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.
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.”
Imagine you’re trying to complete a “first pencil” with a customer who is either in the showroom or communicating through the chat function on your website. The customer has a trade, and better yet, it’s a model you know will turn in 30 days or less.
But then you learn there’s negative equity associated with that vehicle, a record figure in the thousands that Edmunds.com recently discovered to be the average on nearly a third of trades so far this year. What happens next likely determines whether the finance company will buy that deal or if the situation will deteriorate into a slog of trying to get a larger down payment.
“I would certainly say that (negative equity) wouldn’t help in the negotiating at the dealership,” Autotrader senior analyst Michelle Krebs said during a conference call with the media last week.
According to Edmunds data, an estimated 32 percent of all trade-ins toward the purchase of a new model through the first three quarters of 2016 were underwater. This is the highest rate on record, and it’s up from 30 percent of all trade-ins toward new-vehicle purchases from January to September of last year. These “upside down” shoppers had an average of $4,832 of negative equity at the time of trade-in, also a record.
The phenomenon of upside down trade-ins is not limited to new-model purchases. According to Edmunds’ Q3 Used Vehicle Market Report, a record 25 percent of all trade-ins toward a used-car purchase in the third quarter had negative equity. These shoppers had an average of $3,635 of negative equity at the time of trade-in, also a Q3 record in the used market.
“It’s curious to see just how many of today’s car shoppers are undeterred by how much they owe on their trade-ins,” Edmunds senior analyst Ivan Drury said. “With today’s strong economic conditions at their back, these shoppers are willing to absorb a significant financial hit to get into a newer vehicle.”
As Drury indicated perhaps negative equity isn’t posing a problem nowadays since contract terms continue to stretch. Experian Automotive indicated in its latest State of the Automotive Finance Market report released this week that 30.7 percent of all new-vehicle financing in the third quarter stretched to 73 months to 84 months, up from 27.5 percent a year earlier. Analysts even added a new segment to its collection of bar charts since now nearly 1 percent of all new-model financing (0.98 percent to be exact) has terms lasting 85 months and longer.
On the used side, analysts didn’t mention terms stretching beyond 85 months, but Experian did point out that contracts lasting between 73 and 84 months represented 17.7 percent of deals in Q3, up from 16.2 percent during the same quarter in 2015.
So if finance companies decide they just won’t stretch the terms any longer, when does all that negative equity start to short-circuit deals?
“Just thinking about it, it’s a great question,” Kelley Blue Book analyst Tim Fleming said during the recent media conference call. “It’s going to be perhaps a growing issue in the next couple of years. But I don’t know that it’s a significant problem right now.”
Stay tuned.
Nicholas Financial top management explained intense competition for subprime paper triggered not only modifications of its infrastructure and human capital, but also how many contracts the finance company booked during the second quarter of its current fiscal year.
The company reported during the three-month span that finished Sept. 30 that it secured 3,592 contracts, down from the year-ago figure of 4,243. Halfway through its fiscal year, Nicholas Financial added 7,096 contracts, again down from the 8,845 contracts from dealerships the company collected at the midpoint of its previous fiscal year.
“During our second quarter, new-loan origination continued to be below company expectations due to numerous companies looking to acquire automobile retail installment contracts,” Nicholas Financial president and chief executive officer Ralph Finkenbrink said in a news release about its performance.
“Some of these companies are willing to acquire loans at riskier pricing, which we believe will ultimately leave those companies with unprofitable portfolios,” Finkenbrink continued.
Nicholas Financial also reported that its average contract amount and term ticked higher while its average APR dipped a bit. In Q2 of its fiscal year, average contracts stood at $11,565 for 57 months with an APR of 22.26 percent.
All told, the company indicated it held 37,383 active accounts as of Sept. 30, pushing its portfolio to $485.5 million.
As a result of its origination activity plus other market facts, Nicholas Financial mentioned in its disclosures to the Securities and Exchange Commission that it closed three branch locations as a result of these respective markets not meeting the company’s operating criteria to remain viable branch locations. The sites included Sarasota, Fla., Troy, Mich., and Toledo, Ohio, with the company moving activities to other locations already in operation within those markets.
While the company cut those locations, Nicholas Financial also noted in its SEC documents that it opened a full-service branch in Pittsburgh during Q2.
“The company continues to evaluate potential new markets while maintaining its existing markets,” Nicholas Financial said in its Form 10-Q with the SEC. “The company may choose to close or consolidate certain existing branches if they are unable to acquire contracts that meet company expectations. As a result of continued intense competition, the company has been evaluating the long-term sustainability of its current branch-based model.”
Back in the news release, Finkenbrink noted the company also moved all loan-servicing operations from the branch locations to a centralized location within its corporate headquarters in Clearwater, Fla.
“We continue to evaluate the various markets in which we operate,” Finkenbrink said. “However, we do not expect any significant changes to the number of branches or other operations during our third quarter which ends Dec. 31.”
Nicholas Financial elaborated about its personnel and infrastructure moves in the SEC document.
“New regulations and best practices regarding collections were important aspects that led us to the decision to centralize our loan servicing operations,” the company said. “To a lesser extent, the company expects to experience a decline in operating expenses as a result of a reduced headcount.
“The company does not believe there will be any material change in delinquencies and losses as a result of this strategic decision. However no assurances can be given at this time,” the company continued. “The branches will continue to underwrite and acquire contracts. However, any additional material changes to company operations will be evaluated by the company over the next several quarters.”
And speaking of delinquencies, Nicholas Financial reported that its total rate of past due accounts — ranging from just over 30 days to more than 90 days — constituted 9.79 percent of its outstanding portfolio, or about $47.3 million. After Q2 of its previous fiscal year, the company indicated those readings stood at 5.88 percent or $27.9 million.
Looking at its top-line metrics, Nicholas Financial said its Q2 diluted earnings per share decreased 40 percent to $0.25 as compared to $0.42 a year earlier. Net earnings softened to $1.97 million, down from $3.28 million.
The company noted its Q2 revenue remained relatively flat at $22.65 million.
For the six-month span that ended Sept. 30, Nicholas Financial reported that its per-share diluted net earnings decreased 30 percent to $0.62 as compared to $0.89 for six months of its 2015 fiscal year. Net earnings totaled $4.87 million, down from $6.93 million.
Through six months, revenue increased 2 percent year-over-year from $44.71 million to $45.56 million.
“Our net earnings for the three and six months ended Sept. 30 were adversely affected primarily by an increase in the provision for credit losses due to higher charge-offs and past-due accounts along with a reduction in the gross portfolio yield,” Nicholas Financial said. “Conversely, our results were favorably impacted due to a change in the fair value of the interest rate swaps.”
With subprime paper representing only about 16 percent of the total outstanding auto finance balance figure TransUnion reported for the third quarter, the bureau’s top industry analyst indicated that’s not too much lower-end paper currently in portfolios.
“Overall, it’s probably a good thing,” Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion, said about the latest subprime balance figure that grew by 11.4 percent year-over-year.
“The reason I say that is we’re in the sixth, almost seventh, year of economic expansion,” Laky continued during a conversation with SubPrime Auto Finance News after TransUnion’s Q3 2016 Industry Insights Report powered by Prama analytics. “As long as we’re in an economic expansion, the longer that goes, the more confident I think lenders feel in lending to subprime and non-prime consumers, so I think you would expect that growth.
“Again, the further you get into an economic cycle, the more people are going to have net gains in employment,” he went on to say. “We saw 161,000 net new jobs last month, with many of those people coming back into the workforce and may have been unemployed for a period of time or are relatively new to credit. As people are getting employed, it’s naturally creating this demand in subprime and non-prime and lenders are there to meet that demand.”
Balances are higher as now almost 80 million consumers hold some kind of auto financing — a Q3 metric Laky noted as being about 6 percent higher than a year earlier. However as the leaders of both Consumer Portfolio Services and Credit Acceptance noted when they reported their third-quarter results, there is a bit of turbulence that finance companies are facing.
“If there is a tightening — and the reason I say if — from a consumer market prospective, we’re still seeing good growth of consumers getting autos,” Laky said. “From a tightening perspective you’re seeing individual lenders maybe tightening their policies or reducing or being more careful in how they’re participating in the market. There’s a tremendous amount of competition out there. What we’ve seen is the competition for most risk tiers is driving down interest rates or APRs, how they’re being compensated for the risk they’re taking. It’s harder to get at.
“But at the same time, we’re starting to see the beginnings of a higher cost of funds for lenders,” he continued. “The Fed talks about raising rates a little bit. Some of the investor concerns around the fintechs in the second quarter of the year may have just flowed through to auto lenders, particularly independent auto lenders that might have had a higher cost of funds.
“Those two things together can probably just squeeze margins enough that are causing some lenders to really think about where they want to play a little more carefully,” Laky went on to say.
And if finance companies choose to be a little less aggressive, Laky explained the two most likely strategic moves they can make.
“From a lender’s perspective, the two levers that are probably the easiest or most straightforward to pull are credit scores — changing FICO cutoffs is a quick way to manage the credit side of the risk — and the other lever is on the asset side usually with the loan-to-value ratio. That’s another good lever you can pull pretty quickly as a lender,” Laky said. “You can reduce your caps on LTVs or your score cuts relatively easily.
“Nowadays, a lender with any sophistication, things are so engrained — policies and scores and LTVs — that simply changing one isn’t always an option. There’s a lot of thought that usually goes into either expanding the buy or contracting them,” he added.
SubPrime Auto Finance News closed its conversation with Laky by asking about what TransUnion will be watching in 2017 in order to spot significant change or continued patterns of origination growth that’s been noticed for several consecutive quarters.
“From an auto lender’s perspective, we’re going to look a three areas,” Laky said. “First is we’re always going to keep a look on credit quality. We look to see not just how credit is growing across traditional tiers, but the characteristics of the consumers within those tiers and how they’re changing. I feel that’s our responsibility as TransUnion to help our lenders keep an eye on that overall.
“Second is used-car values,” he continued. “We’re a long time into a strong used-car market. There’s a lot of talk about off-lease vehicles increasing over the next couple of years. We certainly see it in the credit file so we’ll keep an eye on that.
“Third, I would keep an eye on funding costs,” Laky went on to say. “The Fed talks about raising rates. While it might only be a little bit, it does flow through to the cost of funds and can certainly challenge margins for lenders. As long as the economy is strong and the Fed is raising rates because of a strong economy, I think that’s the least of the things to worry about.”
TransUnion’s complete Q3 report can be viewed here.
While still making healthy gains in consolidated net income, Credit Acceptance chief executive officer Brett Roberts pointed to data the subprime finance company shared as part of its third-quarter financial statement to explain how competitive the market is to grow its portfolio with contracts that will mature and be profitable.
When looking at Q3 figures, Credit Acceptance generated a 12-percent year-over-year lift in origination volume as the company booked 82,460 contracts through 7,320 active dealers.
But when Roberts gave a glimpse at how the fourth quarter began, he mentioned that Credit Acceptance sustained an 8.3-percent drop-off in originations during October compared to the same month a year earlier.
“I think the primary driver that you see throughout the release is we continue to be in a difficult competitive environment. It’s one that’s been in place for quite some period of time,” Roberts told investment analysts during Credit Acceptance’s quarterly conference call.
“Our strategy in prior cycles like this has been to grow the number of active dealers. It’s pretty hard to grow volume per dealer in the environment that’s as competitive as it is today. And we’ve had some success with that strategy in the past. And I think what we allude to in the release, that that strategy gets more difficult as the number of active dealers grows; it becomes tougher to grow that active dealer base at the same rate,” he continued.
And so we're starting to run into a situation where our existing sales force is signing up as many dealers as they’re capable, but it’s not enough to offset attrition and the impact of the competitive environment on volume per dealer and still leave us with rapid growth. I think that’s where we are today,” Roberts went on to say.
Also to remain competitive, Credit Acceptance continued to extend terms. The company indicated its average contract term in Q3 stretched to 52.6 months, up from 49.8 months a year earlier.
And with the company taking on more risk and watching its collection projections sink below 70 percent, Roberts responded to inquiries about how used-vehicle values are going to impact Credit Acceptance’s performance.
“There’s obviously been a lot written about predictions of what used-vehicle values are going to do in the future, we’re certainly aware of all that,” Roberts said. “We track all the vehicles in our portfolio and the change in the Black Book value every month. Obviously it’s a used vehicle, so it’s a depreciating asset that goes down every month.
“What we’ve seen so far this year is a steeper decline in terms of the depreciation on the vehicles in our portfolio than we have typically seen, probably the steepest declines this year going back to, I think 2008 was the last time we saw depreciation this steep. So that’s certainly impacting the loan performance to date, and it’s something that we’ve included in our forecast,” he continued.
As we talked about last time, the actual amount that we receive at auction from the repossessed vehicles isn’t a huge percentage of our total expected cash flows. So we don’t necessarily have a prediction of what those used vehicle values are going to do in the future. It’s not as important to us as it is to potentially other, more traditional lenders. You could write a loan today, it’s a 50-month loan, trying to predict what used vehicle values are going to be over the next 50 months is obviously very difficult,” Roberts went on to say.
“So instead what we do is we try to build a margin of safety into our business model. As you know that predicting collection rates is very difficult, so we try to set up a situation where even if our collection forecast comes in a little shy of what we expected, the loans would still be very profitable. And that strategy has worked for us very well over time,” he added.
To recap, Credit Acceptance’s consolidated net income came in at $85.9 million, or $4.21 per diluted share, for the quarter that ended on Sept. 30. A year earlier, the company said its consolidated net income totaled $74.0 million, or $3.53 per diluted share.
Through nine months, the company’s consolidated net income stood at $245.2 million, or $12.01 per diluted share, compared to $219.7 million, or $10.49 per diluted share, for the same period in 2015.
According to TransUnion’s Q3 2016 Industry Insights Report powered by Prama analytics, total auto financing balances grew by 9 percent year-over-year during the third quarter.
TransUnion pegged the total balance reading at $1.1 trillion, up from $1.01 trillion in Q3 2015.
Analysts noticed subprime balances experienced the largest increase, with 11.4 percent year-over-year growth. Despite this increase, subprime balances accounted for just $172 million of the $1.1 trillion in total balances in Q3.
“Subprime balance growth outpaced overall growth in the auto loan sector in the third quarter, but subprime consumers’ share of balances has remained steady in the last few years,” said Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion.
“We’re observing increased delinquency rates, but this is a natural function of more non-prime consumers with an auto loan,” Laky continued.
“We hope that steady job growth and wage gains will enable delinquencies to continue at low rates and support continued auto sales growth, though potentially at a more moderate pace than in recent years,” he went on to say.
In the third quarter, 79.3 million consumers had some kind of auto financing, up 6.2 percent from 74.7 million in Q3 of last year. The average balance per consumer was $18,361, the highest level since Q3 2009.
One year prior, the average auto financing balance was $17,946.
The report also found that auto loan delinquency, for consumers 60 days or more past due, reached 1.33 percent in Q3 2016, up from 1.19 percent in the third quarter of 2015.
Auto originations, viewed one quarter in arrears, grew at the slowest annual pace since the Great Recession. Total originations were 7.27 million in Q2 of this year, up slightly from 7.24 million in Q2 of last year.
TransUnion indicated originations to non-prime consumers — individuals with a VantageScore 3.0 score of 660 and below — declined for the first time since Q3 2010.
“The second quarter of 2016 marked the first sign of a slowdown in non-prime originations, but the flat growth in total originations was in line with the expected plateauing of new-vehicle sales,” Laky said.
Editor's note: Watch for a future report from SubPrime Auto Finance News containing more details from TransUnion's latest auto finance analysis.
PointPredictive, a provider of machine learning fraud solutions, recently announced the results of a new study that detected high levels of fraud in early payment auto finance contract defaults.
The firm explained its study encompassed data from millions of auto finance applications submitted by dealers all over the U.S. across all vehicle types. PointPredictive auto fraud models analyzed each application and gave it a fraud score.
While built to detect fraud, PointPredictive said its scientists were surprised to find that it did extraordinarily well in the detection of early payment default, a term finance companies use to indicate when contracts default within the first six months.
The study found that by scoring auto finance applications with models built to detect fraud, finance companies could detect 50 percent or more of their early payment default (EPD) prior to funding than if they relied on traditional credit scores alone.
“Our analysis and experience suggest that many auto loans that default within the first six months have fraudulent misrepresentation on the loan application,” PointPredictive chief executive officer Tim Grace said.
“When we ran fraud pattern recognition models on the application information provided on EPD loans, we found strong evidence of fraud,” Grace continued. “This is the same type of behavior mortgage lenders discovered prior to the mortgage crisis when it was determined that up to 70 percent of mortgage EPD was fraud related.
“The study confirms that using credit scores alone cannot detect fraud or risk of default,” he went on to say.
The PointPredictive analysis proved that fraud scoring could:
• Detect 14 times more fraud for finance than current solutions while flagging less than 5 percent of the total applications.
• Prevent 50 percent or more of a finance company’s early payment default losses by identifying those applications that had misrepresentations that would lead to loss.
• Identify risky dealers that submit multiple fraud applications up to three months sooner and reduce losses due by 70 percent due to early detection of bad players.
In 2007, a study by BasePoint Analytics found that between 30 and 70 percent of mortgage loans that defaulted within the first six months contained serious misrepresentations on the original application. These misrepresentations on borrowers’ income, employment, collateral or even intent to occupy had a material impact on the performance of the loan but were often considered “hidden fraud” since they were never detected in the application process.
PointPredictive insisted that auto financing fraud, like mortgage fraud, occurs when information on an auto finance application is intentionally misrepresented either by the borrower, a sophisticated fraud ring, or an unscrupulous dealer.
When information is manipulated and the finance company does not know about it, PointPredictive noted that institutions may underwrite the application assuming the information is valid. Intentional fraud presents a problem for auto finance companies since loans that have misrepresentation are more likely to result in EPD.
To counter auto finance fraud and better detect EPD, PointPredictive Auto Fraud Manager uses pattern recognition, a technique that scientists have perfected to detect fraud based on historical data mining. The solution works by analyzing historical patterns of fraud, EPD and risky dealer activity and then scores each application as it comes in from a dealer.
Finance companies are automatically alerted when an individual application has a significant number of anomalies or fraud patterns related to the income, employment, collateral, borrower or dealer. The lender can review the application and take action before it is approved. Over time, if a particular dealer submits many applications with similar fraud patterns, the solution will alert the lender to that as well so they can take the appropriate action.
The full results of the study have been published in the PointPredictive whitepaper titled “You Can’t Fight Fraud with Credit Risk Tools,” which is available at no charge by emailing info@pointpredictive.com.
General Motors Financial generated the most North American originations in a single quarter ever while continuing to compile more prime paper than subprime contracts in the process.
President and chief executive officer Dan Berce highlighted that the captive’s North American originations jumped to $3.4 billion during the third quarter, eclipsing the previous high mark of $3.2 billion established a year earlier. During the second quarter, GM Financial’s North American originations totaled $2.5 billion, which include contracts from GM’s franchised dealerships in both the U.S. and Canada as well as dealerships of other OEMs and independent stores that still send the company applications.
Of that new company record, Berce explained during GM Financial’s conference call with investment analysts that $2.2 billion of the Q3 figure stemmed from new-model activity at GM dealers with $600 million being connected to used-vehicle financing at GM stores as well as another $600 million outside of the automaker’s dealer network, which oftentimes is where the captive’s subprime paper originates.
Berce then went on to describe the credit quality of those originations.
“As a percentage of all GM’s subprime lending activity as it relates to GM new vehicles, our share was 30 percent, down both sequentially and a year ago, but our share of prime lending increased to 12 percent, up from June of 2016, but down from 14 percent a year ago,” Berce said.
“I’ll point out as I did before that the mix of our originations continues to shift to higher credit quality tiers and it’s reflected here in the fact that our average FICO for the September 2016 quarter was 686, higher than what we've seen in the last four or five quarters.
Adding in its international activity, GM Financial reported that its retail loan originations rose $5.1 billion for the third quarter, up from $4.2 billion in Q2 and $4.7 billion in the year-ago period.
Through the first nine months of 2016, the captive’s retail loan originations totaled $13.4 billion, compared to $13.1 billion at the same juncture a year earlier.
GM Financial added that its outstanding balance of retail finance receivables stood at $32.2 billion as of Sept. 30.
All of that origination activity helped GM Financial to generate $147 million in net income during Q3. The metric softened a bit year-over-year as the company reported $179 million in net income for Q3 of last year.
Through nine months, GM Financial’s net income came in at $500 million, off from $515 million for the nine months of 2015.
Turning to other parts of its operation, GM Financial noted that its retail finance receivables sitting 31 to 60 days delinquent ticked lower year-over-year to settle at 3.5 percent of the portfolio as of Sept. 30, down from 4.0 percent that the company spotted on the same date last year.
Accounts more than 60 days delinquent also improved slightly as those customers represented 1.5 percent of the portfolio at the end of Q3, down from 1.6 percent a year ago.
GM Financial went on to mention its annualized net charge-offs were 2.0 percent of average retail finance receivables for the third quarter. For the nine months of this year, annualized retail net charge-offs were 1.9 percent. Both readings increased 1 basis point year-over-year.
“Compared to the year-ago quarter, we have continued to see normalization in credit results as well as low recovery rates,” Berce said. “Those factors have been offset by our positive mix shift to prime.
“Finance receivables with FICO scores less than 620 now comprise just over half of our retail loan portfolio in North America compared to 65 percent a year ago,” he continued.
“One more note on recovery rates: They are down both year-over-year and sequentially. This continues a trend that we've seen throughout 2016 and we do expect softer recovery rates as we move into 2017,” Berce went on to say.
Elsewhere within its operation, GM Financial highlighted that its outstanding balance of commercial finance receivables stood at $9.8 billion as of Sept. 30, compared to $9.4 billion on June 30 and $7.8 billion at the close of last year’s third quarter. Berce noted that 745 dealers are using GM Financial’s commercial finance offerings.
“Floor planning continues to represent the bulk of the portfolio at 88 percent, and we do expect to see continued steady increases in both the number of dealers and outstandings as we move forward throughout 2016 and into 2017,” he said.
GM Financial closed by mentioning the company had total available liquidity of $15.4 billion as of Sept. 30. That figure consisted of $2.6 billion of cash and cash equivalents, $11.6 billion of borrowing capacity on unpledged eligible assets, $0.6 billion of borrowing capacity on committed unsecured lines of credit and $0.6 billion of borrowing capacity on a junior subordinated revolving credit facility from GM.
Consumer Portfolio Services chairman and chief executive officer Brad Bradley acknowledged that he thought the company would operate like other subprime auto finance providers during the third quarter — tightening up underwriting and not booking as much paper.
Turns out that according to Bradley, CPS modified its origination pace during Q3, but the rest of the subprime industry didn’t. But he’s not upset because, “We are doing well. We’re making money. Our numbers look pretty good.”
The specific Q3 numbers CPS reported this week included that the company purchased $242.1 million of new contracts compared to $319.1 million during the second quarter of this year and $287.5 million during the third quarter of last year. The activity pushed the company’s managed receivables total to $2.292 billion as of Sept. 30, an increase from $2.254 billion as of June 30 and $1.941 billion as of the end of last year’s third quarter.
“The numbers we can be happy with and given the circumstances in our industry, it’s really not a bad thing,” Bradley said when CPS hosted its quarterly conference call on Tuesday. “I think in a strange way over the last year or so CPS has become somewhat of a spectator in our own industry, and that’s a good thing not a bad thing.
“The good part is everyone seems to know what is going on in the industry, but no one seems to care what CPS is doing. Everybody is happy with what CPS is doing,” he continued.
The CPS results and Bradley’s comments arrived at what might be an interesting juncture. Cox Automotive chief economist Tom Webb shared this assessment back in August, noting, “As I listen to lenders, and more importantly their investors, almost unanimously they are now saying we’re at the point in the cycle where as the saying goes, ‘You manage your book; you don’t grow your book.’”
In light of that kind of sentiment, Bradley said, “In some ways, as much as we’re not wonderfully happy with our total overall performance, we’ve done pretty well.
“Ironically compared to lots of people in the industry we’ve done great,” he continued. “And so that puts us in an odd spot in that everyone is waiting to see what everyone else is going to do. How is the industry going to shake out? How are the big players going to change? What are the small people going to do?
“And so we sit in the middle. We are doing well. We’re making money. Our results are pretty good, and so we’re going to have to wait and see,” Bradley went on to say.
During the third quarter, CPS generated $7.3 million in earnings or $0.26 per diluted share. A year earlier, the company’s net income came in at $8.8 million, or $0.28 per diluted share.
The company also highlighted that its Q3 revenues jumped 15.5 percent to $108.5 million. However, the company’s total operating expenses for the third quarter grew by a higher pace — 22.6 percent — to come in at $96.1 million.
Looking at the performance of CPS’ book, the company indicated its annualized net charge-offs for the third quarter stood at 6.69 percent of the average owned portfolio as compared to 6.27 percent a year earlier.
The company’s Q3 delinquencies greater than 30 days (including repossession inventory) came in at 10.46 percent of the total owned portfolio as of Sept. 30, as compared to 8.81 percent on the same date in 2015.
So what might happen with CPS to close 2016?
“We need some sort of result in what is going to happen with the big guys, what is going to happen to the small guys,” Bradley said. “Personally in our experience of 25 years, I think our industry is well suited to pick up the new small guys. I don’t think there will be a big bunch of crashes and I think the industry itself would absorb anybody who has any problem whatsoever. But we just need all this to happen and then I think you get some closure on those two areas.
“CPS is well positioned to take advantage of the market both in terms of our size, in terms of our growth potential … we’re in a good spot,” he added.
