I recently came across an article titled, “J.D. Power: Speed No Longer Top Consideration When Selecting Finance Sources,” and it sparked my interest about what the modern retail automotive dealer leadership really wants to see from their finance companies when ease of use and speed are concerned. I recently spoke at a conference in Las Vegas, and was surprised by how many of our auto lending competitors were focusing on authenticity and dealer experience, when compared to simply decision and funding speed.
Although I wasn’t surprised that for most retail dealership managers a relationship is more important than application and approval turn-time, one quote in the article mentioned above made me smile from ear to ear as soon as I read the words.
It was this beautiful nugget of information from Jim Houston, senior director of the automotive finance practice at J.D. Power, who said, “Finance sources need to shift from a transactional relationship with their dealers to a more consultative one. Speed has been king and the area lenders have traditionally focused on, but as the market gets tougher, lenders need to center their attention on their relationships with dealers, or they are going to lose business.
For years, we lenders have struggled with the balance of transactional versus consultative selling and (not to pat ourselves on the back) many of us have gotten pretty good at mastering a combined approach, utilizing both techniques successfully.
What was even more interesting were Mr. Houston’s comments about the importance of the lender representative, their interaction with retail sales teams, and the perceived value of the lender representative-dealership call. He shared that consistent visits by a lender representative boosts the overall experience of the dealership’s satisfaction with a lender by as much as 7.5 percent. Those kind of stats put lender representatives and their hard work at an almost superhero or top secret weapon status in our contemporary auto lending environment.
With an impact of lender representative-dealer visits like this, how could it be stated in the very same article that nearly half of dealers surveyed did not receive lender visits at all? Here is where I want to pause and speak directly to the automotive retail dealers’ leadership and management teams.
What’s happening at the store
I know that in your dealership showroom, you can frequently see more lender representatives, vendors, and advertising account managers looking to sell you something than there are “real” customers ready to take delivery of a car. There are an increasing number of hands out, all of them asking for your time and hard-earned cash in exchange for promises to increase profits or reduce your costs in one “new” and innovative way or another. This can be a frustrating occurrence for dealership owners, sales managers, and finance managers like you, particularly when your volume goals aren’t being met and you are struggling to adjust your sales strategy, close out a successful month, and grow your bottom-line according to plan.
As a veteran of the retail auto industry, I remember the days when I swore to myself that if one more lender representative, account manager, or other outside product salesperson came to my desk or headed toward my finance and insurance office, I was going to find a reason to physically throw them out, politely of course, or at least find some personal solace by hiding in the bathroom or the service lane until they were gone. We have all been there.
Call them what you will: lender representative, bank rep, or dealer development representative. Regardless of their title, during my career in retail automotive sales, I was guilty of only leveraging my relationships (or lack thereof) with these sales representatives for a hearty lunch or by asking them for pens, notepads, and the occasional “exception” from their team of credit analysts and funders.
I overlooked these lender representatives for what they were: “secret weapons” that visited me with expert ears and eyes ready to fill me in on all the trends of the industry. They were providing me customized access to authorities knowledgeable about my competitors and their business strategies (what worked and didn’t work for them), and a consistent one-on-one engagement with a specialist who offered a unique insight into the industry that I was unable to see.
These individuals, who I used to avoid (or perhaps worse — used for just a free lunch), were there poised in my showroom ready to help not only me, but also my business and bottom line in any way needed. I didn’t see their value and failed to ask the right questions for the help and guidance I could have really benefited from.
In regard to my bottom-line profit opportunities, they could have been my hero, but instead of seeing Superman, I only saw Clark Kent. I could not get past the secret identity that I had created for my lender representative — one with little value. I had been looking over and through this amazing secret weapon! How wrong was I?
I remember one bank representative who consistently said, “I can help you with liquor, lunch, pens and pads, but not a whole bunch more than that.” What I realize now, is that this lender representative was pandering to the misplaced “value” that I had put on their visits. I had come to expect (maybe even subconsciously demanded) a routine and expected quick pitch about their program, and then we were on to negotiations for lunch, pens, pads, or maybe even tickets to a local game or event.
Instead, if I had come to see these visits differently, I could have earned a real relationship and partnership with an expert (along with their supporting service triangle team of credit analysts and funders), all who have been trained to support Dealerships in protecting and building profits.
How it can be different
Here are just two examples of ways that these lender representative “superhero” secret weapons can help you capture more profit this month, and every month into the future, if you only ask them the right questions:
—Service triangles and profit maximization teams: Understanding what happens to your application once you submit it to any given lender is of utmost importance. Your lender representative can easily talk you through this process, provide you all of the most convenient forms of access to your credit analysts (all who are trained to make you the most money), and to the crucial funders, who verify the application and customer information, and book that profitable deal.
Many lenders choose to utilize service triangle teams (area sales manager lender representatives, credit analysts, and funders) who communicate together every day about your individual business and they discuss how to provide you a quicker approval, improve your deal structures to maximize profit, and work together to ensure your deal is funded in record-time. If you have not utilized your relationship with your lender representative to be introduced to your expert service triangle, or other dealer services teams, I guarantee you are leaving money on the table and are not getting the attention, profit, service, and ease of use from your lender program that you want and deserve.
—Profitable Preferred Programs: With the myriad of lenders available on RouteOne and Dealertrack (presently more than 1,200 nationwide), it is impossible to memorize all of the programs that contribute to your dealership delivering more cars and producing a more robust bottom line. Even if you truly understand all of the nuances and “sweet spots” of any specific lender program, the platform and the profit-opportunity is only as good as the specific essentials required to maximize your profit on every approval. You do not need to simply know what type of deal the Lender buys; you need to understand how to make the most profit on every application they approve. Many times, that lies within their individual preferred status or other loyalty programs.
These preferred programs can, many times, open up the maximum number of allowable ancillary products you can sell on both the front and back-end of your deal, allowing product penetration to skyrocket.
The moral of the story here is to take the time to ask your lender representative about their preferred program and what it can mean to maximize your profits. This may not only surprise you at the end of the month during your gross-profit analysis meeting, but it may also change how you think about and interact with your lender representative.
The lender representative secret weapon
In our insanely competitive industry, it is crucial to take advantage of every opportunity and leverage every possible relationship in order to protect and grow profits your way. One easily overlooked (and potentially game-changing) relationship that you may have yet to maximize, is the one with your lender representative.
I have shared a few examples of how to reframe the way you see your Lender Representative and how to utilize their presence in your Dealership to gain a better understanding of market trends, your competition, and the industry. In addition, by utilizing your Lender Representative to better understand their program’s service triangle, or service team, you can substantially increase profit opportunities, decrease your application turn-time, and quickly shorten your “contracts-in-transit” list.
Lastly, taking the time to ask your lender representative to explain the rules and specific conditions and caveats of their preferred program can change how you think about your profit opportunity on virtually every deal. Don’t worry! Your lender representative will always be good for “liquor, lunch, pens, and pads.”
If you consider looking at these professionals as a new and crucial resource and profit-center partner in your dealership, you may discover that engaging with your lender representative in a different way makes you feel like a superhero, particularly when you start producing uncanny and extraordinary product penetration and gross profit records every month with this new found secret weapon.
George Ewing is the vice president of sales strategy and development at Flagship Credit Acceptance, a national independent auto finance company headquartered in Chadds Ford, Pa. George has spent the last 15 years building a career in the retail automotive industry in roles that include finance, dealership management, underwriting, training and development and marketing.
One of the most noteworthy executives ever to participate in subprime auto financing has retired.
Credit Acceptance announced late on Wednesday afternoon that founder Donald Foss, who most recently served as the company’s chairman, has decided to retire as an officer and director effective Tuesday.
The company indicated the board has no present intention to fill the chairman's role or to fill the vacancy on the board created by Foss’ retirement. Credit Acceptance added the board of directors will be led by lead director and chair of the audit committee, Thomas Tryforos.
Foss founded Credit Acceptance in 1972 and served as the company’s chief executive officer from 1972 through 2001. He added the role of chairman of the board at the time of the company’s initial public stock offering in 1992.
Since that time, the company's market capitalization has grown from $90 million to more than $4.5 billion.
In addition during that more than 24-year period, Credit Acceptance delivered returns to shareholders in excess of 20 percent per year.
“The company has helped change the lives of millions of individuals by helping them obtain a vehicle and providing an opportunity for these individuals to improve their credit standing,” Credit Acceptance said.
Along with delivering for shareholders and vehicle owners, the National Alliance of Buy-Here, Pay-Here Dealers enshrined Foss into its Hall of Fame in 2015.
When introducing him at NABD’s Hall of Fame ceremony, Ingram Walters said, “Don was at the top of the industry. He was selling more than anyone else. But when he got to the top of that peak, he didn’t rest. He didn’t withdraw. He looked around at the other mountains he wanted to climb. He looked around at other peaks he wanted to reach, and that’s what he did.”
Before the year closed, Reynolds and Reynolds added to its collection of libraries of standardized, legally reviewed finance and insurance (F&I) documents for dealers while a subprime finance company serving the Midwest — U Drive Acceptance — moved into new offices.
Furthermore, FICO is looking to help finance companies begin 2017 successfully by dissecting alternative deal structures through a free webinar.
In late December, Reynolds released the Reynolds LAW Montana F&I Library. That announcement came on the heels of the company rolling out the Reynolds LAW Oklahoma F&I Library as well as the Reynolds LAW New York F&I Library.
“The documents in the (libraries) are designed to help dealers meet compliance obligations and manage risk,” said Jerry Kirwan, senior vice president and general manager of Reynolds Document Services. “At the same time, because the documents in the library are written in consumer-friendly language, they can help dealers to establish a clearer, more efficient F&I process. A more efficient F&I process can help lead to a better overall customer experience with the dealership.
"Since regulatory scrutiny is an ongoing concern for automotive retailers, the (library) is a tool to help dealers better meet compliance obligations and manage risk,” Kirwan continued. “Using standard documents written in consumer-friendly language can help to create a clearer, more consistent, and more efficient F&I process for the F&I manager and for the consumer.”
Kirwan also noted that the documents in the library are regularly reviewed for legal sufficiency with the latest automotive regulations by Reynolds’ forms specialists alongside Reynolds’ outside legal partners.
The printed documents in the resources for Montana, Oklahoma and New York also are available in a digital format, which can help facilitate the conversion to laser-printed transactions and e-contracting. Reynolds Document Services maintains licensing agreements with all major providers of electronic F&I (e-F&I) solutions.
Steven Rankin, president of the Oklahoma Automobile Dealers Association, added, “The Oklahoma Automobile Dealers Association aims to protect and support the business interests of Oklahoma car and truck dealers.
“We are happy to share the LAW Oklahoma F&I Library with our dealers because it is designed to help them maintain compliance, improve day-to-day F&I operations, and improve the experience of buying a car or truck for their customers,” Rankin went on to say.
Now with Montana, Oklahoma and New York in the offering portfolio, other states where Reynolds resources are available include: Alabama, Arizona, Arkansas, California, Colorado, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Missouri, Nevada, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, West Virginia and Wyoming.
U Drive Acceptance moves into new space
U Drive Acceptance (UDAC) recently shifted its operation into a new office at 1119 Historic Fourth in downtown Sioux City, Iowa. UDAC is a subprime finance company founded by president Brian Berkenpas and specializes in providing financial solutions to independent and franchised dealers and their customers.
UDAC currently operates in Iowa, South Dakota, Minnesota and Missouri with plans to expand into other Midwest states in the near future.
Since 2013, UDAC has been sharing office space with its affiliated dealership, Big Deal Auto Plaza.
“Our growth has been beyond what had been forecasted. With all of the new technology we have implemented, it was time to make the separation,” UDAC vice president Neil Evans said.
UDAC leverages the technology provided by Creditsmarts to facilitate originations. UDAC chief financial officer Jeremy Bennett explained the importance.
“Our new LOS (loan origination system) has allowed us to go from working three different platforms to only one, which increases our efficiencies dramatically,” Bennett said. “We have been able to stream line our approval process through automation which allows our dealers to get approvals in a matter of seconds on one out of every four applications.”
Creditsmarts national lender sales manager Chad Simmons added, “When U Drive made the move to become an indirect lender, we were very pleased that they selected us for their LOS services. It has been our pleasure to work with Jeremy and Neil as well their team. We are excited to be a part of their growth and bright future.”
For more information, visit www.udriveac.com.
FICO webinar on alternative deal structures
FICO is offering a free educational webinar focused on how to use predictive analytics and optimization to generate alternative deal structures.
The session set for 1 p.m. ET on Jan. 19 will be orchestrated by FICO global analytic segment leader Matt Stanley and Ken Kertz, FICO’s practice leader, auto and motorized.
Stanley and Kertz intend to elaborate about how this approach can eliminate “rehashing” while facilitating regulatory compliance as well as increasing profitability by reducing the perceived need to underprice the competition along with enhanced customer satisfaction.
“When car dealerships have interested customers who are ready to purchase vehicles, nothing is more frustrating than struggling to structure the right deals — ones that maximize profitability, fit the risk parameters of the lender and satisfy buyers,” FICO said.
“Lenders can spend a significant amount of time manually reviewing and restructuring each deal before customers sign on the dotted line. But manual deal restructuring is inefficient and leads to inconsistent origination strategies, credit and regulatory risk exposure and deals lost to the competition,” FICO continued.
Most lenders know that using predictive analytics can help them make better lending decisions. Optimization takes it a step further by identifying the best possible options given a set of variables, constraints and objectives,” FICO went on to say.
Registration for the free webinar can be completed here.
Nearly a year after doubling the floor plan credit line for online retailer Carvana, Ally Financial announced a new agreement with the company on Wednesday where the finance company will make up to $600 million available to Carvana during the next 12 months through financing and bulk purchases of contracts.
Tim Russi, president of auto finance at Ally, explained the agreement is another example of the company’s commitment to the online channel and will help support Carvana’s growing origination volume, while helping the company maintain a seamless and transparent financing experience for its customers.
“We are very pleased to be expanding our relationship with Carvana, and continuing to develop innovative financing solutions that help businesses succeed in the online channel,” Russi said in a news release.
“As the industry evolves, Ally is committed to providing products and services for new business models in the online channel, and also to applying key technology and learnings to help our dealers improve the ease and efficiency of their financing transactions with customers,” he continued.
Under the terms of the agreement, Ally will provide financial arrangements to support Carvana’s retail operations, with an initial commitment of up to $600 million. The agreement expands Ally’s existing relationship with Carvana, which also includes a floor plan credit line and vehicle sourcing through Ally’s SmartAuction platform.
Last February, Ally increased the online retailer’s floor plan credit line from $60 million to $125 million. Executives calculated the increase represented financing for approximately 7,100 vehicles, up from 3,400 vehicles.
Carvana founder and chief executive officer Ernie Garcia elaborated about what Wednesday’s announcement means
“The agreement with Ally will provide Carvana reliable and consistent financing to support both our origination growth and future expansion plans,” Garcia said in the release.
“As we look to enter new cities, this relationship will help us to easily accommodate more volume, while maintaining the seamless customer experience that we are known for,” he added.
Carvana is known for its unique, customer-driven experience, which lets customers control much of the vehicle purchase process, including choosing their financing terms and monthly payments. Ally’s commitment will allow Carvana to maintain a frictionless, transparent customer experience and will help to facilitate Carvana's growth.
With plans to expand to additional states over the next few years, Carvana already offers as-soon-as next-day delivery to residents in 21 markets:
—Atlanta
—Austin, Texas
—Birmingham, Ala.
—Charlotte, N.C.
—Cincinnati
—Cleveland
—Columbus, Ohio
—Dallas
—Houston
—Indianapolis
—Jacksonville, Fla.
—Memphis, Tenn.
—Miami
—Nashville, Tenn.
—Orlando, Fla.
—Pittsburgh
—Raleigh, N.C.
—Richmond, Va.
—San Antonio
—Tampa
—Washington D.C.
And the two companies might not be finished as Ally and Carvana said they are also exploring other opportunities to expand the relationship.
With the staff at SubPrime Auto Finance News fresh for 2017, we gathered up some noteworthy announcements that arrived while we celebrated the close of a great year with family and friends.
Among some of the highlights that came during the past few days included an update on defaults, an acquisition by RouteOne and TransUnion settling with the Consumer Financial Protection Bureau in an agreement set to cost the credit bureau nearly $20 million.
First, here is the latest default information stemming out of the S&P/Experian Consumer Credit Default Indices generated by S&P Dow Jones Indices and Experian.
Data through November indicated auto financing defaults recorded a 1.00 percent default rate in November, down 8 basis points from October.
The auto finance default rate hasn’t been that low since last July when S&P and Experian pegged it at 0.93 percent.
Analysts determined the latest composite rate — a comprehensive measure of changes in consumer credit defaults — remained unchanged on a sequential basis as both the October and November readings stood at 0.87 percent.
First mortgages also came in flat in November, holding at 0.70 percent. S&P and Experian added the bank card default rate rose 5 basis points in November compared with from the previous month to settle at 2.81 percent.
S&P and Experian noticed three of the five major cities saw their default rates decrease in the month of November.
Dallas posted the largest decrease, reporting in at 0.66 percent, which was down 10 basis points from October.
New York saw its default rate decrease by 2 basis points to 0.91 percent in November, and Chicago reported a decrease to 0.96 percent, down 1 basis point from the previous month.
Los Angeles watched its default rate increase, up 8 basis points to 0.70 percent.
Miami's default rate spiked to 1.44 percent, up 38 basis points in November and setting a 12 month high. The default rate increase of 38 basis points is unmatched in Miami since January 2013.
David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices. explained a historical review of Miami's basis points movement in November shows increases since 2005, suggesting a seasonal up-trend in defaults for the month of November.
“Recent data paint a picture of a strong economy, and lower consumer credit defaults reflect this,” Blitzer said. “Default rates are modestly lower than a year ago, even as continued strength in home sales, auto sales and retail sales are supporting expanded use of consumer credit.
“Money market rates rose after Election Day, the Fed raised the target range for the Fed funds rate (in December) and has indicated that further increases lie ahead. The favorable default trends are likely to be tested in 2017 as interest rates rise,” he continued.
Among the five cities regularly tracked in this report, Blitzer reiterated Miami has consistently shown the highest default rate.
“One factor may be that home prices rising in Miami and mortgages are the largest portion of the city composite rate,” he said. “While Dallas home prices are rising faster than Miami, Dallas prices fell far less in the housing bust and have rebounded to new all-time highs.
“Miami home prices remain more than 20 percent below the highs set in 2006,” Blitzer went on to say.
Jointly developed by S&P Indices and Experian, analysts noted the S&P/Experian Consumer Credit Default Indices are published monthly with the intent to accurately track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.
The indices are calculated based on data extracted from Experian’s consumer credit database. This database is populated with individual consumer loan and payment data submitted by lenders to Experian every month.
Experian’s base of data contributors includes leading banks and mortgage companies and covers approximately $11 trillion in outstanding loans sourced from 11,500 lenders.
TransUnion’s CFPB settlement tops $15M
TransUnion said in a filing with the Securities and Exchange Commission that the credit bureau agreed to settle with the CFPB stemming from a civil investigative demand (CID) the regulator delivered back on Sept. 14, 2015.
TransUnion explained in the filing posted on Dec. 29 that that the CID was focused on common industry practices relating to the advertising, marketing and sale of consumer reports, credit scores or credit monitoring products to consumers by the company’s consumer interactive segment.
In connection with the agreed settlement, TransUnion indicated that it has executed and delivered a “stipulation and consent to the issuance of a consent order,” pursuant to which TransUnion will accept the issuance of a consent order by the CFPB requiring TransUnion to:
• Implement certain agreed practice changes in the way TransUnion advertises, markets and sells products and services offered directly to consumers, including more robust disclosures regarding the nature of the credit score being provided as well as confirming consumer consent if the product or service is being sold through the use of a negative option feature (such as a trial period becomes a recurring paid subscription unless the consumer affirmatively cancels their registration).
• Develop and submit to the CFPB for approval a comprehensive compliance plan detailing the steps for addressing each action required by the terms of the consent order and specific time frames and deadlines for implementation.
TransUnion acknowledged that it will incur a one-time charge of approximately $19.4 million in the fourth quarter of 2016, consisting of the following:
— Approximately $13.9 million for redress to eligible consumers.
— A civil money penalty to be paid to the CFPB in the amount of $3.0 million.
— Current estimate of $2.5 million for additional administrative, legal and compliance costs we will incur in connection with the settlement.
“The CFPB is expected to recommend the aforementioned settlement to the director for final approval,” TransUnion said in the filing signed by senior vice president Mick Forde about the agreement reached on Dec. 22.
RouteOne acquires MaximTrak
In a deal effective as of Dec. 20, RouteOne acquired the assets of MaximTrak and its related business in a move that means MaximTrak will operate through its wholly-owned subsidiary RouteOne Holdings.
The company insisted the acquisition will bring together two long-time partners to deliver a seamless vehicle F&I sales process.
Executives explained the vehicle purchase process has undergone fundamental changes in recent years, and will continue to do so with increasingly rapid speed. Consumers and dealers alike expect consistency and seamless transition across all physical and digital sales channels.
As a result, both RouteOne and MaximTrak have been pursuing aggressive strategies to innovate the sales process on behalf of their respective customers. RouteOne and MaximTrak’s complementary strategies have now come together to deliver on the vision of a complete sales and F&I solution that meets OEM, dealer and consumer needs — any time, any place, and on any device.
While reiterating MaximTrak will be operated by RouteOne Holdings, a wholly-owned subsidiary of RouteOne, officials mentioned MaximTrak leadership and team members remain in place and continue to operate from the MaximTrak offices in Pennsylvania.
RouteOne and MaximTrak employ approximately 400 people with offices in Michigan, Pennsylvania and Canada, as well as local staff in major markets. Directly and through partnerships, RouteOne and MaximTrak have customers in the U.S., Canada, Puerto Rico and Mexico.
“RouteOne has had a long and successful relationship with MaximTrak, and we share very similar cultures, values and DNA,” said RouteOne chief executive officer Justin Oesterle. “We are excited to have made this acquisition happen as we believe it creates significant value for all our customers at the OEM, finance source, provider, and dealer levels.
“It also creates strategic and economic value for RouteOne’s owners: Ally, Ford Credit, TD and Toyota Financial, all of whom supported the investment,” Oesterle continued.
“I, and the entire RouteOne team welcome MaximTrak to the family. We look forward to doing great things together for the industry,” he went on to say.
The companies added RouteOne and MaximTrak product integration began prior to the acquisition and will now be further developed and strengthened on an expedited basis.
MaximTrak was founded in 2003 by the Maxim family.
“The entire MaximTrak team is excited and energized by the growth opportunities that this transaction represents for our customers, employees and key stakeholders. Like RouteOne, MaximTrak is an established, innovative leader in the F&I space,” MaximTrak president Jim Maxim Jr. said.
“Where RouteOne excels in the finance elements of F&I, we excel in the “I” side of the equation and in developing technologies that optimize the dealership process and ultimately dealer profitability through F&I product sales,” Maxim continued. “Together, with our combined scale, talents and product line-ups, we will be able to provide a complete digital workflow from initial customer contact and first pencil to finance, aftermarket and eContracting across online, mobile and in-store channels.
“With that, our emphasis will be on helping our customers deliver a buying experience they control and one that consumers actually want,” he added.
Three economists who regularly share their assessments with SubPrime Auto Finance News dissected the Federal Reserve’s actions this week, which at the conclusion of the regularly scheduled Federal Open Market Committee meeting included the raising of the federal funds rate by 25 basis points.
In unanimously approving the move, the Fed explained its stance of monetary policy remains “accommodative,” thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
“In determining the timing and size of future adjustments to the target range for the federal funds rate, the committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation,” the FOMC said. “This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.
“In light of the current shortfall of inflation from 2 percent, the committee will carefully monitor actual and expected progress toward its inflation goal,” the group continued. “The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.
“However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data,” the FOMC added.
Cox Automotive chief economist Tom Webb considered the Fed actions and focused his assessment more on the availability of credit, rather than the rate uptick.
“The quarter point rise in the targeted federal funds rate will not, in and of itself, have a direct negative impact on new or used auto sales or wholesale values,” Webb said. “For one, note that market-determined rates like the two-year and 10-year Treasury yields had already moved up significantly post-election.
“And remember, after the December 2015 Federal Reserve rate hike, market rates actually declined — with the benchmark 10-year Treasury yield falling to a record low 1.4 percent last summer,” he continued.
“Although we do not anticipate a similar response in the year ahead (indeed, rates are expected to continue to rise), it is an industry truism that ‘the availability of credit is more important than the cost of credit.’ And a steepening yield curve generally helps financial institutions and promotes lending,” Webb went on to say.
Webb closed his thoughts by pointing out that the auto finance industry shouldn’t just dust aside what the Fed does.
“There are, however, possible indirect negative impacts. Most notably, there is the possibility of an over-strengthening dollar and/or global financial market volatility,” he said. “Additionally, although the impact on residential real estate is also likely to be modest, there could be a more pronounced impact on commercial real estate where there is always large amounts of debt that needs to be rolled over.”
Comerica Bank chief economist Robert Dye recapped that in addition to the policy announcement, the FOMC also released a new set of economic projections and a new dot plot. Dye explained the economic projections show a slight increase in expected real GDP growth for 2017 and a slight decrease in the expected unemployment rate. He added the Fed’s inflation expectations were unchanged from September.
Dye went on to highlighted the new dot plot — which shows FOMC member’s expectations for the fed funds rate over the next few years — indicates that the FOMC now expects to raise the fed funds rate three times in 2017 and three times in 2018.
“It is purely speculative on our part to say that a reasonable pattern for the timing of fed funds rate increases for 2017 might be March 15, July 26 and Dec. 13 of 2017,” Dye said. “We will be adjusting our interest rate forecast for 2017 and 2018 upward slightly, based on the news from the Fed.”
Dye also noted that Fed chair Janet Yellen indicated in her last press conference of the year that her policy of data dependence would continue,
“That is to say that the fed funds rate is not on a predetermined course and that economic conditions could change and expectations of future interest rate hikes could change as well,” Dye said. “She was careful not to specifically endorse a potential Trump Administration fiscal stimulus plan or tax reform strategy.
“Moreover, she was careful to restate previous statements about running a ‘hot economy,’ Dye continued. “She does not recommend letting the economy expand at a rate significantly above potential GDP growth for a period of time in order to absorb remaining slack. She restated her view that the Federal Reserve would eventually wind down its balance sheet by not reinvesting principle payments and rolling over maturing assets once the fed funds rate was well on its way toward normalization.”
Finally, Stifel Nicolaus chief economist Lindsey Piegza agreed with Dye’s summation of the Fed’s new dot plot.
“More importantly, however, the Fed’s longer-run outlook for growth and inflation was unadjusted, leaving the longer-term pathway for rates little changed,” Piegza said. “In other words, the committee sees the potential for a modest uptick in prices and activity over the next 12 to 24 months.
“But in the long-run, the Fed’s forecast for a moderate (read: blah) trajectory of the economy remains,” she added. “Despite the market’s more optimistic view with pro-growth policies potentially ushered in next year, the Fed expects to maintain a slow and ‘gradual’ pace.
EFG Companies and Northwood University on Wednesday announced the selection of Team Vigilance as the winner of the 2016 F&I Innovator of the Year Award competition and the recipient of $25,000.
Competition orchestrators highlighted that Team Vigilance utilized its millennial mindset, ongoing dealership research and F&I mentor input to create “401Karrs.” The product can address millennial and Gen Z concerns around financial security and deliver on dealership goals around customer retention.
In addition to the team’s monetary reward, the group will potentially see 401Karrs developed by EFG for market availability. Team Vigilance is made up of three team members:
• Alec Bond from Lindin, Mich.
• Houston Huff from Tuscon, Ariz.
• Lucas Myrhe from Austin, Texas
“We want to thank all the teachers and mentors from this competition and across Northwood who’ve been a huge inspiration and motivation throughout this project,” Myrhe said. “With their guidance, we were able to deliver a product that is beneficial to customers and dealerships, increasing dealership profit, retention, and customer satisfaction.”
During the semester-long contest, team members leveraged time spent with their mentor, Craig Drew, the general manager of Central Maine Motors Auto Group in Waterville, Maine.
“Team Vigilance hit the ground running from day one, and they weren’t afraid to go back to the drawing board. Their dedication and perseverance to create a useful and beneficial product won them this award,” Drew said.
Details about 401Karrs
Team Vigilance developed 401Karrs to address a concern among millennials and Generation Z — financial stability. According to the Federal Reserve, 44.2 million Americans owe nearly $1.26 trillion in student loan debt. In 2016 alone, student loan debt increased by 6 percent. The generations that will soon make up the bulk of the auto retail consumer market are entering adulthood with the largest debt load in history.
With 401Karrs, this new generation of vehicle buyers will have a tool to help manage their money by reducing or eliminating their out-of-pocket expense by putting a down payment on a vehicle.
401Karrs is essentially a down-payment savings product. Dealership customers will have the opportunity to add as little as $20 to their monthly payment, which will be used for a down payment on their next vehicle. When they return to the selling dealership to purchase their next vehicle, the dealer will match up to 20 percent of the amount saved, or $1000. In this way, the product acts as a customer retention tool, since they must return to the dealership to take advantage of the match.
The last part of 401Karrs is a reinsurance opportunity. As with vehicle service contracts, dealers can participate in reinsurance on the 401Karrs product, accruing interest on the money set aside for the down payment. This balances out the dealership match and has the potential to generate greater reinsurance profit.
Contest pairs students with F&I industry leaders
In addition to experienced team mentors, the contest was judged by F&I industry leaders. The eight-member panel brought more than 100 years of F&I expertise from automotive dealerships and corporations from across the country, encompassing all major automotive brands.
Several of the judges commented that the student product entries provided a fresh perspective and challenged their thinking about their own dealerships and operations.
“This competition offers students the unique opportunity to take their education beyond the classroom and individual dealership rooftops to create an industry impact,” Northwood University president and chief executive officer Keith Pretty said. “Each of the participating students will be able to learn from their experiences from this semester and apply them to their future success as leaders.”
The contest winners were picked last Thursday during a ceremony at Northwood University.
The F&I Innovator contest designed to boost development and reach consumers.
Each year during Northwood’s fall semester, the F&I Innovator of the Year Award competition pits six teams of Northwood undergraduate automotive marketing and management students against one another to conceptualize and build a new F&I product, while earning course credit. EFG and Northwood created the F&I Innovator of the Year competition to stimulate another level of innovation in the F&I space.
“With changing market demographics, increased compliance, and an evolving dealership model, everyone is looking at how the F&I space will evolve in the coming years,” EFG Companies president and CEO John Pappanastos said.
“This competition exemplifies the need to develop new ways of capitalizing on these market changes by taking into account fresh sources of inspiration to meet new demands," Pappanastos added.
Comerica Bank explained why it continues to expect the Federal Reserve to increase the effective range of the Fed funds rate by 25 basis points on Wednesday. Analysts indicated the Fed funds futures market placed an implied probability of 97.2 percent on the event.
“Fed officials have done nothing to counter the very strong market expectation,” Comerica Bank said in its most recent economic commentary.
So what does an interest rate move this late in the year mean for auto financing, especially for companies that participate in the subprime space? Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion, addressed the topic with SubPrime Auto Finance News on Tuesday morning.
“Remember the impetus for the rise in interest rates right now is that it is generally believed that central bankers have an optimistic view of the economy right now,” Laky said. “We’re continuing to get momentum. There are lots of strengths. When you start to see interest rate increases, it’s usually a really good sign for the economy so I think the positive impact for employment wage gains and consumer consumption fare outweighs the quarter basis point increases.
“From a financing perspective, when we see an interest rate increase, there are a couple of things,” he continued. “One, a 25-basis-point increase in and of itself that’s passed through to the consumer is only a few dollar per payment difference. One uptick doesn’t make that big a difference.
“However, what it starts to do as more rate increases happen, for subprime consumers that probably means they have less ability to borrow when they go out to get a car,” Laky went on to say. “The subprime consumer tends to be more payment constrained so they can only afford a certain amount per month to pay for a vehicle. As you raise interest rates, that translates into a little bit less that you can finance.”
Laky also mentioned what could happen in higher credit tiers if the Fed altered interest rates more often than perhaps twice per year.
“The prime consumer, particularly the super-prime, it’s a little bit of the opposite effect in that many super-prime consumers have the option to either finance or pay cash,” Laky said. “As interest rates increase, those special finance offers like 0 percent or 0.9 percent, those aren’t quite as low and more super-prime consumers will choose to pay cash.
“So you might see overall sales not change a lot but you may see financing decrease a little in the super-prime space and you might see the amounts financed decrease a little bit in subprime,” he added.
Stifel chief economist Lindsey Piegza agreed with Comerica Bank’s assertions about what the Fed is likely to do this week. But Piegza spotted another potential issue.
“A second-round interest rate increase at (this) week’s FOMC meeting has essentially been fully priced into the market. But while another 25-basis-point hike come (Wednesday) is essentially baked into the cake, what happens next in terms of the longer-term trajectory of policy remains a large question mark,” she said.
“The Fed has a long history of miscommunication with the market and will likely continue to struggle to communicate the next stage of monetary policy as we turn the corner into 2017, particularly against the backdrop of heightened expectations for a pro-growth Trump administration buoying economic conditions near-term,” Piegza continued.
With an interest rate move more than likely, Comerica Bank closed by emphasizing what else the Fed is likely to share this week.
“The most interesting new element of the Fed’s upcoming policy announcement will be how it guides expectations for 2017,” Comerica Bank analysts said. “We will get a new set of economic forecasts from the Fed, and a new dot plot. The dot plot shifted down through 2016. We will watch to see if it shifts again.”
With the Federal Reserve’s final gathering of the year set for next week, an interest rate move certainly appears to be in the works since at least one observer said the market has been behaving that an uptick is coming with “100-percent certainty.”
As the Fed considers a wide range of data points before making an interest rate decision, one member of the Federal Open Market Committee (FOMC) explained three important implications of a low-level interest rate. Fed Board of Governors member Jerome Powell discussed them during an appearance at The Economic Club of Indiana in Indianapolis just after Thanksgiving.
“First, today’s low rates are not as stimulative as they seem,” Powell said. “Consider that, despite historically low rates, inflation has run consistently below target and housing construction remains far below pre-crisis levels.
“Second, with rates so low, central banks are not well positioned to counteract a renewed bout of weakness,” he continued. “Third, persistently low interest rates can raise financial stability concerns. A long period of very low interest rates could lead to excessive risk-taking and, over time, to unsustainably high asset prices and credit growth. These are risks that we monitor carefully. Higher growth would increase the neutral rate and help address these issues.”
Perhaps what the Fed might be monitoring is auto financing being extended to the riskiest credit segment, which Experian Automotive noted as being at a nine-year low during the third quarter.
Powell then reiterated what the Fed considers before making any moves regarding interest rates.
“Incoming data show an economy that is growing at a healthy pace, with solid payroll job gains and inflation gradually moving up to 2 percent,” Powell said. “In my view, the case for an increase in the federal funds rate has clearly strengthened since our previous meeting earlier this month.
“Of course, the path of rates will depend on the path of the economy,” he went on to say. “With inflation below target, relatively slow growth, and some slack remaining in the economy, the committee has been patient about raising rates. That patience has paid dividends. But moving too slowly could eventually mean that the committee would have to tighten policy abruptly to avoid overshooting our goals.”
Immediately after the FOMC released minutes from its gathering in early November, Stifel Nicolaus chief economist Lindsey Piegza called them “essentially moot at this point,” because of what chairman Janet Yellen and others mentioned for much of the year.
“Against the backdrop of a flurry of committee members’ comments — including the chairman herself — suggesting a rate rise was imminent, the market is now pricing in a December hike with 100 percent certainty,” Piegza said.
“There remains much debate among the committee members over the need for preemptive Fed action,” she continued. “Some argued that risks to economic and financial stability could ‘increase over time’ if the labor market overheated, and furthermore that maintaining low interest rates for an extended period could lead to a further mispricing of risk.
“Of course, other suggested that given the sill-lackluster pace of activity in the overall economy, allowing the unemployment rate to fall below its longer-run normal level for a time could result in ‘favorable supply-side effects,’ as well as potentially ‘hasten’ the return of inflation back to the committee’s longer-term 2-percent objective,” Piegza went on to say.
Speaking of employment data, Cox Automotive chief economist Tom Webb noted in his commentary associated with the latest Manheim Used Vehicle Value Index that a 178,000 increase in payrolls in November means that full-year 2016 job gains will likely total 2.2 million — the sixth consecutive year above the 2-million mark. Webb calculated that figure would push the six-year total to 14.5 million.
“Real GDP growth in 2017 is expected to be significantly faster than in 2016, but job growth will likely be slower,” Webb said.
“Think of it as a capacity issue,” he continued. “The overall unemployment rate is already below 5 percent, and for college graduates it is only 2.3 percent. But faster economic growth coupled with slower absolute job gains will, by definition, ensure that the benefits will be more widely and evenly spread. Look for faster wage gains and increased labor productivity.”
Piegza circled back to the employment data to elaborate about what the Fed appears poised to do.
“Employment gains remain modest but solid as we enter into the final month of the year, with the latest November report in line with the trend pace over the past several months,” she said. “For the Fed, the November employment report simply reinforces the notion of moderate labor market conditions: not too hot, not too cold, but good enough to follow through with the expected December rate hike priced in with 100 percent certainty.
“The market, meanwhile, is already looking out to 2017, with a new world of pro-growth policies expectedly ushered in by a Trump administration,” Piegza went on to say. “The November report does little to undermine the optimism already priced into the market — furthermore, it does little to justify such an extreme reaction since the presidential election.”
Veros Credit recently announced the promotion of Harvey Singh to chief operating officer.
The finance company that originates paper with both franchised and independent dealerships highlighted Harvey will continue to oversee the loan servicing department and will also be responsible for companywide operational policies, objectives and initiatives in the originations, production, corporate operations, and nationwide sales and marketing departments.
“It has been my privilege to work side by side with Harvey,” Veros Credit chief executive officer Cyrus Bozorgi said. “I am confident that his 15-plus years of experience in the consumer finance industry with a heavy focus on leadership, development and mentoring, will allow him to be highly capable and proactive in his new role where he will continue to deliver excellent leadership, adding to his continued success with Veros Credit.“
Harvey joined Veros Credit in 2014 as vice president of strategy and process improvement and was shortly promoted to senior vice president of loan servicing in 2015. He was instrumental in the successful restructuring of the loan servicing department as well as the implementation of companywide processes and procedures that have allowed Veros Credit to increase productivity and efficiency.
“Veros Credit’s commitment to providing prompt, responsive and distinguished service while doing business ethically and with integrity is just one of several factors which set us apart within the auto finance industry,” Singh said. “A team that works well together creates efficiencies, generates new ideas, opens opportunities for growth and provides a strong support system.
“We believe that every employee, dealer and customer is part of the Veros Credit team,” he continued. “This mindset crosses all areas of our operation, from our online portal to our customer service center and we strive to deliver uncompromising excellence on every dealer and customer interaction.”
