Customers looking to finance or refinance their vehicles through Ally’s newly launched auto finance marketplace, Clearlane, will soon be able to complete financing online through a new digital signing capability.
Built on top of its digital transaction management platform, officials highlighted the SmartSign technology from eOriginal will be incorporated into the Clearlane platform in July and will allow customers to sign and submit their financing documents online or via mobile devices, facilitating a more efficient transaction.
“A digital signing capability is a strong addition to Clearlane that will add efficiencies and time savings for both our customers and our network of lenders,” said Tim Russi, president of auto finance at Ally.
“Being able to sign and submit financing documents online will help alleviate stress and increase customer satisfaction, especially with millennial customers, a large consumer demographic in the automotive market,” Russi continued.
Russi went on to mention the ability to sign and manage documents digitally is expected to bring additional speed and convenience to Clearlane's auto finance and refinance process by eliminating the need to print, sign and scan documents to complete transactions.
Ally contends that the capability puts Clearlane on the leading edge of the digital signing trend, as Forrester Research estimates that eSignature transaction volume will exceed 700 million by 2017.
"Taking paper out of the vehicle buying process improves the customer experience, reduces dealer overhead costs and expedites funding cycles,” eOriginal president Stephen Bisbee said. “We are excited to work with Ally to integrate our platform into Clearlane’s lending marketplace, and help to ensure accurate, fast and secure transactions on the site, which all contribute to a great user experience.”
Ally launched the Clearlane marketplace in April, connecting consumers with more than a dozen finance providers to help finance or refinance their vehicles. For more information about Clearlane, visit www.clearlane.com.
EFG Companies announced earlier this week that the company has achieved national recognition for its efforts across the entire organization. EFG was recognized in the 15th annual American Business Awards, receiving:
• Gold in Communications Department of the Year
• Bronze in Communications or PR Campaign of the Year under the Reputation/Brand Management Category
• Bronze in Marketing Campaign of the Year under the Financial Products and Services Category
With more than 3,600 entries this year, the American Business Awards is one of the nation’s premier business awards program. More than 190 professionals worldwide participated in the judging process to select this year’s award winners. These judges found EFG’s campaigns and initiatives to be comprehensive, measurable and holistic.
EFG was also recently recognized as a Top Contact Center by BenchmarkPortal. Previously known as the Top 100 Contact Centers, this recognition is based on statistical comparison to the world’s largest and most respected database of call center metrics.
BenchmarkPortal objectively identifies centers that achieve superior results in both financial and qualitative terms. This marks the second year in a row in which EFG has achieved this distinction through its commitment to exceeding customer expectations.
• The company’s average call speed to answer is less than 30 seconds.
• 67 percent of total claims are one call claims.
• 96 percent of all claims are paid within one hour of receipt of invoice.
“At EFG, we strive every day to achieve customer service excellence,” said John Pappanastos, president and chief executive officer of EFG Companies. “This requires that everyone who comes to work at EFG takes personal accountability for living up to our values of dependability, respect, integrity, visionary and excellence.
“We would not be able to achieve recognitions from organizations like the American Business Awards and BenchmarkPortal without the everyday efforts of our team to help drive success in our clients’ businesses, and fulfill our promise to take care of contract holders at their time of need,” continued Pappanastos, who will be a special guest on an upcoming episode of the Auto Remarketing Podcast.
Download and subscribe to the Auto Remarketing Podcast on iTunes or on Google Play.
The latest move coming from defi SOLUTIONS is the launch of what the company dubbed defi EXCHANGE, a secure, online portfolio marketplace where sellers of auto finance portfolios can access multiple buyers and manage the entire sales process.
The company highlighted defi EXCHANGE is designed to improve efficiencies and profitability by automating and enhancing processes, revolutionizing the way auto finance portfolios are bought and sold.
With defi EXCHANGE, defi SOLUTIONS chief executive officer Stephanie Alsbrooks explained that buyers no longer need to build their bulk deal evaluation outside their financing platform in spreadsheets and with manual processes that require extra data scrutiny and attention. Alsbrooks indicated sellers no longer need to provide sensitive consumer data to many potential buyers and then follow up manually.
Alsbrooks insisted defi EXCHANGE eliminates processing inefficiencies and allows for the complete evaluation and pricing provided by a loan origination system.
She added the development of defi EXCHANGE resulted from the purchase of SellYourBulk.com, one of the first firms to offer this kind of technology to the auto loan marketplace. SellYourBulk.com began operations in 2015.
“The key reason we acquired SellYourBulk.com is because defi SOLUTIONS and Sell Your Bulk share the same passion for helping auto lenders become more efficient while growing their business,” Alsbrooks said. “We’ve been in the lenders’ shoes and understand the challenges they face, so we’re committed to building and delivering tech-forward products that bring much-needed convenience, efficiency and control.”
In addition to buying the SellYourBulk.com technology, defi SOLUTIONS has retained creator Randy Spradlin to lead the ongoing development and growth of defi EXCHANGE.
“Before defi EXCHANGE, there wasn’t a place to go to efficiently purchase auto loan portfolios,” Spradlin said. “We’re providing access to quality loan portfolios to buy and sell. The key is making it accurate, secure and simple to use.”
And once a defi EXCHANGE seller securely submits a portfolio, the company pointed out, multiple buyers get alerted based on their buying criteria and can quickly make offers. Sellers can then compare offers, select the best, negotiate final terms, complete due diligence, close and get paid — all from a central streamlined system.
To learn more about defi EXCHANGE, reach out to Spradlin at [email protected] or visit defiSOLUTIONS.com/EXCHANGE.
On Wednesday, FactorTrust released its newest Underbanked Index, highlighting quarterly insights of the earning, spending and living habits of underbanked consumers — what the firm contends is a $105 billion untapped market.
The index highlighted the demographic characteristics, credentials and capacities of the underbanked, like the trend of median loan values among this segment increasing as incomes increase.
The analysis — derived from FactorTrust’s proprietary alternative credit data used in analytics and risk scoring solutions by lenders and to make informed decisions about consumers they want — showed four main findings. They included:
—Age and gender: The average age of underbanked consumers at the time of the loan application is 39, and the average age of the borrower in 41. The average loan amount borrowed trends upwards with age, peaking at 45. This trend has shifted to a slightly older demographic over the course of the last several years, due in part to growth in the diversity of products, channels of delivery and average size of loans.
—Income and loan amounts: While the average income for applicants is $2,712 ($32,544 annually), for borrowers, the average is slightly higher at $2,936 ($35,232 annually).
—Employment: More than 50 percent of underbanked consumers are employed in two primary areas: retail (32 percent) and quick serve restaurants (20 percent). The average length of employment with one employer is 34 months.
—Education: Approximately 45 percent of underbanked consumers hold a bachelor’s degree or higher. Another 54 percent hold only a high school diploma, while another one percent has attended a vocational or technical school or program.
FactorTrust chief executive officer Greg Rable explained that determining which consumers are borrowing, how much they borrow, and their income can assists finance companies and other lenders with determining right-pricing opportunities and term setting appropriate for the underbanked market.
“As the leading alternative credit bureau, our updated Index on underbanked consumers is another educational resource we provide the industry that sets us apart,” Rable said.
“We continuously update our findings to help lenders, as well as interested associations, analysts and media, to better understand the demographics of this growing segment of the consumer population,” he continued in a news release.
FactorTrust generated an infographic about the latest Underbanked Index, which can be downloaded here.
The Federal Open Market Committee within the Federal Reserve is set to conduct its next regularly scheduled meeting on Tuesday and Wednesday. It appears the policymakers have much to discuss since first-quarter gross domestic product figures arrived this past Friday.
With interest rates on the mind of auto finance providers and others in the industry, the GDP figures prompted a pair of experts from First Franklin Financial Services to state, “The fact the Fed can no longer hold off on rate hikes really raises the stakes for the overall economy because we now have zero room for negative downturns. We really need these consumers to step up and start spending their higher wages and we really need some of this soft data to come to fruition.”
According to a recap from Comerica Bank, the first estimate of Q1 real GDP came in “about as expected” with a 0.7 percent annualized growth rate. Chief economist Robert Dye indicated several factors were in play. He noted that personal consumption expenditures — what he called the lion’s share of GDP — increased at a 0.3 percent annualized rate.
“A soft Q1 was expected, and that’s what we got,” Dye said in a commentary released by Comerica Bank. “We continue to expect better performance for the current quarter and through the end of this year.
“However, there is a growing question mark over Washington, D.C. We need to see some real progress on the Trump administration’s fiscal agenda in order to justify positive economic expectations for the second half of this year,” Dye continued.
“The failure of meaningful tax reform and infrastructure initiatives could result in a negative and consequential reset of business and consumer expectations and confidence,” he went on to say.
First Franklin Financial Services chief market strategist Brett Ewing and research director Lance Mitchell echoed a similar position, stating consumers took a “wait and see” attitude in the first quarter. Ewing and Mitchell acknowledged this situation is making forecasts even more difficult to make.
“The story continues to be the struggle between the hard and soft data gathered since election time,” they said. “Inconsistencies between the supposedly more bullish consumer and business communities versus the actual dollars and cents they are spending are plaguing the accuracy of economist reports.
“It makes it impossible to predict whether this economy is peaking or just getting revved up,” they added.
Ewing and Mitchell described the near-term as a potential “inflection point” for the economy. Why?
“Business costs are rising as they fight for labor in an extremely tight labor market. But it remains to be seen if higher wages and compensation will eventually run through the economy and lead to higher spending,” they said.
And as far as what the Fed might do, perhaps policymakers won’t tip their hands this week. But when they gather again on June 13 and 14, it might be a completely different situation.
“We believe this also gives the Fed the green light to continue hiking rates and odds should rise to a near certainty for June. They simply cannot hold off into such strong labor numbers,” Ewing and Mitchell said.
Meanwhile, Dye agreed.
We look for the Fed to keep the fed funds rate steady at their upcoming Federal Open Market Committee meeting,” he said. “The odds of a June 14 interest rate hike are increasing.
“According to the fed funds futures market, the cumulative implied odds of a June 14 fed funds rate hike are now up to about 71 percent, which indicates a strong market expectation,” Dye went on to say.
Consumer Portfolio Services chairman and chief executive officer Brad Bradley likes the position where the subprime auto finance company sits after the first quarter.
And it’s not just because CPS posted its 23rd consecutive quarter of positive earnings.
Bradley pointed to the difference where CPS stands with more than 25 years in the subprime business versus newer operations that might have only a fraction of that the portfolio seasoning.
During the company’s Q1 conference call conducted last week, Bradley touched on some similarities in the competitive landscape he’s seeing now that percolated back in 2008 and 2009.
“Both of those were some result of a recession. We haven't had a recession this time, but certainly feels a lot like there is going to be some consolidation in industry. We’re going to lose some of the competitors in the industry,” Bradley said.
“There is a lot of competitors in our industry struggling. Lots of small ones that came into the industry over the last couple of years are now having some real significant problems as the paper they’ve bought hasn’t performed,” Bradley continued a couple of moments later during his opening comments when he often shares his assessment of the entire subprime industry.
“They’re going to have more difficult access to the capital markets. And that also applies to some of the larger players in our industry who have grown real fast and haven’t really done as well as people might have expected. And so again many folks are waiting to see how that shakes out,” he said.
In terms of how the first quarter shook out for Consumer Portfolio Services, the company reported earnings of $4.5 million, or $0.16 per diluted share.
Meanwhile, revenue jumped 6.9 percent year-over-year to land at $107.6 million. However, the company’s Q1 operating expenses spiked 12.9 percent to $99.8 million; impacting in part on the year-over-year decline in net income.
A year earlier, CPS said, its net income came in at $7.2 million, or $0.24 per diluted share.
During the first quarter of 2017, CPS purchased $229.6 million of new contracts compared to $215.3 million during the fourth quarter of 2016 and $312.3 million during the first quarter of 2016. The company's managed receivables totaled $2.323 billion as of March 31, an increase from $2.308 billion as of Dec. 31 and $2.142 billion as of March 31 of last year.
“In terms of originations, as I mentioned, we haven't seen too much signs of tightening overall in the industry,” Bradley said. “I think some of the bigger folks, some of the larger banks have certainly talked about tightening, and you may be seeing a little bit of it there. Down in our end of the neck of woods, you really haven't seen too much of it lately.”
Bradley mentioned that CPS did tighten its loan-to-value ratio to the lowest point it has been since Q2 of 2014.
“We think LTV is one of the real indicators of what you're buying,” he said. “So, that would be an easy way to indicate that we certainly did do some tightening in the first quarter.
“I think other players will tighten as they go or maybe we’ll see more tightening, but at the moment certainly through the first quarter we haven’t seen too much other than sort of ourselves,” Bradley said.
Also noted in the company’s latest financial statement, CPS indicated annualized net charge-offs for the first quarter of 2017 stood at 7.91 percent of the average owned portfolio as compared to 7.57 percent for the first quarter of last year.
The company added its delinquencies greater than 30 days (including repossession inventory) involved 9.74 percent of the total owned portfolio as of March 31, as compared to 8.97 percent on the same date a year earlier.
CPS announces $225.2M securitization
In other company news, Consumer Portfolio Services also announced the closing of its second term securitization in 2017. The transaction is CPS’ 24th senior subordinate securitization since the beginning of 2011 and the seventh consecutive securitization to receive a triple-A rating on the senior class of notes from at least two rating agencies.
In the transaction, qualified institutional buyers purchased $225.17 million of asset-backed notes secured by $230.0 million in automobile receivables originated by CPS. The sold notes, issued by CPS Auto Receivables Trust 2017-B, consist of five classes.
Ratings of the notes were provided by Standard & Poor’s and Kroll Bond Rating Agency, and were based on the structure of the transaction, the historical performance of similar receivables and CPS’s experience as a servicer.
Note
Class |
Amount |
Interest
Rate |
Average
Life |
Price |
S&P
Rating |
KBRA
Rating |
| A |
$101.660 million |
1.75% |
.71 years |
99.99332% |
AAA |
AAA |
| B |
$38.985 million |
2.33% |
1.87 years |
99.99341% |
AA |
AA |
| C |
$34.155 million |
2.92% |
2.57 years |
99.98493% |
A |
A |
| D |
$27.715 million |
3.95% |
3.26 years |
99.97496% |
BBB |
BBB |
| E |
$22.655 million |
5.75% |
3.94 years |
99.98065% |
BB- |
BB- |
The company indicated the weighted average coupon on the notes is approximately 3.45 percent.
CPS said the 2017-B transaction has initial credit enhancement consisting of a cash deposit equal to 1.00 percent of the original receivable pool balance and over-collateralization of 2.10 percent.
The final enhancement level requires accelerated payment of principal on the notes to reach overcollateralization of 7.45 percent of the then-outstanding receivable pool balance.
Officials went on to note the transaction utilizes a pre-funding structure, in which CPS sold approximately $145.7 million of receivables in April and plans to sell approximately $84.3 million of additional receivables during May.
“This further sale is intended to provide CPS with long-term financing for receivables purchased primarily in the month of April,” the company said.
A quartet of auto finance technology firms collaborated this week on a pair of relationships aimed at enhancing both originations and payments.
First, Payix and Nortridge Software announced they formed a strategic alliance to help finance companies connect with their borrowers and improve their ability to collect payments. The alliance is geared to allow Payix to offer real-time integration between its suite of collections tools and the Nortridge Loan System (NLS).
Then, AutoGravity announced a partnership with CarFinance.com, a direct to consumer online finance company that is an affiliate of Flagship Credit Acceptance. The partnership is designed to give qualified users access to even more financing options through the AutoGravity digital platform.
Both developments come at time when the latest report generated by the Federal Reserve Bank of New York declared that 2016 officially represented the year of the highest auto finance originations — at least in the 18-year history of the data officials obtained from Equifax.
Payix’s collections tools include its intuitive, engaging and affordable mobile collections application, as well as web, interactive voice response (IVR), text and collector portal applications. Nortridge explained that its clients can add the Payix solutions to their existing collections tools with virtually no IT work on their part and in just a few weeks’ time.
“Lenders are always striving for ways to improve collections,” Nortridge Software president and chief executive officer Greg Hindson said. “The integration between Nortridge and Payix makes it easy for borrowers to pay anywhere and anytime — benefiting both borrowers and lenders.”
Executives went on to mention the Nortridge and Payix teams collaborated in the development of the seamless web services interface between the Nortridge Loan System and the Payix payment system, ensuring that transactions could be carried out in real-time and without interruption.
“We are elated to partner with an organization as strong and well-respected as Nortridge Software,” Payix president Chris Chestnut said. “Their products are incredibly flexible and reliable, and their team of industry leaders is fantastic to work with. We both realize our organizations are stronger together, and we couldn’t be more pleased to be able to form this alliance with them.”
Payix’s collections tools are white-labeled to help finance companies promote their own brands with their borrowers, and they were specifically designed for any size lender to use easily and affordably. Chestnut elaborated about the tool in this report from SubPrime Auto Finance News.
So finance companies can have more contracts on which to collect, the team at AutoGravity contends its smartphone technology helps potential buyers get up to four personalized finance offers on the new or used vehicle of their choice — on average in under 10 minutes.
Designed with state-of-the-art security, AutoGravity protects user information with advanced bank-level encryption to ensure that sensitive information is processed securely. The tech company also recently confirmed that its network of partner dealerships has grown to more than 1,400 franchised dealers.
“AutoGravity transforms car financing by empowering car buyers with up to four binding finance offers in minutes,” AutoGravity founder and chief executive officer Andy Hinrichs said. “Growth in our network of partner lenders creates more options for our users, marking another great step forward in delivering a world-class digital car shopping and financing experience.”
CarFinance.com joins a growing list of automotive finance providers that have embraced proprietary AutoGravity technology to allow consumers to shop for vehicles and see personalized financing options, all from the convenience of their mobile phones. Users are empowered by a one-of-a-kind financing experience that delivers efficiency, transparency and freedom of choice.
“We are pleased to partner with AutoGravity, a rising star in the digital car financing market,” said Samuel López, senior vice president and general manager of CarFinance.com. “More consumers are using digital tools to shop for and finance their cars, as we have seen with our customers at CarFinance.com.
“Our partnership with AutoGravity will provide car buyers, particularly millennials, access to our suite of best-in-class online tools that make it easy to complete the entire loan process online,” López continued.
Finance offers from CarFinance.com are now available to shoppers on all versions of the AutoGravity auto financing platform.
“Our success at CarFinance.com is driven by our ability to offer a fantastic user experience as our customers secure financing for their next car,” said Gerry Quinn, vice president of business development at CarFinance.com.
“Through our partnership with AutoGravity, we are seizing the opportunity to expand our reach and serve new customer segments with a cutting-edge mobile solution that complements our own digital lending platform and seamless online journey,” Quinn went on to say.
A recent Equifax survey indicated most consumers who participated do not place themselves at the head of the class when it comes to financial literacy. Auto finance companies such as General Motors Financial are putting initiatives in motion to coincide with National Financial Literacy Month in April to improve the situation.
First, the challenge that Equifax uncovered. Its survey showed one-third of the respondents grade themselves a "C" when looking at their financial literacy knowledge.
Findings also pointed out that one in five surveyed consumers know more about national politics than their own credit histories, 13 percent said they knew more about their favorite sports teams, 7 percent said they knew more about this season of their favorite TV series, and 6 percent knew more about the latest fashion trends.
The good news is that most consumers are taking steps to educate themselves when it comes to financial literacy. When asked to select the steps they’ve taken to improve their financial literacy within the last year, Equifax found that 45 percent of the surveyed consumers said they read news articles on financial websites, while 28 percent sought guidance from family and friends.
While parents were the most popular source of information, the second most common source was a personal finance course during high school or college. Equifax noted 90 percent of survey respondents saw value in teaching personal finance, saying they thought it should be a required course to graduate high school.
“At Equifax Global Consumer Solutions, we know that financial literacy is a key part of the foundation to establishing responsible credit behavior,” said Dann Adams, president of global consumer solutions at Equifax. “Without a basic understanding of credit and your own behaviors, it can become challenging to do some of the basic fundamentals such as save for retirement, establish an emergency savings account or move beyond living paycheck to paycheck.
"One of the survey’s results we found encouraging is that many consumers understand the importance of paying bills on time, every time. When it comes to creating knowledge, and establishing the right kinds of credit behaviors, we can't emphasize this point enough,” Adams added.
The survey also found:
—Most surveyed consumers correctly selected the factors that can impact credit scores. Specifically, 87 percent knew paying bills on time is one factor that impacts a credit score.
—Additionally, 42 percent of surveyed consumers knew that most types of negative information can stay on a credit report for seven years. This is up slightly from the 40 percent of surveyed consumers who knew this same information in 2016.
—A majority of surveyed consumers felt confident about their short- and long-term financial futures. Sixty-one percent indicated they were confident or extremely confident about their short-term financial futures, and 54 percent indicated they were confident or extremely confident about their long-term financial futures.
Respondents 60 years of age and older were most confident about their financial futures, while respondents aged 45 through 59 were least confident.
“As consumers age and financial needs change, the importance of staying educated about personal finance and credit is absolutely critical,” Adams said. “We will continue to learn from these surveys and infuse financial wellness and literacy into our consumer-facing efforts at Equifax."
For the second annual Equifax Global Consumer Solutions Financial Literacy Survey, Equifax commissioned a blind survey of more than 1,000 American consumers in March. The margin of error for this survey is plus or minus 5 percent.
And Equifax isn’t alone in its efforts to educate consumers about finances.
GM Financial reaffirmed its commitment to empower and enrich local communities through financial education and resources that create opportunities for upward mobility.
National Financial Literacy Month was officially established in 2004 to highlight the importance of this critical skillset and teach Americans how to establish and maintain healthy financial habits. This month, GM Financial will advance the financial literacy mission through its sponsorship of Financial Literacy Day on Capitol Hill (“Hill Day”) planned for April 28.
Hill Day was created to raise awareness on Capitol Hill and among capital-area thought leaders about current efforts to improve our country’s financial literacy, and to showcase organizations that are leading the way. The event is organized by Jump$tart Coalition, a non-profit organization dedicated to improving personal financial literacy.
This engagement follows the launch of the finance company’s comprehensive educational program, KEYS by GM Financial, late last year. This program includes live, interactive training sessions with a certified GM Financial facilitator, tailored terminology guides, comprehensive budget worksheets and access to free online tools and resources.
“As a financial institution and engaged corporate citizen, GM Financial is committed to improving financial literacy with our customers and communities,” GM Financial president and chief executive officer Dan Berce said.
“Through our KEYS program and outreach, we are demonstrating this commitment by developing and delivering critically important credit, budgeting and basic financial education that helps fulfill dreams of social and financial mobility,” Berce continued.
The company also recently announced a partnership with the City of Fort Worth’s job development initiative CAPWORKS to provide biweekly financial literacy education.
GM Financial highlighted the KEYS curriculum complements and aligns with the other comprehensive services CAPWORKS already provides to economically disadvantaged families, individuals and elderly in Tarrant County, including energy bill payment assistance, economic independence coaching, emergency rental payment assistance, tuition reimbursement and more.
Cox Automotive chief economist Tom Webb cautioned watchers of the auto ABS market as well as managers who compute severity of loss at finance companies. Webb insisted that softening wholesale values and what vehicles might be fetching at the auction are not the only components potentially dragging on recovery rates and impacting financial statements.
Webb acknowledged during this final conference call for the company that the recovery rate on repossessions “have been very troubling for some lenders as of late.”
For example, Consumer Portfolio Services reported that as of Dec. 31, its finance receivables related to the repossessed vehicles in inventory totaled $40.1 million. CPS applied a valuation adjustment, or loss allowance, of $28.9 million, which was based on a recovery rate of approximately 28 percent.
And over at Nicholas Financial, the company reported at the close of the third quarter of its fiscal year that its write-off to liquidation percentage rose to 12.35 percent. Nicholas Financial defined this metric as net charge-offs divided by liquidation, which is the beginning receivable balance plus current period purchases minus voids and refinances minus ending receivable balance.
When explaining how he sees severity of loss, Webb said, “Please do not write this up as simply lower wholesale used-vehicle values. In many cases, that was the minor factor.
“Clearly if you inflate your loan-to-value ratio to 130 percent, your severity of loss will increase. But it’s even more than that,” he continued. “Just how squishy is that quote value in the loan-to-value ratio. Value is an editorialized guidebook assumption at the time of the contract origination, not the market value at the top of repossession. More importantly, what exactly is in that value figure? Service contracts? Fancy wheel rims etc. at $150 a pop? Or even the possible stealth hiding of negative equity to empower booking?”
With conjecture about diminishing recoveries impacting underwriting decisions — especially in the subprime space — Webb compared the situation to the fable, “The Boy Who Cried Wolf.” As you might recall, the story goes on about a shepherd boy who repeatedly tricks nearby villagers into thinking wolves are attacking his flock. When one actually does appear and the boy again calls for help, the villagers believe that it is another false alarm.
“In the end, there was a wolf,” Webb said.
So is credit availability about to be eaten up like a wolf might devour a sheep?
“I do expect that some time credit conditions will roll over,” Webb said. “Whether they roll over gently or not remains to be seen. That will put an additional downward pressure on used-vehicle values.”
Views on residual values
During the conference call, Webb also explained how changing used-vehicle values might be misunderstood in the leasing arena, as well. Of course, residual values are a huge factor since new-vehicle leasing constituted a roughly 30 percent of new-vehicle deliveries in 2016, according to reports released each quarter from Experian Automotive.
“It is not inconsistent for the Manheim Index to show high and stable pricing while at the same time our commercial consignors are reporting larger end-of-term lease losses and lower repo recovery rates. There are two simple reasons for that,” Webb said.
“First, the bleed-over from new-vehicle pricing. Let’s put it in very simple terms,” he continued. “Basically, the Manheim Index today has been flat for years. It was 124.4 in March 2014 versus 124.1 today. Meanwhile new-vehicle transaction prices rose from $32,073 to $34,342 today, according to Kelley Blue Book.
“Thus, if your three-year lease residual written in 2014 was at 45 percent, that meant an end-of-term dollar amount of $14,433,” he went on to say. “If wholesale pricing was flat, as it was, then at today’s new-vehicle pricing you would need to reduce your residual percentage to 42 percent. Well, we all know lessors did not reduce their residual assumptions. Indeed they raised them.
“So let’s face it, residual setting remains very much a look-in-the rear-view mirror type of exercise,” Webb added.
Webb also mentioned the return rate — a vehicle not bought by the grounding dealer nor by the lessee — is currently running at about 50 percent to 55 percent. Webb emphasized that level is much less than back in 2002 when return rates soared past 80 percent as many commercial banks got into the leasing game and the remarketing industry wasn’t as evolved as nowadays.
“As you get a wider spread between contract residuals and market values it certainly goes up,” he said. “As you get a higher number of units, it certainly goes up.
“We expect it to go up, but it will not go anywhere close to what it was in the last lease cycle in 2002,” Webb continued. “The primary difference is leasing is primarily controlled by the captive finance companies. They have a lot of carrots and sticks to get the grounding dealer to buy that vehicle at end of term. Of course, they offer that dealer a fair market price, not the contract residual.
“The reason a grounding dealer would pass is simply because he has too many of that particular model. He might have that particular car already in stock, so they’ll pass,” he went on to say.
The latest report generated by the Federal Reserve Bank of New York declared that 2016 officially represented the year of the highest auto finance originations — at least in the 18-year history of the data officials obtained from Equifax.
And at least one finance company that specializes in subprime paper isn’t sure when the current cycle of aggressive originating is going to slow.
The New York Fed indicated there were $142 billion in auto originations during the fourth quarter, leaving the amount of outstanding balances at $1.16 trillion, roughly $93 billion higher than the close of 2015.
In the company’s letter to shareholders distributed this week, Credit Acceptance chief financial officer Kenneth Booth tried to leverage past credit cycles to project what might happen for the rest of this year and beyond.
Booth told Credit Acceptance shareholders that he expected the current origination cycle to unfold similar to the one that began in 1994, which lasted four years, as well as the one that started in 2003, which stretched on for five years. He acknowledged the current cycle began in 2012 and now is working toward a sixth year.
“While much has been written about an imminent collapse of our industry, so far those predictions have not materialized,” Booth wrote. “The first two cycles ended for different reasons. In the mid-1990s, it was mistakes made within our industry that caused the cycle to end. Like us, others in the industry grossly misjudged the performance of the loans they were originating. In contrast, the end of the 2003–2007 cycle had very little to do with anything that occurred in our industry, but instead was due to the global financial crisis triggered by the collapse of the housing market.
“As I write this letter, it is difficult to see anything on the horizon that will cause this current cycle to end,” he continued. “Some might point to a decline in used vehicle values (which adversely impacts loan performance), although so much has been written about this that I expect many in the industry have already factored it into their models. Some might point to an expected rise in interest rates, although it would seem to be relatively simple for the industry to gradually adjust pricing models to offset any increase in rates.
“Although I continue to believe that we will have a more favorable environment at some point in the future, my long-term outlook has changed,” Booth went on to say.
Booth then mentioned that the current environment “may be the norm,” while the period that included the Great Recession “may be the exception,” in reference to the span from 2008 through 2010.
“While this is not much more than a guess on my part, and I try to avoid making predictions about the future, I think it’s important to share my thoughts with shareholders, even when those thoughts may prove to be incorrect,” Booth wrote. “In my view, it seems likely that the markets that supply capital to our industry may have figured out how to protect themselves by structuring financing transactions with a margin of safety.
“There is much more information available today and a much longer historical track record upon which they can base their conclusions. If so, capital availability may at times be modestly more restricted, but a complete exit of capital sources from our industry as occurred in the mid-1990s and after the financial crisis may not occur for many years,” he continued.
So where do current conditions leave Credit Acceptance and perhaps other finance companies, especially ones that book subprime paper?
“If this is true, we will need to accelerate our ability to adapt to a competitive cycle that lasts much longer than we hoped,” Booth wrote. “For us, this means continuing to focus on our product and our culture, but also recognizing that it will be critical to make progress more rapidly.
“What we don’t plan to do is grow volume by taking risks we view as unwise. Instead, we will continue to invest your capital in ways we think make sense and return the rest to you,” he added.
