and shifts in the ability to access consumer credit greatly impacted younger consumers overall, both those with a student loan and those without. The percentage of consumers ages 18 to 29 with credit products such as mortgages, credit card and auto loans dropped significantly between 2005 and 2012.
However, this drop impacted both consumers with student loans and those without similarly; the presence of a student loan in repayment did not appear to disproportionately impact consumers with student loans. Other macroeconomic factors, such as rising unemployment rates for younger consumers and tightening lending standards, were likely far larger contributors to decreased consumer credit originations and participation by all consumers in this age group.
“Participation rates for mortgages, credit cards and auto loans dropped significantly between the 2005-2007 and 2012-2014 timeframes — and impacted both consumers repaying student loans and those in the control group to a similar degree,” Wise said.
“However, just as we observed in 2005, student loan borrowers in 2012 generally left school with lower loan participation rates than their control counterparts, likely due to difficulty in accessing credit while a student with little or no income,” he continued.
“Over the next two years, student loan borrowers were actually more credit active in opening new auto and credit cards, enabling them to close this gap. Further, we saw the rate of new mortgage originations nearly identical between the student loan and control groups, keeping the mortgage gap constant — the same thing we saw in the 2005 cohort,” Wise went on to say.
“Even the immense growth in student loan balances does not appear to be driving any different impact on new credit access today than what we saw a decade ago,” he added.
In addition, results from the study show that consumers ages 18 to 29 with a student loan in repayment generally had better performance on new accounts than their peers without student loans.
For instance, those consumers with a student loan entering repayment at the end of 2012 had a 15 percent lower 60-day delinquency rate on newly opened auto loans by the end of 2014 than those consumers without a student loan in the same cohort.
Over that same timeframe, student loan borrowers also had a 1 percent lower 60-day delinquency rate on new credit cards than the control group.
“This is an important finding, because it shows lenders that rather than being concerned about student loan borrowers’ ability to manage new credit, this may actually be an attractive marketable group, both in terms of higher credit demand as well as potentially better repayment performance,” Wise said.
“Lenders looking to attract and maintain relationships with millennials should find this news encouraging,” he added.
Convergence Point
The study also looked over longer timeframes to find if and when consumers with student loans in repayment caught up with the control group in terms of new loan participation and originations.
“Student borrowers often leave school with fewer consumer loan products than their peers who do not have student debt. But once they graduate, they immediately begin to catch up to their peers,” Wise said.
For the 2005 group, TransUnion found that this convergence in loan participation occurred after two years for auto loans, after which point the student loan group had a higher percentage of auto loans. The convergence timeline took six years for mortgages.
Even with elevated student-loan debt levels and coming off a devastating recession, convergence timeframes did not increase dramatically for the 2009 cohort.
For auto loans, the convergence timeframe increased to three years, primarily due to the fact that student loan borrowers left school in 2009 with a larger gap compared to the control group than they did in 2005, but they were able to close this gap through higher new auto loan originations.
For mortgages, the 2009 student loan group was 1 percent behind the control group after five years and on track to reach convergence after six years—the same convergence timeframe as observed in 2005.
“Despite having thousands of dollars more in average student-loan debt in more recent years, our study clearly shows that student-loan borrowers in repayment continue to catch up to the control group — those without a student loan — in a relatively short period, due to their higher new loan origination rates,” Wise said.
“This is an especially important finding, because it shows the dramatic rise in student loan balances has not materially impacted younger consumers in gaining access to mortgages, auto loans or credit cards, or in their ability to successfully manage their new credit obligations,” he went on to say.
For more detailed information about the TransUnion Student Loan study, visit http://transunioninsights.com/studentloans.
In a new development this week, address scoring and location reports from Digital Recognition Network are now available in the Shaw Systems Associates collections software platform.
Officials highlighted Shaw Systems’ customers now have access to new data insights that can allow them to address collections earlier in the workflow and improve debt collection.
The company explained DRN’s address scoring and location reports use vehicle location data comprised of license plate scans gathered throughout the U.S. Address scoring uses DRN’s vehicle location data to help determine whether a given address vicinity is likely “good” or “bad” for collections.
Then, the information is plugged into scoring solutions that can determine whether a given address is likely a “good” or a “bad” address for contact.
In the collections business, DRN insisted knowing the correct address for making contact increases positive outcomes for finance companies. By scoring throughout the collections process, Shaw customers can address collections issues earlier in the collections lifecycle and work earlier to prevent default.
Once an address is scored, location reports can be used to help identify the most accurate addresses for skip tracing and making contact.
“When it comes to collections, the more you know, the better your collections outcome,” DRN chief executive officer Chris Metaxas said.
“DRN’s address scoring and location reports provide new data insights that have a proven impact on debt collections,” Metaxas continued. “Now, Shaw Systems’ customers get to experience the benefits of DRN’s solutions within a familiar platform.
“Having DRN solutions embedded into the Shaw platform, will optimize debt collections by addressing collections issues and aid in identifying the best location to make contact,” he went on to say.
Finance company managers can join a webinar hosted by DRN and Shaw for a demonstration of how address scoring and location reports work. The session is scheduled for 4 p.m. ET on Monday. Registration for the free session can be completed here.
For individuals who cannot attend the webinar, contact Shaw Systems at (804) 272-3800 or sales@shawsystems.com.
General Motors Financial is less than two quarters into its strategic adjustment of originating more prime paper than the finance company ever has in part to its enhanced relationship as the captive for the parent automaker.
But GM Financial is already seeing how more prime customers in its portfolio is leaving an impact on its delinquencies and its allowances for loan losses. That’s what company executives shared when they reported their first-quarter performance, which included gains in net income and consumer loan originations.
Taking into account what GM Financial reiterated is seasonality, the company said its consumer finance receivables 31-to-60 days delinquent stood at 3.4 percent of the portfolio as of March 31. That’s up just marginally from 3.1 percent the company spotted on the same date a year ago.
Meanwhile, GM Financial indicated its accounts more than 60 days delinquent came in at 1.4 percent of the portfolio at the close of first quarter both this year and last year.
And annualized net credit losses registered at the same reading on a year-over-year basis, both settling at 1.8 percent of average consumer finance receivables.
“I want to remind everybody that we do expect to see a mild decline in those rates as we go throughout 2015,” GM Financial president and chief executive officer Dan Berce said. “And going forward, we do expect to see our credit metrics, both delinquencies and losses, to show an improvement, mainly because we are originating a bigger mix of prime today as I showed you a few slides ago.
“In fact, the average FICO score for our March 2015 quarter originations were some 50 points higher than the origination mix a year ago,” Berce continued.
Along with traditional installment contracts, GM Financial is originating more leases. Operating lease originations of GM vehicles came in at $3.0 billion in Q1, up from $2.1 billion in the fourth quarter and $773 million in the first quarter of last year.
Leased vehicles totaled $8.9 billion as of March 31 as now GM Financial is the exclusive lease originator for GM vehicles. Buick and GMC came into the platform in February and Cadillac in March. Chevrolet joined the platform just before GM Financial closed its first quarter.
The company’s Q1 consumer loan originations came in at $4.1 billion, up from $4.0 billion in the previous quarter and $3.4 billion in the year-ago quarter.
GM Financial’s outstanding balance of consumer finance receivables totaled $25.6 billion when Q1 closed.
“The increases were mainly concentrated in vehicles sold by GM dealers, with big increases in loans originated on new vehicles for GM dealers as well as used vehicles. Those increases were led by the fact that our prime lending has now reached $467 million for the quarter, up from $292 million in the December quarter,” Berce said.
Meanwhile, the GM Financial’s AmeriCredit-branded business — vehicles the company finances that are sold by non-GM dealers — remained steady on a sequential basis at $700 million but slightly lower year-over-year.
“We continue to maintain strong discipline on both credit and pricing and loan structure in that business, despite the fact that competition was probably a little bit heightened in the first quarter compared to what we saw in 2014,” Berce said.
Looking over at GM Financial’s commercial business, the company’s outstanding balance of commercial finance receivables stood at $7.6 billion when Q1 finished. That figure is down slightly on a sequential basis ($8.1 billion) but up a bit year-over-year ($7.1 billion).
“The commercial business, it's pretty darn competitive and pretty price sensitive, so we are not in any way, shape, or form trying to artificially create share through price or otherwise. We are letting the business come our way because we are the captive,” said Berce of this segment of GM Financial’s business that is used by 530 dealerships.
“I think we will continue to see steady growth, that 40, 50, 60 dealer-adds a quarter. Again, for the first time we've got a full portfolio of product now, so I think that will help us competitively, whereas before we really had one hand tied behind our back,” he went on to say.
All of those performance elements combined to help GM Financial generate net income of $150 million for the quarter, up from $145 million a year earlier.
The company also mentioned it had total available liquidity of $10.9 billion as of March 31, consisting of $2.1 billion of unrestricted cash, $7.2 billion of borrowing capacity on unpledged eligible assets, $0.6 billion of borrowing capacity unsecured lines of credit and $1.0 billion of borrowing capacity on a Junior Subordinated Revolving Credit Facility from GM.
“We do believe that our growth in this business will continue to accelerate as we go into 2015 and 2016, because for the first time GM Financial now has a complete suite of products in the U.S. And our penetration in those products, whether it's U.S. lease, U.S. prime continues to increase,” Berce said.
“Again, we believe we had a very solid quarter highlighted by the successful execution of GM lease exclusivity in the U.S., which resulted in strong growth in our lease portfolio in U.S., coupled with continued growth in our prime,” he continued. “Our funding plan is on track globally. And despite the investments we have made in the balance sheet and infrastructure to achieve full captive status, we did hold earnings constant year-over-year.
“We do believe the investments that we are making now will pay off in the future. We expect 2016 and beyond profitability to increase at a nice rate from 2015. All in all GM Financial is well-positioned for future growth and increases in profitability, while we maintain a strong balance sheet and support for GM,” Berce went on to say.
The latest report from a pair of experts at the Federal Reserve Bank of St. Louis included a question that could significantly impact finance companies and dealership F&I departments. The report was titled, “Student Loan Delinquency: A Big Problem Getting Worse?”
Senior economist Juan Sanchez and technical research associate Lijun Zhu found that the delinquency rate for federal student loans increased significantly during the past 10 years — from 11 percent to slightly above 17 percent. Sanchez and Zhu found delinquency was monotonically increasing before reaching 15.8 percent in 2010.
“Thus, about 77 percent of the increase over the past 10 years occurred between 2004 and 2010. The delinquency rate decreased during 2011 and then increased sharply during 2012. Since then it has remained quite stable at about 17 percent,” the St. Louis Fed experts wrote in the report posted here this week.
But here’s the rub and its possible impact on what finance company underwriters or F&I managers might spot when they pull credit reports for potential buyers who need vehicle financing and already have a student-loan burden.
Back during the fourth quarter of 2010 Sanchez and Zhu determined that about 45 percent of student loans were not in repayment, implying that only about 55 percent of student loans were in repayment.
“As a consequence, if we adjust the delinquency rate to consider that only a fraction of the borrowers have payments due, this level of delinquency is very concerning,” Sánchez and Zhu said.
“A delinquency rate of 15 percent for all student loan borrowers implies a delinquency rate of 27.3 percent for borrowers with loans in repayment,” they continued.
And in comparison to auto financing, that newly calculated delinquency rate for student loans is about 10 times higher than the 30-day delinquency rate Experian Automotive reported for the fourth quarter. Experian determined the reading to be 2.62 percent, nearly flat from a year earlier.
The latest American Bankers Association’s Consumer Credit Delinquency Bulletin showed auto loan performance in the fourth quarter didn’t stumble much as the two categories analysts track moved only a total of 3 basis points year-over-year.
ABA reported that direct auto loan delinquencies — contracts arranged directly through a commercial bank — fell from 0.72 percent to 0.71 percent, meanwhile indirect auto loan delinquencies — contracts arranged through a third party such as a dealer — rose from 1.51 percent to 1.53 percent.
The bulletin went on to mention delinquencies in closed-end loans and bank cards rose slightly in Q4 but remained near record lows. Analysts contend the broader results paint a positive picture with delinquencies in seven of the 11 individual loan categories falling.
The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, rose 3 basis points to 1.54 percent of all accounts, settling well under the 15-year average of 2.29 percent.
The ABA report defines a delinquency as a late payment that is 30 days or more overdue.
“Even as incomes rise and the economy improves, consumers continue to take a judicious approach to managing their finances,” ABA chief economist James Chessen said. “Consumers have regained confidence since the last recession, but they remain careful about taking on additional debt.”
Bank card delinquencies ticked up slightly in the fourth quarter, rising 1 basis point to 2.52 percent of all accounts. They remain well below their 15-year average of 3.75 percent and have varied by only 14 basis points since the fourth quarter of 2012.
“As credit access and consumer spending increase, the overwhelming majority of cardholders continue to pay off or pay down their balances month after month,” Chessen said. “We expect this trend to continue as consumers remain laser-focused on keeping debt at manageable levels.”
Delinquencies in two of the three home-related categories — home equity loans and home equity lines of credit — trended downward in the fourth quarter, falling to 3.23 percent and 1.48 percent, respectively. Delinquencies for property improvement loans increased 11 basis points to 0.93 percent.
“Home equity delinquencies are trending in the right direction as the housing market continues its slow march toward recovery,” Chessen said. “As household wealth and income rise, consumers are better positioned to meet their financial obligations.”
Chessen insisted that a healthy economy and continued financial discipline among consumers bode well for future delinquency rates.
“The economy is better, incomes are higher and the risk of lending is lower,” he said. “People have a greater capacity to repay their debts, and we expect delinquencies will continue to fluctuate near these low levels for the foreseeable future.”
The Q4 composite ratio is made up of the following eight closed-end loans. ABA explained all figures are seasonally adjusted based upon the number of accounts.
The movements of those eight closed-end loan categories included:
— Personal loan delinquencies fell from 1.51 percent to 1.42 percent.
— Direct auto loan delinquencies fell from 0.72 percent to 0.71 percent.
— Indirect auto loan delinquencies rose from 1.51 percent to 1.53 percent.
— Mobile home delinquencies fell from 3.64 percent to 3.60 percent.
— RV loan delinquencies fell from at 1.03 percent to 0.98 percent.
— Marine loan delinquencies fell from 1.21 percent to 1.17 percent.
— Property improvement loan delinquencies rose from 0.82 percent to 0.93 percent.
— Home equity loan delinquencies fell from 3.24 percent to 3.23 percent.
ABA also tracks three categories of open-end loans. The Q4 data was as follows:
— Bank card delinquencies rose from 2.51 percent to 2.52 percent.
— Home equity lines of credit delinquencies fell from 1.52 percent to 1.48 percent.
— Non-card revolving loan delinquencies rose from 1.68 percent to 1.80 percent.
In what might not be surprising to top company executives, Fitch Ratings recently acknowledged that auto finance companies are likely to see loan asset quality weaken in 2015, with annualized net losses moving closer to their historical averages.
While prime auto loans continue to perform well, Fitch indicated subprime auto loan ABS annualized net losses are deteriorating at a “quicker pace”, recently crossing 8 percent before dropping to 7.26 percent as of the end of February.
Analysts pointed out the level is above the 10-year average of 6.24 percent, but below the past recession peaks of 9 percent to 13 percent.
“Fitch expects subprime auto loan performance to continue to soften modestly in 2015 due to heated competition-driving declines in subprime loan pricing, easing underwriting standards and moderation in used-car values,” analysts said.
“These factors contribute to Fitch's negative 2015 sector outlook for finance and leasing companies, but at this stage they are viewed as manageable relative to available capital levels and current auto lender ratings,” they continued. “For auto ABS, asset performance remains in line with loss expectations and Fitch’s outlooks are stable for prime and subprime auto loan ABS performance.”
While Fitch noted manufacturers have been disciplined on new-vehicle production and incentive spending, the firm emphasized that strong overall vehicle sales have kept the industry vulnerable to competitive pressures.
“We believe loan demand is likely to remain strong amid improving economic indicators in the U.S., despite an increase in consumer indebtedness,” analysts said.
Fitch sees not only an easing of overall credit terms (inclusive of loan term, pricing and down payments), but also a decline in average FICO scores.
“These factors have led to increases in subprime lending and a rise in subprime auto ABS issuance over the past year,” Fitch said.
“We see the eased standards being driven by smaller, less capitalized market participants, some backed by private equity capital,” analysts continued. “These lenders are competing to win market share and capture increased loan yields. We see loosened standards likely to affect the performance of the 2014 and 2015 loan vintages.”
Fitch went on to mention that against the backdrop of easing loan standards are the counterforces of an “improving” macro environment and currently “healthy” used-vehicle values, which help underpin the stable outlooks on auto ABS.
The firm recapped that U.S. auto loan and lease credit losses and delinquency rates increased in the second half of last year due to the seasonal effect of lower available consumer discretionary spending and, despite picking up in the fourth quarter, an overall decline in recovery values on used vehicles.
The average net loss rate for Fitch rated finance companies was 1.06 percent in the fourth quarter, up 5 basis from the end of 2013. Average 30-day delinquencies stood at 3.96 percent, an increase of 7 basis points since the fourth quarter of 2013.
Fitch explained the metrics are “reflecting continued easing of underwriting standards and higher nonprime lending. Both metrics still remain comfortably below pre-crisis levels.”
The top nine Fitch-rated auto finance companies, including captives, held about $450 billion of auto loans at year end. Of the nine, only General Motors Financial and Capital One have any “meaningful” subprime exposure in their loan portfolios, according to Fitch.
As the company ramps up its prime financing program, General Motors Financial still is keeping an eye on its subprime business as a Wall Street analyst touched on recent inquiries from the U.S. Department of Justice and the Securities and Exchange Commission.
GM Financial rolled out its prime loan product to all GM dealers on Nov. 1, and with just two months to generate paper, the company reported that its prime bookings totaled $493 million for the year. The extra prime paper also elevated the average FICO score for Q4 originations as the company pegged the typical score at more than 40 points higher than what it saw in the same quarter a year earlier.
However, 31.1 percent of the subprime auto financing the parent automaker generated in the fourth quarter still went into the GM Financial portfolio. The company reported Q4 North American originations came in at $1.934 billion with $507 million of that figure being connected with used-vehicle financing at GM stores, an amount more than triple the figure posted in the year-ago quarter.
With subprime still a major part of the company business, BlackRock analyst Bryan Jacobi asked GM Financial leadership during its recent conference call about subprime securitizations. Jacobi’s question arrived in light of the federal agency inquiries and since, in his opinion, performances have been “quite good.”
In response, GM Financial chief financial officer Chris Choate said, “The performance of auto ABS, not only currently but back across the economic cycle, was strong and stable. Everybody got repaid interest and principal in a timely manner as really no defaults occurred.
“Auto ABS is maybe being evaluated by the different governmental agencies perhaps unfairly, in light of what happened with subprime mortgage securitizations as kind of the go by,” Choate continued.
Then Choate discussed why GM Financial didn’t have any of significance to share in connection with the DOJ or SEC matters that first were disclosed last summer.
“Really the reason we haven't updated or changed any of our disclosures related to those ongoing matters is really they’ve been fairly stagnant, if you will, relative to the interactiveness between us and those agencies. We certainly are cooperating. We provided lots of data,” he said.
“There have been certain direct interactions between the company and different agencies. But really, sort of the ball is in the agency’s court to move forward. We don’t really have a timeline for when or how that may happen,” Choate continued.
“Certainly any time you have agencies investigating your business, it's a serious matter and we take it seriously. And there is a certain element of concern. But again, the facts on the ground relative to how auto ABS performed, in our view, sort of mitigates a negative outcome,” he went on to say.
More Details About Portfolio Health
GM Financial’s North American delinquencies stayed relatively flat year-over-year during the fourth quarter. The company reported delinquencies up to 60 days came in at 7.4 percent of the portfolio, and total delinquencies stood at 9.9 percent as of Dec. 31. A year earlier, the readings were 7.5 percent and 10.0 percent, respectively.
GM Financial mentioned its annualized net quarterly credit losses remained almost flat year-over-year as well, coming in at 3.6 percent. The company’s recovery rate did soften a bit on a sequential and year-over-year basis, dipping to 53.1 percent.
“Consumer loan credit performance in North America, these metrics are very stable quarter-over-quarter, year-over-year,” GM Financial president and chief executive officer Dan Berce said. “I should say, just like subprime originations, we see a distinct seasonal trend in subprime credit, with the March and June quarters being the strongest and the December quarter typically being the weakest.
“We’ve seen a bit of softness in the market year-over-year, and we do expect to see continued moderation in used-car pricing throughout 2015, albeit from a historical standpoint still quite good,” Berce continued. “Going forward, our credit metrics will be impacted by our increasing mix of prime originations and so we should see a favorable impact to overall North America credit metrics, delinquencies and losses going forward.”
Enhancing Floor-Planning Business
GM Financial closed the year with 487 dealers with an active floor-planning account, up from 309 stores a year earlier. The increase pushed the company’s outstanding commercial lending portfolio past a new threshold — up to $3.2 billion
Berce insisted GM Financial’s goals for its commercial business haven’t changed, even though analysts believe the conditions are ripe for more activity there since the company now offers a full suite of financing products and GM is pushing its leasing activity to the captive.
“When we launched the business less than three years ago, we articulated that over a number of years we'd like to get to a 20-percent type share target. And we’re kind of halfway into reaching the target. We’re at around 10 percent now,” Berce said.
“If we keep going on the rate we're on of market share gains, I think we’re very comfortable with that,” he continued. “I think that one thing that could change that trajectory is the fact that for the first time now going into 2015, in the U.S. we have complete captive type capability.
“We didn’t have the prime product in our suite before, and we got a lot of feedback from dealers saying, ‘Well, we'd like to use you as our floorplan source, but we’d also like to use you for all the products.’ We didn't have all the products so we were a bit handicapped,” Berce added.
“So I think that'll help the momentum in 2015 and beyond, but we still don’t have outsized share targets for commercial. We’re really quite pleased with the trajectory we’re on,” he went on to say.
Top-Line Performance
GM Financial reported earnings of $59 million for the fourth quarter, down from $121 million for the same quarter a year earlier
The company’s earnings for the year came in at were $537 million, down from $566 million for 2013.
Officials mentioned earnings include $13 million and $42 million in pre-tax acquisition and integration expenses for the quarter and year ended Dec. 31, 2013, respectively.
Additionally, earnings for the fourth quarter of 2013 include $15 million in pre-tax charges associated with discontinuing the Chevrolet brand in Europe.
The January Senior Loan Officer Opinion Survey on Bank Lending Practices orchestrated by the Federal Reserve indicated about 29.4 percent of the banks that originate subprime auto loans expect delinquency and charge-off rates to increase this year.
Fed officials acknowledged this week that level is a somewhat smaller fraction of banks expecting that performance deterioration relative to a year ago. Meanwhile 70.6 percent of the banks that originate subprime auto loans indicated that loan quality is likely to remain around current levels.
For banks only participating in the prime credit space for their auto business, the percentage of institutions expecting delinquency and charge-off rates to climb this year is smaller, coming in at just 11.3 percent. By far the largest segment — 82.3 percent — believes loan quality is likely to remain around current levels while a smaller contingent — 6.5 percent — project that portfolio quality actually will likely improve somewhat this year.
The delinquency and charge-off survey data from the Fed arrived along with many of these same banks polled seeing about the same level of demand for auto financing during the past three months. While 67.2 percent are watching interest levels stay about the same, another 18.8 percent surveyed told the Fed that demand became moderately stronger during the last three months as the remaining 14 percent witness either moderate or substantially weaker demand.
As banks are seeing vehicle installment contract applications flow into their origination departments, the Fed survey highlighted that the majority hasn’t made notable changes to underwriting practices. Here is a breakdown of the majority questioned:
— Over the past three months, how has your bank changed the following terms and conditions on loans to individuals or households to purchase autos? A total 92.1 percent said metrics have remained basically unchanged.
— Minimum required down payment? A total 93.7 percent said metrics have remained basically unchanged.
— Minimum required credit score? A total 95.2 percent said metrics have remained basically unchanged.
— Maximum maturity? A total 92.1 percent said metrics have remained basically unchanged.
— The extent to which loans are granted to some customers that do not meet credit scoring thresholds? A total 98.4 percent said metrics have remained basically unchanged.
Also of note in the Fed’s latest survey, 88.9 percent of senior loan officers questioned said that the spreads of loan rates over the bank’s cost of funds has remained basically unchanged during the past three months.
The entire Fed survey can be downloaded here.
Despite consumer advocates insisting that rising auto financing default rates are mirroring the mortgage mess that triggered the most recent recession, Moody’s Investors Service explained that elevating delinquencies for loans originated by independent finance companies reflect a loosening of credit typical of the current expansionary consumer lending cycle.
Analysts determined the rise does not indicate that lending has reached a tipping point at which finance companies will not be able to manage losses. Moody’s arrived at that assertion according to the report titled, “Rising Subprime Auto Delinquencies Reflect Gradual Credit Expansion.”
Although 60-plus delinquencies rose 14 percent to 2.07 percent in third-quarter 2014 from 1.82 percent one year earlier, Moody’s data showed they are still below their highs following the financial crisis.
In addition, Moody’s vice president and senior analyst Peter McNally noted that loosening credit and increased competition among finance companies has caused delinquencies to rise across other segments.
“These factors have led to a 5-percent rise in delinquencies for banks and a 9-perccent rise for credit unions, which tend to focus on prime lenders,” McNally said.
McNally emphasized the current rise instead reflects the expansion of credit that typically occurs following a downturn.
“Lenders would have to dramatically expand lending to borrowers with the weakest credit to cause subprime auto performance to significantly deteriorate in 2015,” McNally said.
Moody’s also mentioned that performance is unlikely to deteriorate significantly, because finance companies are already showing some caution in underwriting in response to rising delinquencies. Analysts projected this tightening will limit the amount by which losses will rise.
The report pointed out the rate at which banks and captive finance companies have increased their lending to subprime borrowers slowed in the third quarter, and credit unions reduced their share of subprime loans by 4.2 percent year-over-year.
“However, subprime lenders continue to pursue some risky strategies, such as offering larger loan amounts and extended loan terms, which put the lenders at greater risk in the event of borrower default,” Moody’s said.
It’s the thought of those risky strategies that are giving fuel for arguments offered by the Center for Responsible Lending, which recently published a report titled, “Reckless Driving: Implications of Recent Subprime Auto Finance Growth.”
Center analysts acknowledged individuals who argue that the auto finance market is not facing similar issues that the mortgage market did before the housing meltdown usually start with a comparison of delinquency and default rates. They believe claims auto loan delinquencies and default rates look much lower in comparison to the mortgage market are misleading for several reasons.
“First, the delinquency and default rates used are a snapshot in time measurement,” the report said. “These rates are calculated by taking the total number of accounts outstanding and dividing that by the number of accounts in delinquency (meaning that the consumer is behind on their payments) or in default (the point at which the lender seeks to recover the collateral).
“Data on the cumulative number of delinquencies and defaults over a period of time is much more revealing because that data show the overall impact on the market, and is virtually never reported in the auto market,” center analysts continued.
“The second fault in the comparison is that auto lenders can repossess a car in about one-tenth the time it takes to foreclose on a house,” they added. “On average, a lender repossesses a car within 48 days, whereas the average foreclosure takes 577 days. A delinquent home loan stays on the delinquency and default report until the home is foreclosed, which means that those loans are included in the delinquency and default rates for a long time. Conversely, auto lenders are able to clear delinquent loans off the books relatively quickly.”
The Center for Responsible Lending cheered the regulatory moves made by agencies such as the Consumer Financial Protection Bureau. But the center closed its report by emphasizing that it is looking for federal officials to do more, especially when it comes to dealer participation.
“Dealers already receive compensation in forms other than interest rate markup, and those other forms have far less risk of discrimination and unfairness than interest rate markup,” the report said. “Regulators should also strongly consider applying a consistent ability-to-repay standard for auto lending, and ensure that lenders are exercising appropriate underwriting practices.”
Auto loan performance helped overall delinquencies to continue to decline in last year’s third quarter, according to results from the American Bankers Association’s Consumer Credit Delinquency Bulletin.
But what might delight finance companies even more is how optimistic ABA chief economist James Chessen is about the future as the economy continues its upward trend and consumer confidence improves.
“Consumers are on surer financial footing, which bodes well for future delinquency rates,” Chessen said. “Consumers are smiling every time they fill up their tanks. Every 1-cent decline in pump prices puts about $1 billion back into consumers’ pockets, which means their paychecks are going much further.
“The signs are pointing in the right direction, but consumers hold all the cards when it comes to continuing to prudently manage their finances,” he went on to say.
Consumers appear to be managing their fund better as indirect auto loan delinquencies were among seven out of 11 categories that registered a year-over-year decline.
The bulletin indicated delinquencies for indirect auto loans — contracts arranged through a third party such as a dealer — fell from 1.55 percent to 1.51 percent.
Meanwhile, analysts noted delinquencies for direct auto loans — financing arranged directly through a bank — remained at 0.72 percent in Q3.
ABA reported that its composite ratio, which tracks delinquencies in eight closed-end installment loan categories, fell 6 basis points to 1.51 percent of all accounts — a record low that is well under the 15-year average of 2.30 percent.
The ABA report defines a delinquency as a late payment that is 30 days or more overdue.
“Strong economic growth has boosted job creation and supported income growth, which has made it easier for consumers to meet their financial obligations,” Chessen said. “Lower gas prices helped free up resources for everything from new purchases to debt repayment.”
Bank card delinquencies ticked up slightly in the third quarter following two consecutive quarters of declines, rising eight basis points to 2.51 percent of all accounts. They remain well below their 15-year average of 3.77 percent.
“Bank card delinquencies have hovered near 15-year lows with only minor fluctuations over the past two years, and we expect that trend to continue,” said Chessen, who noted that bank card delinquencies have varied by only 14 basis points since the fourth quarter of 2012.
“While people are clearly ready to spend again as economic activity picks up, the overwhelming majority of consumers continue to keep debt at manageable levels,” he added.
The bulletin mentioned delinquencies in two of the three home-related categories — property improvement loans and home equity loans — continued their downward trend in the third quarter, falling to 0.82 percent and 3.24 percent, respectively.
Chessen pointed out that delinquencies for home equity lines of credit edged up slightly, rising 2 basis points to 1.52 percent.
“As the housing market continues its slow and steady recovery, home-related delinquencies are following a parallel track,” Chessen said.
“Increased home prices have eased pressure on consumers, but stresses can still occur, particularly as home equity lines reach the fully amortizing period and payment requirements rise,” he continued. “Banks continue to work with customers to ensure they can meet their obligations.”
The Q3 2014 composite ratio is made up of the following eight closed-end loans. All figures are seasonally adjusted based upon the number of accounts.
— Personal loan delinquencies fell from 1.62 percent to 1.51 percent.
— Direct auto loan delinquencies remained at 0.72 percent.
— Indirect auto loan delinquencies fell from 1.55 percent to 1.51 percent.
— Mobile home delinquencies rose from 3.56 percent to 3.64 percent.
— RV loan delinquencies fell from at 1.09 percent to 1.03 percent.
— Marine loan delinquencies fell from 1.34 percent to 1.21 percent.
— Property improvement loan delinquencies fell from 0.97 percent to 0.82 percent.
— Home equity loan delinquencies fell from 3.36 percent to 3.24 percent.
In addition, ABA tracks three open-end loan categories:
— Bank card delinquencies rose from 2.43 percent to 2.51 percent.
— Home equity lines of credit delinquencies rose from 1.50 percent to 1.52 percent.
— Non-card revolving loan delinquencies fell from 1.92 percent to 1.68 percent.
