It’s no secret that the auto finance industry is taking its collective foot off of the origination accelerator. In fact, TransUnion now has seen originations soften on a year-over-year basis for four quarters in a row.
Displayed one quarter in arrears, TransUnion’s recently released Industry Insights Report indicated that originations declined by 2.2 percent between Q2 2016 and Q2 2017.
Analysts explained the decline was driven by a 5.9-percent drop in subprime, near prime and prime contract openings. They added this downward movement was partially offset by a 3.2-percent rise in originations to the least risky consumers in the prime plus and super prime risk categories over the same time period.
As a result of this shift, TransUnion pointed out that 2.3 points of market share have shifted from subprime, near prime and prime to prime plus and super prime.
While overall auto-finance balances rose 5.9 percent between Q3 of last year and Q3 of this year, the development marked the lowest year-over-year growth rate since Q3 2012. As balance growth slowed, analysts mentioned serious auto finance delinquency rates — contracts more than 60 days past due — rose 7 basis points in the last year to close the third quarter at 1.40 percent.
“Though serious auto loan delinquency rates are slowly rising, we still do not believe this is a cause for concern,” Brian Landau, senior vice president and automotive business leader at TransUnion, said. “The recent uptick in delinquencies was driven primarily by ‘relaxed’ underwriting standards from recent years, which drove non-prime origination growth.
“The recent decline in originations is due to the tightening of underwriting requirements and the slowing demand for new vehicles,” Landau continued. “Despite fewer originations, there is evidence that more people will be opening auto loans in the near term.
“In September, U.S. light vehicle sales increased for the first time this year on an annual basis. Also, there will likely be several thousand new vehicles purchased as a result of the hurricanes in Florida and Texas,” he went on to say.
Q3 2017 Auto Finance Trends
| Metric |
Q3 2017 |
Q3 2016 |
Q3 2015 |
Q3 2014 |
| Number of Auto Loans |
78.6 million |
74.8 million |
69.8 million |
64.6 million |
| Borrower Level Delinquency Rate (60+ DPD) |
1.40% |
1.33% |
1.19% |
1.20% |
| Average Debt Per Borrower |
$18,567 |
$18,361 |
$17,946 |
$17,351 |
| Prior Quarter Originations* |
7.1 million |
7.3 million |
7.2 million |
6.8 million |
| Average Balance of New Auto Loans* |
$20,653 |
$20,436 |
$20,097 |
$19,524 |
*Note: Originations are viewed one quarter in arrears to account for reporting lag.
Q3 2017 Auto Finance Performance by Age Group
| Age/Variable |
60+ DPD |
Annual Pct. Change |
Average Loan Balances Per Consumer |
Annual Pct. Change |
| Gen Z (1995 – present) |
1.86% |
7.0% |
$13,796 |
2.8% |
| Millennials (1980-1994) |
1.87% |
3.4% |
$17,574 |
2.0% |
| Gen X (1965-1979) |
1.59% |
3.0% |
$20,798 |
1.9% |
| Baby Boomers (1946-1964) |
0.86% |
5.2% |
$18,514 |
0.6% |
| Silent (Until 1945) |
0.76% |
9.2% |
$14,608 |
-1.4% |
Beyond its originations and collections activities, Wall Street observers questioned Credit Acceptance Corp. leadership about two specific operational areas when executives discussed their third-quarter results.
Investment analysts wanted to know about Credit Acceptance’s strategy for adding to its sales force to enhance its active dealer network, which stood at 7,737 dealerships at the close of Q3 on Sept. 30. That figure climbed by 946 new active dealers; stores that originate at least one contract with the subprime auto finance company during a quarter.
Another conference call participant also wondered how Credit Acceptance is bracing for upcoming changes in accounting regarding the allowance for losses. Last summer, the Financial Accounting Standards Board (FASB) issued an accounting standards update the organization explained was designed to improve financial reporting by requiring timelier recording of credit losses on loans held by financial institutions and other organizations.
What triggered a longer discussion was the salesforce dialogue between call participants and Credit Acceptance chief executive officer Brett Roberts, who shared that the company’s team to generate dealer activity is 30 percent larger now than it was a year ago. While the number of active dealers is higher, analysts questioned the productivity of the sales team since origination volume per active dealer softened by 9.7 percent year-over-year in the third quarter, resulting in Credit Acceptance’s total origination volume dipping by 4.7 percent to 78,589 contracts.
“As we talked about last time, it’s a longer-term play for us to increase the sales force,” Roberts said. “We don’t necessarily expect it to have any impact this year.
“If you go back and look at our history, the last time we increased the size of our sales force, it took us about two years to roughly double the sales force and then approximately three years after that before productivity got back to where it was when we started the expansion,” he continued. “So you’re looking at kind of a five-year process from start to finish. We’re not trying to double it this time, but we are increasing its size significantly, and we expect that’s something that will play out longer term.”
The analyst continued by asking when Credit Acceptance was making a play to carve out more origination volume through franchised dealerships along with its independent store footprint in hopes of driving the active dealer network to the 10,000 mark and beyond.
“We’re reluctant to sort of give you a stated goal long term that this is how big we’re going to get. I mean we’re obviously trying to get as big as we’re capable of getting, and we think adding to the sales force helps us do that,” Roberts said while acknowledging that the largest portion of Credit Acceptance’s originations came from franchised stores, “what we call national accounts, which are the kind of the largest dealer groups in the country."
He continued by adding, “We allow independents to write purchased loans if they’ve closed a pool of 100 loans on our portfolio program. So once we have some experience with an independent, if that’s positive, we’ll allow them to access the other program. And then there’s a limited number of independents that are allowed to write purchased loans from the beginning. Those are independents that we view as kind of quasi-franchise dealers, working to distinguish them from the traditional independents, and we’ve allowed them to write purchased loans as well. But most of it is franchise dealers and the larger national accounts.”
Later in the call, the topic turned to accounting as analysts inquired about how much the modified mandates for reserving for losses was going to impact Credit Acceptance’s financial standing and what preparations the company is already making for the changes to that go into effect in 2020.
“As we’ve talked about on prior calls, we’ve begun our assessment on that,” Credit Acceptance senior vice president and treasurer Doug Busk said. “The guidance is extensive and it’s complicated, and it’s not effective until 2020. Having said that, we’re making good progress. We’re working with our auditors on it. So when we know more, we’ll talk about it. But at this point, we haven’t finished quantifying the impact it will have on our financial statements."
Top-line results
Credit Acceptance reported Q3 consolidated net income of $100.7 million, or $5.19 per diluted share, compared to consolidated net income of $85.9 million, or $4.21 per diluted share, for the same period in 2016.
For the nine-month span that ended Sept. 30, the company’s consolidated net income came in at $293.1 million, or $14.99 per diluted share, compared to consolidated net income of $245.2 million, or $12.01 per diluted share, for the same timeframe a year ago.
As mentioned previously, Credit Acceptance noted its unit and dollar origination volumes declined 4.7 percent and 0.5 percent, respectively, during the third quarter. The number of active dealers grew 5.7 percent while average volume per active dealer declined 9.7 percent.
“Dollar volume declined slower than unit volume during the third quarter of 2017 due to an increase in the average advance paid per unit,” the company 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 vehicle selling price 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.
“For three out of the four most recent quarters, unit volumes declined as compared to the same periods of the prior year,” Credit Acceptance continued. “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,” the company went on to say.
Credit Acceptance named to The Detroit Free Press 2017 Top Workplaces List
In other company news, Credit Acceptance has been selected as a 2017 Top Workplace by The Detroit Free Press.
Credit Acceptance was named the No. 2 workplace in the large company category. This is the sixth year in a row that Credit Acceptance has won a Detroit Free Press Top Workplace honor.
“Credit Acceptance was selected from among hundreds of companies vying for a place on the list,” the company said. “Our ranking was based solely on the results of a team member survey administered by Energage, LLC (formerly WorkplaceDynamics), a leading research firm that specializes in organizational health and workplace improvement.
“Several aspects of our workplace culture were measured, including alignment, execution, and connection, just to name a few,” Credit Acceptance added.
In the words of General Motors Financial president and chief executive officer Dan Berce, the paper the captive is adding “continues to skew to more prime originations.”
Berce made his latest proclamation when GM Financial shared its third-quarter results, which included $2.2 billion of prime originations. As Berce explained during the company’s latest conference call, that figure constituted 58.3 percent of the captive’s total retail mix in Q3, up from 54.4 percent a year ago.
And with less non-prime coming into the portfolio, Berce highlighted that “as far as credit performance, we did see improvement, again, year-over-year with losses attaining a 1.9 percent level, down from 2.5 percent a year ago. The increase is driven primarily by our continuing shift to prime lending.
“In fact, finance receivables with FICO score less than 620, now comprise just 39 percent of our North America retail loan portfolio compared to 48 percent at calendar year-end 2016 and 51 percent a year ago,” Berce went on to say.
The company indicated its retail finance receivables 31 to 60 days delinquent represented 3.6 percent of its portfolio at the close of Q3, down from 4.4 percent a year earlier. Accounts more than 60 days delinquent constituted 1.6 percent of the portfolio, down from 1.9 percent.
With higher quality paper entering the system, GM Financial tabulated that its income from continuing operations for the quarter that ended Sept. 30 came in at $186 million, compared to $134 million a year earlier. The captive said its income from continuing operations through nine months totaled $635 million, up from $415 million through the first three quarters of 2016.
So far this year, GM Financial has originated in $15.5 billion retail financing with $4.7 billion coming in the third quarter. The outstanding balance of retail finance receivables was $32.3 billion as of Sept. 30.
GM Financial’s leasing segment continues to grow, too, as the captive originated $19.6 billion in lease deals through three quarters with $6.5 billion arriving in Q3.
And on the commercial side, GM Financial reported that its outstanding balance of commercial finance receivables stood at $9.5 billion on Sept. 30, up from $6.6 billion a year earlier. The captive indicated that 874 dealers are leveraging its commercial offerings with 90 percent of that portfolio representing floor-plan financing.
Finally, GM Financial shared that its total available liquidity is $17.8 billion, consisting of $4.0 billion of cash and cash equivalents, $12.7 billion of borrowing capacity on unpledged eligible assets, $0.1 billion of borrowing capacity on committed unsecured lines of credit and $1.0 billion of borrowing capacity on a junior subordinated revolving credit facility from GM.
Some finance companies might see success as the more originations, the better. That’s not quite the case at Consumer Portfolio Services as a strategy chairman and chief executive officer Brad Bradley thought would be successful during the worst part of the Great Recession nearly 10 years ago is turning out to be the case.
During the third quarter, CPS reported that it purchased $204.7 million of new contracts compared to $233.9 million during the second quarter of 2017 and $242.1 million during the third quarter of 2016. While those Q3 originations are lower than comparable timeframes, the pace is in line with where Bradley said, “We could probably run a very stable company.”
The Q3 purchases left the company’s managed receivables at $2.346 billion as of Sept. 30, an increase from $2.343 billion as of June 30 and $2.292 billion as of the close of last year’s third quarter.
During the company’s recent conference call, Bradley elaborated about why the originations cadence CPS has enjoyed for nearly three years works well for this subprime auto finance company.
“What’s interesting is in 2007, 2008, after getting whacked around in that recession, even though CPS is doing very, very well, I sort of said, ‘Geez, if we could get to $50 million originations a month, we could probably run a very stable company and be very successful.’ But we instead grew a whole bunch and got up into the ($100 million) for a while. But now after doing that we are sitting in that $70 to $75 million a month range and in fact doing exactly what I said.
“We’re running a very stable company or quite profitable,” he continued. “Our numbers all look good.”
CPS’ Q3 earnings came in at $4.7 million, or $0.17 per diluted share, as revenues ticked up by $1 million year-over-year to $109.5 million. The company’s total operating expenses also increased, rising by $5.3 million or 5.5 percent to $101.4 million.
When it comes to vehicle installment contract performance, CPS indicated its annualized net charge-offs for the third quarter stood 7.96 percent of the average owned portfolio as compared to 6.69 percent at the same point in 2016.
CPS’ delinquencies greater than 30 days (including repossession inventory) constituted 10.27 percent of the total owned portfolio as of Sept. 30 as compared to 10.46 percent a year earlier.
So while other finance companies might be having arm-wrestling contests in the marketplace to gather as much paper as they can push through their systems, Bradley reiterated that CPS remains confident in its position.
“They’re trying to grow real fast in a competitive environment because car sales are down, which puts more pressure across the board. And I say this because CPS isn’t doing any of that. We reached a point where we can sort of buy what we want to buy, we don't have any pressure to grow,” Bradley said.
“Given the environment I just described and given where we stand as a company, it just doesn't seem like the right course to get out there and slug it out in an industry that’s going to have problems going forward,” he added later in the company’s conference call. “We think doing what we’re doing right and doing it for a while here is probably the best course.
“Having said that we are very opportunistic, we think there will be opportunities in the future and sort of keeping some dry powder, doing the things we're doing the way we are, we could be in a really good spot going forward,” Bradley went on to say.
And one other note from the company’s latest financial report, CPS’ board of directors this month approved an increase to the aggregate authorization to repurchase outstanding securities by $10 million.
During the third quarter, CPS purchased 1,189,660 shares of stock in the open market at an average price of $4.28. For the nine months ended Sept. 30, CPS purchased 2,292,070 shares at an average price of $4.51.
More than 300,000 additional credit union members might be using GrooveCar’s platform to make a vehicle purchase.
The buying resource enjoyed another busy quarter and signed up 25 new partners in Q3.
“GrooveCar puts the platform in the hands of members, literally. Shop from any place at any time. Credit unions on the program realize 82 percent of members do their research through third-party sites. Without offering an auto buying service, credit unions risk missing out on auto loan growth opportunities,” said Robert O’Hara, vice president of strategic alliances at GrooveCar.
The new credit unions aboard the program include:
California
Chabot Federal Credit Union with assets of $70 million serving 2,045 members
SCE Federal Credit Union with assets of $680 million serving 52,927 members
Minnesota
North Shore Federal Credit Union with assets of $158 million serving 9,383 members
New York
CFCU Community Credit Union with assets of $1 billion serving 68,839 members
First New York Federal Credit Union with assets of $325 million serving 31,371 members
North Dakota
Prairie Federal Credit Union with assets of $123 million serving 7,772 members
Ohio
Buckeye State Credit Union with assets of $81 million serving 16,363 members
LCE Federal Credit Union with assets of $38 million serving 5,067 members
New Horizons Credit Union with assets of $38 million serving 5,348 members
Riverview Credit Union with assets of $60 million serving 5,465 members
Steel Valley Federal Credit Union with assets of $27 million serving 5,375 members
Tennessee
Collegedale Credit Union with assets of $43 million serving 5,226 members
Holston Methodist Federal Credit Union with assets of $14 million serving 2,302 members
MPD Community Credit Union with assets of $27 million serving 2,997 members
Texas
Baylor Health Care System Credit Union with assets of $73 million serving 5,608 members
Beacon Federal Credit Union with assets of $152 million serving 17,206 members
First Central Credit Union with assets of $81 million serving 14,155 members
Hockley County School Employees Credit Union with assets of $31 million serving 3,054 members
Lifetime Federal Credit Union with assets of $40 million serving 3,688 members
Members Financial Credit Union with assets of $40 million serving 5,303 members
Metro Medical Credit Union with assets of $74 million serving 7,240 members
Scott & White Employees Credit Union with assets of $45 million serving 5,490 members
Texoma Community Credit Union with assets of $127 million serving 14,583 members
West Virginia
Pioneer West Virginia Credit Union with assets of $195 million serving 17,341 members
Wisconsin
St. Mary’s & Affiliates Credit Union with assets of $33 million serving 3,913 members
“We are thrilled to welcome them onboard and begin servicing their members. With our marketing support programs, the message gets broadcast out to members through email marketing, social media engagement and digital exposure,” O’Hara said.
Craig Schleicher of PwC sees robotic features having a much greater presence in auto finance in the not-so-distant future. No, C-3PO and R2-D2 from Star Wars likely aren’t taking over underwriting and servicing vehicle installment contracts, but the manager of consumer finance at PwC described how robotic process automation (RPA) can be a good thing.
Schleicher is set to discuss RPA and other cutting-edge developments during his Used Car Week general session on Nov. 14 as the industry gathers in Palm Springs, Calif., for the annual gathering of thought leaders, operators and executives that touch all segments of the used-vehicle space.
During a phone conversation with SubPrime Auto Finance News earlier this week, Schleicher noted that two technology developments are percolating in auto finance; one within the customer-facing business segment and those connected to finance companies’ internal workings.
“On the customer side, the quality of inventory data and VIN level information has really changed the interaction model for a lot of lenders and allowed for direct to indirect conversion where lenders are presenting vehicle options and financing options on their website and becoming a lead referral source for their dealer partners, which really changes the dynamics of indirect lending,” Schleicher said.
“On the internal side, I see robotic process automation as something that has been adopted significantly in a number of other industries that auto finance is just starting to dip its toes into. To me, it has really significant potential to increase the efficiency of the back-office operations across the entire loan lifecycle,” he continued.
Before you open an online search engine to learn about RPA, check out how Schleicher succinctly explained the technology in two sentences.
“RPA you can think of as software overlay that works a lot like an Excel macro that also works across multiple different programs,” he said. “It combines an easy user interface to design programming with technology like optical character recognition to make it easy to automate repetitive tasks that are highly manual without having to go through a full system integration.”
Schleicher explained that one example where RPA could be impactful in auto financing is how the technology could produce review capabilities of contract documents against what is contained in the loan origination system. And not just a sample, but 100 percent of a portfolio.
PwC delved into the connection of RPA and auto financing through a project that’s available here. Schleicher will be elaborating on the topic more during his session at Used Car Week, and will also cover specific processes where RPA could enhance how finance companies operate.
“I’m really excited for the presentation because I think we’re going to take a strategic lens on some of the elements of auto finance that don’t get the publicity that they deserve,” Schleicher said. “We’re going to take a look at how lenders can start to think strategically about opportunities for innovation across the loan life cycle to improve their performance in the servicing and collections function specifically.
“One of the areas I’m most excited to talk about is I think there is a real opportunity for lenders to change how they think about the collections function from being just a loss-prevention tool to something that’s part of their bigger strategy and supports their overall goals of customer retention, loyalty and satisfaction,” he continued.
When finance company executives have down time, perhaps they can delve into the Star Wars series of motion pictures; maybe robots can make their institutions more compliant or profitable.
“I also think there is a big opportunity and the need for continued evolution in the technology to improve the customer experience,” Schleicher said. “I expect that the pace of change in auto finance will be much greater over the coming years than it has been.”
Experian Automotive reported that credit unions held a 20.3-percent market share of all auto financing during the second quarter, up from 18.7 percent a year earlier.
GrooveCar is looking to help credit unions boost the figure even more during this quarter through what the company is calling its Ultimate Year-End Auto Sales Event.
Beginning on Oct. 20 and running for 10 days, Long Island-area credit unions are offering a $300 savings certificate off the member’s best deal from participating dealerships.
Along with that certificate, GrooveCar highlighted that participating credit unions often originate with APR about 21 percent below the industry average. Experian Automotive pegged the average APR on new-vehicle financing at 5.20 percent in Q2 with the used-vehicle financing reading at 9.02 percent.
“This is our annual sale, and credit unions are pulling out all the stops during this promotion period,” GrooveCar senior vice president Frank Rinaudo said. “Each year excitement builds for credit unions, area dealerships who have an extra incentive to move end-of-the-year inventory, and members who benefit from all the savings.”
GrooveCar has positioned this campaign to leverage the fall selling season in an attempt to present the best value to its partners and their clients, including the credit union, dealership and members.
“Dealerships are looking to clear inventory to make room for new models, and are very motivated to sell,” Rinaudo said. “We are in the business of facilitating the car purchase transaction between three parties, and these sales are an effective means to capitalize on those relationships.”
As the sector’s auto finance market share grows, GrooveCar also highlighted credit union membership in the U.S. is rapidly growing, too. The company mentioned 4.6 million new members joined the ranks during the first half of 2017.
GrooveCar reaches nearly a million members in the region during its auto sale, and Rinaudo pointed out that dealerships are more than ready to service the influx of potential buyers.
In addition to running the sale with the credit unions and dealerships, GrooveCar added that it provides all the tools needed to make the sale a success.
“We begin planning this sale months in advance, working with our credit union partners on the right messaging they need to reach the member,” Rinaudo said.
This week, F&I Express welcomed Crystal Fusion Technologies to its network of aftermarket providers, which now total more than 140 companies.
Crystal Fusion manufactures Ultra-Hydrophobic coatings for windshields to enhance visibility in bad weather and strengthen the glass. Crystal Fusion also offers a windshield warranty and a unique retention program that has been successfully implemented in thousands of dealerships worldwide.
“Crystal Fusion is the clear choice when choosing a product to protect your windshield,” said Gary LoCicero, sales director of CFT Products. “Partnering with F&I Express creates a seamless experience for those looking to protect their investment with our product.”
Digital solutions from F&I Express include eContracting, eSignature, Express Recoveries aftermarket cancellations, and more. F&I Express can streamline the aftermarket process for optimized efficiency to make F&I easier and more profitable for everyone involved.
“We are excited to welcome Crystal Fusion to the F&I Express provider network of over 140 different providers,” F&I Express chief executive officer Brian Reed said. “This will provide Crystal Fusion access to not only the F&I Express system but also to our partners who access our Dealer System Providers API.”
While Cox Automotive’s latest workforce study uncovered some startling data and Hireology presented some branding suggestions, Automotive Personnel chief executive officer Don Jasensky reiterated the seven differences he has seen between “job seekers” and “career seekers.”
Jasensky insisted that “there is a world of difference,” as finance companies and dealerships look to fill their workforces with the best possible employees to finalize contracts, complete deliveries and the myriad of other tasks that happen in the automotive retail space.
“Career seekers are looking to ‘become something more’ and ‘add career value’ when they seek a new position,” Jasensky said in a blog post on his company’s website.
Jasensky then explained the seven differences between these individuals that he teaches recruiters and clients. They include:
—Career seekers will likely put more effort in becoming very good at their work.
—Career seekers will invest more money, effort and energy in developing their careers.
—Career seekers are looking long-term and will make decisions that will benefit them long-term.
—Because they are looking long-term, career seekers will be more selective and take more time to make a decision.
—Career seekers will talk to mentors and other trusted people before committing to a new position.
—Job seekers will come to interview “all enthused” and will “jump through any hoop,” which is attractive to many managers but is not an indicator of high performance.
—Job seekers will accept a position quicker with less investment in researching the company and the position.
“Career seekers will be excited the day they get started because they are beginning a new chapter in their career,” said Jasensky, who also is a board member of the National Automotive Finance Association. “The job seeker will be happy that the ordeal of finding a job is over. Entirely different mindsets."
More workforce recommendations and current industry job listings can be found by going to Automotive Personnel’s website.
Dealer Marketing Services, the makers of ProMax, on Monday announced significant enhancements to its certified integration with Dealertrack.
ProMax is a certified partner of most major dealer management systems, and has offered a certified integration with Dealertrack since 2009. The newly updated two-way integration with Dealertrack further facilitates the automated transfer of data between ProMax and Dealertrack, including inventory, repair orders, customers, service and delivered deals.
The company insisted this data flow, updated multiple times daily, can enable dealers to streamline their processes and improve accuracy.
“With the continued growth and evolution of technology and data in automotive retail, it’s a strategic advantage to work with innovative partners such as ProMax to expand and enhance our Opentrack DMS program,” said Candy Lucey, senior director of marketing at Dealertrack.
“Opentrack substantiates our vision of an open platform approach designed to give third-party partners such as ProMax the maximum flexibility to use our platform to best meet the needs of our dealers,” Lucey continued.
“This enhanced integration is great news for our mutual dealer customers,” said ProMax chief executive officer John Palmer, whose company provides lead-generation solutions along with other products associated with credit reports, dealer websites and more.
“We’re always looking for ways to help our dealers succeed, and this updated integration will go a long way towards doing that,” Palmer went on to say.
