Comerica Bank chief economist Robert Dye summarized what he called the nine important takeaways from the minutes released last week condensing the Federal Reserve’s Federal Open Market Committee's latest meeting, where members used the adjective “transitory” to describe first quarter GDP growth.
First, here are the points Dye shared in Comerica Bank’s latest weekly analysis that focused on his summation of the FOMC meeting minutes policymakers shared:
1. The Fed views weak first quarter GDP growth as transitory.
2. The staff economic forecast is supported by the assumption of expansive fiscal policy.
3. There is some concern that monetary policy normalization by the Fed could lead to financial strains in emerging markets.
4. FOMC members expect that conditions will continue to warrant gradual increases in the fed funds rate. This statement is consistent with a 25-basis-point increase in the fed funds rate range on June 14.
5. Balance sheet reduction will be executed in a gradual and predictable manner.
6. Caps on the dollar amount of securities that the Fed will roll off will be set low and then raised every three months.
7. Once ramped up, the caps will be maintained until the balance sheet has reached its targeted size.
8. The Fed’s policy normalization principles and plans will be updated soon.
9. The Fed will likely begin balance sheet reduction before the end of this year.
“We expect to see a 25-basis-point increase in the fed funds rate range announced on June 14. The implied probability of that has increased to 87.8 percent, according to the fed funds futures market,” Dye said.
The meeting minutes certainly elaborated on the points Dye mentioned. The minutes first described financing conditions, specifically touching on the auto finance space.
“Financing conditions in consumer credit markets remained accommodative, on balance, in early 2017,” policymakers said, according to their meeting minutes. “Consumer credit appeared to be broadly available even as interest rates charged on credit card balances and new auto loans drifted up in line with their benchmark shorter-term interest rates.
Growth in consumer loan balances moderated a bit further from the relatively strong pace seen during the past few years, although year-over-year growth in credit card balances, student loans and auto loans stayed in the 6 to 7 percent range through February,” they continued.
Later in the meeting recap, FOMC members discussed GDP behavior.
“Although the incoming data showed that aggregate spending in the first quarter had been weaker than participants had expected, they viewed the slowing as likely to be transitory,” the minutes indicated.
“With respect to the economic outlook and its implications for monetary policy, members agreed that the slowing in growth during the first quarter was likely to be transitory and continued to expect that, with gradual adjustments in the stance of monetary policy, economic activity would expand at a moderate pace, labor market conditions would strengthen somewhat further, and inflation would stabilize around 2 percent over the medium term,” the minutes continued.
“Members continued to judge that there was significant uncertainty about the effects of possible changes in fiscal and other government policies but that near-term risks to the economic outlook appeared roughly balanced. A couple of members noted that the outlook for global growth appeared to have brightened and that downside risks from abroad had waned. Members agreed that they would continue to closely monitor inflation indicators and global economic and financial developments,” the minutes went on to recap.
Not long after launching its lending and leasing as a service (LLaaS) product powered by Oracle, technology services and consulting company DecisivEdge articulated what the firm believes are the six “must haves” when auto finance providers are considering loan origination software (LOS).
DecisivEdge senior vice president of business optimization Andrew MacDowell used automotive imagery when explaining that he wanted to take a “look under the hood” of loan origination software on the market today and study the many “moving parts” designed to meet the rigorous requirements of diverse finance companies with the key objective of strengthening customer and dealer relationships, mitigating risk, and streamlining day-to-day operations.
MacDowell arrived at the six “must haves” and initially mentioned them in a blog post shared with SubPrime Auto Finance News.
1. Compliance
MacDowell insisted standalone software will not assure compliance, but should provide the solution to execute with confidence. He emphasized that compliance calculation and Truth in Lending Act (TILA) disclosures must be compliant.
“Origination software should assist in storing copies of key documentation: including appropriate disclosures and contracts, all documents must be in compliance with the Electronic Fund Transfer Act including electronic fund transfer pre-authorization, disclosure documents, transaction history, application denials, adverse action notices, procedures of less favorable terms, and loans subject to risk-based pricing regulations,” he said.
“Additional software capabilities include generating appropriate notices to customers, and single electronic fund transfer transactions in compliance with EFTA Regulation E,” he continued.
2. Credit Scoring and Auto-Decisioning
MacDowell contends that a state-of-the-art LOS should replace the manual processes of requesting and analyzing credit bureau requests by automatically parsing the credit reports into useful financial information that can be used for automated scoring and decision-making.
He explained that the system should support manual re-scoring of the credit application if another credit bureau report is pulled, or if another scoring model is processed.
“Credit analysts should also have the ability to specify if a credit bureau report is not required. Ideally, the platform would also provide a highly configurable user-defined scoring model that can be setup for each product you are offering and a scoring engine built into the application should use data attributes from both the loan application and the credit bureau report,” MacDowell said.
“The system should support auto-decisioning as well as manual decisioning,” he continued. “Based upon the risk model setup, lenders should look for platforms that can compute a custom credit score for the application and assign a credit grade. The credit grade can then be used to auto-decision the application or be queued to an underwriter for further manual review."
3. Risk-Based Pricing
MacDowell suggested that finance companies must have a platform that helps facilitate the setup of pricing scenarios based on the provider’s credit policies. He noted different pricing rules should be defined based on parameters such as product, state, dealer, credit grade, contract amount and asset/collateral.
“The pricing setup can be configured in a number of ways with multiple attributes to provide flexibility,” MacDowell said. “The system should recommend ‘best-match’ pricing based upon the application parameters and conform with the institution’s pricing strategy during setup configuration.
“With the auto-decision process, the system can assign a price based on the credit risk of the application,” he went on to say. “In order for efficient processing and data integrity, the uploading of the pricing records from a data file is also supported. This functionality is critical in light of increasing challenges in the auto lending and leasing industry this year.”
4. Multi-Channel Triggers
MacDowell pointed out that finance companies require the key capability to trigger originations in real time, utilizing any consumer banking channel, including mobile, web, telephone, fax, internet or the dealer/branch.
With the convenience and security of a cloud-based solution, MacDowell explained applications can be received, customer credit immediately calculated, and lending decisions concluded automatically or manually.
“Default stipulations should be integrated into the application to allow the lender immediate opportunity to effect a leveraged plan or a decision based on market performance and compliance,” he said.
5. Flexibility of Product Offerings
MacDowell acknowledged that the ability to offer secured or unsecured loans, leases, loans or lines of credit can be a lengthy process without continual compliance to prevailing Consumer Financial Protection Bureau compliance policies and market trends.
MacDowell also mentioned customer status changes, daily interest margins and competitor’s rates are among the key concerns to consider with product offerings. He recommended that they should be integrated into a well-built lending platform.
“With ‘all bases covered,’ product offerings can be validated, tested and brought to market at a faster pace,” MacDowell said.
6. Straight-Through Processing
Streamlining the receipt, analysis, and processing of loan applications allows for more efficient transactions, according to MacDowell.
“By removing the requirement for manual data reentry and enabling the simultaneous distribution of information, such automation lends itself to the elimination of costly processing delays,” he said. “Quick processing of adjudication is important to facilitating lender turnaround responses.
“A major benefit of streamlining lending platforms will result in a consistent, precise and more thorough transaction process,” MacDowell went on to say. “This ultimately leads to generating the right credit decisions delivered at the right time to the right customer.”
MacDowell closed his discussion by making one more point.
“Be diligent as you assess your prospective implementation partner before making your decision. You will want to ensure the prospective implementation partner has the expertise to deliver both technical and servicing requirements,” he said.
DecisivEdge’s solution powered by Oracle
As previously mentioned, DecisivEdge, which also is a gold-level member of Oracle PartnerNetwork (OPN), recently announced the launch of its lending and leasing as a service (LLaaS) product, powered by Oracle. DecisivEdge highlighted LLaaS is designed to be a simple, flexible, securely featured and cost-effective way for small and medium-sized finance companies to leverage the capabilities of a world-class solution.
Oracle Financial Services Lending and Leasing (OFSLL) is at the core of DecisivEdge’s offering. It is hosted in a securely featured cloud and bundled with 24/7 monitoring, support and other value-added services.
The company indicated the service is priced based on account volume and service levels selected by the subscriber. This simplifies adoption and dramatically reduces the cost of entry. DecisivEdge is onboarding its first customer, a midsized lessor of residential HVAC equipment to the platform and is working with several other interested lenders.
“We are extremely excited to be working with Oracle to bring this innovative solution to the marketplace,” MacDowell said. “The traditional model requires a sizable up-front capital expense to acquire the software and infrastructure, often putting such a solution out of reach for small and medium-sized lenders.”
Andrea Klein, vice president of alliances at Oracle Financial Services, added, “We are delighted to collaborate with DecisivEdge to offer an innovative solution alternative to our customers.
“We look to work with progressive companies such as DecisivEdge to bring to clients the solutions they need to differentiate, enhance and grow their businesses,” Klein went on to say.
Auto Financial Group (AFG), one of the nation’s leading sources of residual based financing and vehicle remarketing for financial institutions, recently announced first-quarter growth figures, revealing increasing momentum in new customer signings.
Since January, AFG reported that it has signed four new credit unions to the AFG Balloon Lending Program. That group includes:
—Torrington Municipal & Teachers Federal Credit Union
—Sioux Falls Federal Credit Union
—Great Lakes First Federal Credit Union
AFG indicated the fourth credit union could not be disclosed due to marketing policies.
Officials highlighted these four credit unions represent a reach increase of 634,389 consumers and combined assets of more than $1.9 billion across four states.
Additionally, AFG mentioned FNCB Bank signed on as a partner in the first quarter.
“We welcome these financial institutions to the growing AFG family,” AFG chief executive officer Richard Epley said. “Residual-based financing is at an all-time high in the U.S. and we’re excited that these institutions have chosen our program.”
Auto Financial Group added that it has also started to receive transactions from its recently launched leasing program and expects continued growth through the second quarter as the company seeks to provide its unique financing products to financial institutions across the U.S.
Learn more about the leasing program at www.autofinancialgroup.com/products/leasing-program.
AFG reiterated that its balloon lending program can provide institutions with a walk-away, residual based, balloon loan program that is fully insured, and where AFG takes 100 percent of the residual value risk and completely manages the end of term process.
Learn more at www.autofinancialgroup.com/products/balloon-lending-program.
The first two winners of the Subprime Auto Finance Executive of the Year presented during Used Car Week are collaborating to help increase business for Westlake Financial Services.
Westlake announced this week that the finance company recently contracted Bill Jensen to focus on developing its strategic accounts division. In this role, the company indicated Jensen will analyze all aspects of strategic account relationships to maximize business for dealerships and Westlake.
“Westlake’s relationships with strategic accounts are crucial to continued growth primarily because these accounts consist of the largest and most growth orientated dealer groups in the U.S.,” said Jensen, who was named the first winner of the Subprime Auto Finance Executive of the Year in 2013. “Westlake Financial is a strong competitor in the industry, successfully serving both franchise and independent dealers nationwide through its integration of technology and constant innovation.
“Westlake’s full range of financial services products and full-spectrum lending capabilities are a solid fit for auto dealers of all sizes,” continued Jensen, who is looking to leverage his extensive background in indirect auto financing from JP Morgan Chase, Mazda and Bank of America to provide Westlake measurable strategies to expand in this segment.
Jensen began his career in auto finance with Bank of America in 1972, joining their management trainee program. A year later, he joined Security Pacific Bank as an indirect auto collector, worked in various roles in both credit and sales and was appointed head of business development in 1989.
In 1993, Jensen became manager of dealer financial services at Mazda Motor of America where he expanded Mazda’s captive finance relationship with Primus, a subsidiary of Ford Motor Credit. Jensen returned to Bank of America in 1995 in the role of national sales and marketing manager in which he helped design and launch its national indirect lending platform.
He joined Bank One in 1999 as director of marketing. Then in 2005, the company was acquired by JP Morgan Chase and Jensen was appointed custom finance senior executive, a position in which he was responsible for subprime business and processes including originations, booking and funding, collections, pricing and profitability, dealer management, dealer administration, MIS and sales.
In 2012, he became national retail lending credit executive and was responsible for Chase Auto Finance Credit originations, booking and funding provided to more than 17,000 auto dealerships nationwide. In 2014, Jensen was appointed senior credit executive and was responsible for major credit origination process and control improvement projects until his retirement in 2016.
“Bill brings over 45 years of experience to this role,” said Ian Anderson, group president of Westlake Financial Services. “His knowledge will provide us even deeper insight into the needs and interests of these unique groups.
“We are dedicated to solidifying our position as the selected indirect lender for strategic accounts nationwide and we are confident that Bill will heavily contribute to this initiative,” continued Anderson, who was picked as the Subprime Auto Finance Executive of the Year a year after Jensen.
GWC Warranty, a provider of used-vehicle service contracts and related finance and insurance products sold through dealers, this week released Dealer Portal 2.0 — the latest enhancement to GWC’s online e-contracting platform.
The company indicated Dealer Portal 2.0 introduces to dealers a series of new features and enhancements designed to make e-contracting with GWC Warranty vehicle service contracts even easier and faster, helping them operate a successful business in today’s digital marketplace.
Highlighting the latest release is a brand new layout with a fresh new look and streamlined navigation. Dealer Portal 2.0 also features a responsive design to optimize access on tablets. The company contends both enhancements make for a more intuitive user experience while helping dealers more quickly find the information and functions they want.
In addition to a refreshed design, new features included in the Dealer Portal 2.0 release were also created to save users time.
GWC Warranty said dealership administrators can now add and edit a list of preferred lenders with information that pre-populates while rating a vehicle. Online contract cancellation inquiries are also now available to expedite the request through an easy-to-use online form complete with the ability to upload attachments.
GWC Warranty’s Dealer Portal was introduced in 2014 and has since received more than 230,000 contract submissions and 775,000 logins in that time. Since its inception three years ago, the Dealer Portal has evolved from an online tool for dealers to rate and submit contracts electronically to a comprehensive resource center used by more than 108,000 users nationwide.
Today, the company said dealerships use the Dealer Portal to rate, submit and remit contracts, access an educational video library, manage contracts and applications in real time, download electronic content such as brochures and component coverage information, brand inventory with service contract protection and much more.
For more information about GWC Warranty, visit www.GWCWarranty.com.
Even as TransUnion noted that auto finance origination volume appears to be losing a little steam, the Federal Reserve Bank of New York’s Household Debt and Credit Report released on Wednesday showed how the balances consumers are absorbing for their vehicles helped to push total consumer debt above the highest level ever recorded.
The report indicated that total household debt reached $12.73 trillion in the first quarter, surpassing the peak of $12.68 trillion reached during the recession in 2008.
“Almost nine years later, household debt has finally exceeded its 2008 peak but the debt and its borrowers look quite different today. This record debt level is neither a reason to celebrate nor a cause for alarm. But it does provide an opportune moment to consider debt performance,” said Donghoon Lee, research officer at the New York Fed.
“While most delinquency flows have improved markedly since the Great Recession and remain low overall, there are divergent trends among debt types,” Lee continued. “Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high.”
TransUnion put the latest delinquency rate at 1.30 percent, up from 1.16 percent in Q1 of last year, driven in part by poorer payment performance in the subprime and near-prime segments.
The New York Fed noted that the outstanding auto finance balance stood at $1.17 trillion, up by $96 billion compared to the first quarter of last year and $10 billion higher on a sequential basis.
However, Brian Landau, senior vice president for financial services and automotive business leader for TransUnion, didn’t make any projections about the auto finance industry approaching $2 trillion any time soon during a phone conversation with SubPrime Auto Finance News. After TransUnion’s Industry Insights Report offered clear evidence that auto finance originations are slowing, especially in the subprime space, Landau mentioned that he’s been answering lots of questions filled with ominous tones.
“I don’t think we feel like the sky is falling. In other conversations I’ve had with other reporters, that’s what they think. But I think and many of us at (TransUnion) think this is just a reset of the market,” Landau said.
The credit bureau’s report, powered by Prama analytics, indicated that auto finance originations, viewed one quarter in arrears, declined to 6.66 million to end 2016, down 0.2 percent relative to fourth quarter of 2015. This movement marks the second consecutive quarter in which total originations were down year-over-year.
Analysts found that subprime originations posted the steepest decline in originations, dropping by 5 percent.
“You have to take things in the proper context. We’ve had seven consecutive years of growth,” Landau said. “We have not witnessed that probably since the dawn of the auto industry. A lot of that was due is there was a great buildup of pent-up demand stemming from the financial crisis.
“You’re seeing right now that the industry is resetting and recalibrating to account for the slight uptick in subprime and near-prime delinquencies,” he continued.
In a separate blog post, Lee described how analysts are reviewing the financial crisis from a different perspective in light of what the recent data is showing.
“The Great Recession led to a household borrowing situation in America that was very different from what we’d seen historically, but in 2007 when the financial crisis began to unfold, there was much less data available to economists on the state of household balance sheets,” Lee wrote.
“With better information now, we will continue to share new developments and analysis in the area of household debt,” he continued.
And the team over at TransUnion is watching the credit world closely, too, especially in the auto finance space, where Landau considered what strategy providers could leverage as part of a pullback in originations.
“One of the levers that can pull immediately is a pullback on extended terms,” Landau said. “We’ve seen terms on average ticking up over the last several years; 84 months was never something you heard about in the normal state of auto lending. Now, it’s becoming more of a common term used.
“Another lever is asking customers to put down a higher down payment on their vehicle purchase. That would improve loan-to-value ratios going forward,” he went on to say.
PayLink Direct and Omnisure Group, two specialty finance and vehicle service contracts, recently merged to create one of the largest VSC payment plan providers in the United States.
Rebecca Howard, co-founder and chief executive officer of PayLink Direct, and Paul Walder, co-founder and chief executive officer of Omnisure Group, announced the completion of the transaction on April 28. Officials said the union of these companies creates a combined entity with “unsurpassed funding power and unparalleled client support abilities.”
Officials added the alliance will allow the new company to meet the predicted growth demands of the service contract market through “best-in-class” payment plan financing.
Walder said, “The merger and resulting combination of our companies' core competencies will provide many benefits to our clients and to consumers. We’ll be able to offer them expansive product solutions that are administered quickly and conveniently, making VSC sales an integral stream of revenue for direct marketing companies, auto dealerships and service contract administrators.”
Howard said, “Remaining a leader in our niche market means continually looking for new ways to grow and adapt. Today’s car buyers are keeping their vehicles longer, with an average car loan term of more than 60 months. This partnership will allow us to meet the demands of the growing service contract market by giving consumers, contract administrators and sellers of service contracts ultimate product flexibility through a state-of-the-art technology platform, exceptional customer service, and an extensive portfolio of attractive financing solutions.”
The combination of PayLink Direct and Omnisure Group brings together two highly complementary client networks and will serve more than 3,000 auto dealerships, 100 direct marketers and 50 administrators nationwide.
The new merged entity will operate under the PayLink Direct name and the marketing brand will be a combination of brand elements from both organizations. Howard will be the CEO of the merged entity and Walder will maintain an ownership position and remain involved in an executive capacity.
“The leadership teams are excited about bringing an enhanced level of service and an expanded depth of experience to their clients, business partners and employees and they anticipate the integration to be seamless,” the company said.
On Wednesday, Black Book introduced its next generation ValuEngine platform with what the firm described as a new, easy-to-navigate web interface. Black Book reiterated ValuEngine is a real-time collateral valuation tool allowing automotive industry professionals, finance companies, OEMs and dealers the ability to value their entire portfolio through a secure, on-demand, self-service platform.
With ValuEngine, Black Book explained professionals can react quickly to market changes by valuing a portfolio’s historical, current and projected residual values on any collateral, down to the specific trim level. By utilizing ValuEngine, users can improve loss forecasting while also identifying delinquencies for a more precise collections strategy, aiding in risk analysis.
Especially in today’s market, with razor-thin margins and price fluctuations occurring frequently, Black Book insisted ValuEngine can help automotive industry professionals and finance companies determine how the loan-to-value ratios in a given portfolio change over time.
In addition, ValuEngine has the ability to process files on-demand or through its advanced scheduling capability, allowing for greater flexibility.
“In today’s highly competitive automotive market, having an accurate view of your portfolio is essential. By utilizing ValuEngine’s batch processing, users can run millions of VINs in a single job,” said Jared Kalfus, senior vice president of sales at Black Book.
“Industry professionals want to know how all VIN specific data points and valuations impact their portfolio profit potential and risk levels, and ValuEngine delivers each of these in a comprehensive, easy-to-use platform,” continued Kalfus, who is scheduled to be a part of a future episode of the Auto Remarketing Podcast.
Download and subscribe to the Auto Remarketing Podcast on iTunes or on Google Play. You can also listen to the latest episode in the window below.
Credit Acceptance Corp. appears well aware of the risk the finance company is taking as installment contract dollar amounts as well as terms keep growing.
But that risk is certainly paying off — literally — as the company’s first quarter consolidated net income jumped by nearly $20 million year-over-year.
Credit Acceptance reported that Q1 consolidated net income came in at $93.3 million, or $4.72 per diluted share, up from $74.4 million, or $3.63 per diluted share, in the year-ago quarter.
The company added that adjusted net income, a non-GAAP financial measure, for the three months that ended March 31 totaled $92.3 million, or $4.67 per diluted share, compared to $82.3 million, or $4.02 per diluted share, for the same period in 2016.
Credit Acceptance indicated its origination unit volume declined 6.6 percent as the finance company added 94,809 installment contracts. Driven by multiple factors, Credit Acceptance mentioned dollar volume associated with those originations grew 6.4 percent during the first quarter.
Management reported the number of active dealers in its network rose by 4.8 percent to 7,851, but the company acknowledged average volume per active dealer declined 11.0 percent.
“Dollar volume grew while unit volume declined during the first quarter of 2017 due to an increase in the average advance paid per unit,” Credit Acceptance said. “This increase was the result of an increase in the average size of the consumer loans assigned primarily due to an increase in the average initial loan term and an increase in purchased loans as a percentage of total unit volume, partially offset by a decrease in the average advance rate due to a decrease in the average initial forecast of the consumer loans assigned.
“Our progress in growing unit volumes has slowed considerably over the last five quarters,” the company continued. “For the most recent two quarters, unit volumes declined as compared to the same periods of the prior year. This trend reflects the difficulty of growing the number of active dealers fast enough to offset the impact of the competitive environment on attrition and per dealer volumes.
“In addition, in response to the decline in forecasted collection rates experienced in 2016, we adjusted our initial collection forecasts downward during 2016. While the adjustments have been modest, we believe these adjustments have had an adverse impact on unit volumes,” Credit Acceptance went on to say.
During the company’s conference call with investment analysts, Credit Acceptance chief executive officer Brett Roberts mentioned that the finance provider average term for contracts written in Q1 averaged 54 months. However, Roberts declined to give loan-to-value metrics when asked about the company’s risk appetite and mitigation.
“The loan term is disclosed. You can see we’ve got a little bit longer this quarter. We don’t disclose loan-to-value. But as we’ve talked about with the term, it’s a mix issue,” Roberts said.
“We write loans with terms of 24 months up to 72 months. For about 80 percent of the loans we write, we have a full amortization period behind us. We’ve got a full history on how those loans will perform,” he continued. “And for the 66-month and 72-month loans, we don’t have a full history. I think we’re about 75 percent of the way through the 66 months. So, we have 48 to 50 months of history there. And on the 72, we have about between 24 and 30 months of history on those. So, we feel like for most loans we write, we’ve got good data to back it up.
“For the 72-month loans, we have to do a little bit of estimation, so there’s a little bit more risk there,” Roberts added. “But because we’ve got a lot of 60s and lot of 66-month loans on which to base it, we don’t think it’s a stretch to be able to forecast those with a high degree of accuracy.”
Securitization update
The last securitzation Credit Acceptance finalized came back on Feb. 23 when the company announced the completion of a $350.0 million asset-backed non-recourse secured financing. Pursuant to that transaction, Credit Acceptance contributed contracts having a net book value of approximately $437.8 million to a wholly-owned special purpose entity that issued three classes of notes.
Wall Street observers asked the company for its current impression of the auto ABS market.
“Well, speaking relative to conditions in the capital markets, certainly nothing that we’re seeing at this point that would indicate that the ABS market is less available to the industry than it has been,” Credit Acceptance senior vice president and treasurer Doug Busk said.
“Spreads were very attractive in Q1. They have widened a bit since then, but are still at relatively attractive levels. So, certainly, nothing on the funding side,” Busk continued.
When Busk mentioned spreads, it triggered more inquires during the call as one investment analyst wondered about another finance company posting a “pretty widening spread in the bottom tranches” of its offering.
The call participant asked, “Do you think that’s a one-off situation with the placement of that deal or do you think that’s a trend that we might actually see investors place lower demand on bottom tranches of ABS deals?”
Busk replied, “It’s a good question, and it’s a little bit tough to say because there hasn’t been a lot of subprime auto issuance real deep in the capital stack over the last few weeks. Certainly, spreads have widened out in general a little bit, but the widening has been much more extreme on the BB and BBB tranches than it has on the higher-rated tranches.
“So I think at this point it’s a little bit premature to conclude on that point. We’ll just have to watch subsequent issuances and see what happens,” he added.
Rising cost of doing business
Elsewhere in Credit Acceptance’s Q1 financial report, the company mentioned an increase in salaries and wages expense of $4.2 million, or 13.4 percent. Credit Acceptance also had an increase in sales and marketing expense of $3.5 million, or 30.2 percent, primarily as a result of “an increase in sales commissions driven by higher consumer loan assignment unit volume related to seasonality and an increase in the size of our sales force.”
The company said it also had an increase in general and administrative expense of $1.4 million, or 11.2 percent, stemming mostly from of an increase in “legal fees.”
“We’re in the process of expanding the numbers of salespeople that we have,” Roberts said. “The number at the end of Q1 was higher than the start of Q1 but a lot of those salespeople are new so we haven’t seen much of an impact yet in terms of the unit volume numbers.
“But hopefully as they become more seasoned, we’ll see a positive impact from that,” he added.
S&P Global Ratings recently considered what two specific areas contain the most risk since loosening underwriting resulted in U.S. auto loans and leases rising steadily over the past several years to reach all-time highs in 2016.
With more than $1 trillion in outstanding balances, S&P Global Ratings acknowledged the figure has raised questions about whether the growth will ultimately lead to significant asset quality deterioration and increased depreciation on leases, as well as which finance companies will bear the impact. The firm considered those questions and more in recent article titled, “How Worsening Auto Finance Conditions Could Affect Banks, Nonbank Finance Companies, and Captive Finance Companies.”
Adding to analysts’ concerns are subprime auto delinquencies climbing recently while used-vehicle prices have somewhat declined.
“We believe the greatest areas of market and credit risks are leasing and nonprime —including subprime —lending, respectively, and the financial institutions with significant concentrations in those areas, or in auto finance in general, are at risk of declining earnings or even bottom-line losses,” said S&P Global Ratings credit analyst Brendan Browne.
S&P Global Ratings reminded the industry that the financial institutions the firm rates includes captive auto finance companies owned by manufacturers given that they hold the lion's share of leases. Because of their contract exposure, the firm also mentioned that its recent analysis includes two nonbank auto finance companies — DriveTime Automotive Group and Credit Acceptance — as well as a handful of banks, most notably Santander Holdings USA and Ally Financial.
"If used-car prices continue to fall, the captives likely will have to report higher depreciation expenses on their leases, and non-prime lenders will have lower recoveries on defaulted loans,” Browne said. “A further increase in delinquencies and losses on loans would affect lenders. We could lower our ratings on companies in auto finance if these trends were severe enough.”
With regard to the used-vehicle prices, the Manheim Used Vehicle Value Index came in at 124.7 in April, which was up 1.6 percent year-over-year. According to a report accompanying the index, wholesale prices climbed 0.5 percent from March on a mix-, mileage- and seasonally adjusted basis.
In an analysis accompanying the index, Cox Automotive chief economist Tom Webb downplayed the concern many analysts have expressed about used-car price declines.
“Although the Manheim Used Vehicle Value Index increased for the first time this year on a month-over-month basis, used-vehicle values have not collapsed the way many analysts have warned of for more than a year due to expected increases in wholesale supplies,” Webb said. “And in fact, what weakness we have seen is probably more a result of excessive new-vehicle inventory, not used.”
Meanwhile, TransUnion reported the auto finance delinquency rate increased from 1.16 percent in Q1 2016 to 1.30 percent in Q1 2017, driven by poorer payment performance in the subprime and near prime segments.
“Serious auto loan delinquency rates are approaching levels not seen since the recession, but it’s important to understand that delinquencies in the auto market never elevated to levels observed for other key credit products such as credit cards and mortgages,” said Brian Landau, senior vice president for financial services and automotive business leader for TransUnion.
“Regardless, with flatter sales volumes and higher delinquencies, we anticipate lenders will evaluate their credit policies for subprime and near prime borrowers to calibrate for the uptick in delinquencies,” Landau continued.
S&P Global Ratings indicated a few factors that provide some protection against ratings downgrades include support from parents (as in the case of the captives and Santander), diversification outside of auto (for most banks), and ratings that already factor in an expectation of high losses on auto loans (as in the case of the nonbank finance companies).
“Still, we view worsening conditions in auto finance as a negative rating factor for all of these companies,” S&P Global Ratings said.
The S&P Global Ratings report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com.
Staff writer Joe Overby contributed to this report.
