Both S&P Global Ratings and the American Bankers Association spotted rises in auto finance delinquencies in their recent reports, but Cox Automotive chief economist Tom Webb insisted this week that the “overall financing environment remains extremely favorable.”
According to results from the ABA’s second-quarter Consumer Credit Delinquency Bulletin, both of its categories of auto financing registered slight year-over-year upticks. ABA reported direct auto loan delinquencies — contracts arranged directly through a bank — edged 1 basis point higher in Q2 from 0.81 percent to 0.82 percent.
Meanwhile, ABA noted Q2 indirect auto loan delinquencies — financing arranged through a third party such as a dealer — moved up from 1.45 percent to 1.56 percent.
And S&P Global Ratings carved out its look strictly at subprime paper and noticed the 60-plus-day delinquency rate ticked up to 4.85 percent in August 2016 from 4.74 percent in July and 4.14 percent in August of last year. Analysts acknowledged subprime delinquencies remain below the highest level, which was recorded in August 2009 at 5.19 percent.
Webb also considered where wholesale prices currently stand when evaluating how delinquencies might be impacting auto financing activity.
“There have been some lenders who have pulled back as a necessity because they became overly aggressive and they started to see it in their portfolio performance. However, there have been other players who have come in,” Webb said during his quarterly conference call. “From the dealer standpoint, the availability of financing is not an issue at all.
“From the lender standpoint, although delinquencies are ticking up a little bit, they’re not overly alarming,” he continued. “There have been some significant increases for some lenders in terms of their severity of loss. But I would suggest that would not be because of used-vehicle values but because of their loan-to-value ratio going in.”
Looking back at the ABA bulletin, the composite ratio — which tracks delinquencies in eight closed-end installment loan categories — fell 3 basis points to 1.35 percent of all accounts — a record low. This reading also marked the third year that delinquency rates were below the 15-year average of 2.21 percent.
The ABA report defines a delinquency as a late payment that is 30 days or more overdue.
“Consumers have become more confident over the past two years and for good reason — their financial picture is improving and their paychecks have finally started to rise as we near full-employment levels,” ABA chief economist James Chessen said. “Quarter after quarter, consumers continue to build a stronger balance sheet as they earn more, save more and keep debt levels low relative to income.”
So if Chessen is correct, auto finance companies might be leveraging a strategy Webb described. After all, Equifax recently reported that newly opened auto loans and installment contracts year-to-date through June and reported to Equifax as of August represented a rise of 3.5 percent versus the same period a year ago.
“Going forward, you assume that wholesale values are going to deteriorate a least a little bit. To use the same loan-to-value ratio, you’re putting more risk on your books because your loan-to-value ratio is based on current values whereas your repo might occur 16 to 18 months later,” Webb said.
“I think they have to incorporate that and I wouldn’t be surprised if everyone tries to get a little more up-front money in the deal. I think it would be better for everyone,” he went on to say.
This week, Wolters Kluwer Governance, Risk & Compliance completed divestment of its indirect loan origination solutions, including the AppOne platform, to Reynolds and Reynolds.
The development finalizes an agreement officials said included €32 million in cash through a deal initially announced on Sept. 8. At that time, Wolters Kluwer explained its divestment is in line with the division’s strategy to focus its financial services group of businesses on growing its compliance content and expert solutions for banks and other financial institutions globally.
The company’s AppOne indirect loan origination platform, compliance documents and risk mitigation services are used primarily by automotive, marine, powersports and recreational vehicle dealers across the U.S. to facilitate interaction with finance companies.
Wolters Kluwer expects to report a €13 million book gain, net of tax, on the divestment. Reynolds anticipates extending offers of employment to 36 Wolters Kluwer employees as part of the transaction.
“As a leader in automotive dealership solutions, Reynolds and Reynolds is well-positioned to continue to support the unique needs of indirect loan origination customers,” said Richard Flynn, chief executive officer of Wolters Kluwer’s Governance, Risk & Compliance division.
“Wolters Kluwer will continue to invest in our core regulatory compliance business which serves thousands of banks, credit unions, and mortgage lenders globally,” Flynn continued.
Steven Meirink, executive vice president and general manager of the Compliance Solutions business unit for Wolters Kluwer’s Governance, Risk & Compliance division, added, “At the same time, we remain committed to providing these banks and other licensed lenders with our proven regulatory expertise, solutions and services for their mortgage, consumer and commercial lending as well as investment and insurance businesses.”
Jerry Kirwan, senior vice president and general manager of Reynolds Document Services at Reynolds, elaborated on what the move means for that company.
“We continually look for ways to grow our business,” Kirwan said. “Reynolds already offers an extensive documents product portfolio, along with well-known expertise in business forms compliance for dealerships.
“By acquiring these additional documents, software and services business, Reynolds will be able to serve an even broader set of markets and customers even more effectively,” he went on to say.
Before arriving at Equifax, both Lou Loquasto and Craig Sims spent time in the industry trenches with auto finance companies, competing against other providers for applications and contracts generated at dealerships.
When Loquasto and Sims offered the industry media a glimpse of Equifax’s newest tool — TradeSight — the availability of this marketplace intelligence platform made them both harken back to how it could have made their tenure with finance companies even more fruitful.
Combining Equifax consumer credit information with dealer and vehicle data from third-party sources, TradeSight can enable auto finance companies to assess their dealer network, benchmark against their peers and better understand a dealer’s commercial risk.
“In all the years I’ve been in auto finance, this is the most excited I’ve been about a product,” said Loquasto, Equifax’s vice president. “It has to do with dealer risk, helping lenders in what is a very competitive environment.
“We took that track that when we were lenders, what did we want as far as a dealer and business intelligence tool? That’s what we produced,” he continued during that sneak peek of the tool that officially launched on Wednesday.
It took Equifax nearly two years to develop the tool in response to finance companies’ need to assess opportunities within a sector that is increasingly competitive, particularly with the emergence of nontraditional financing providers.
Leveraging data from industry leaders such as Black Book and IHS Automotive, TradeSight can provide comprehensive analytics from a single platform that can uniquely provide market insights into contract-level analysis. This analysis can enable lenders to adjust terms offered to consumers to track dealer performance in support of portfolio growth.
Offering data on the last 48 months of originations and providing regular updates, TradeSight is designed to help finance companies assess:
—Percentage of loans being directed to them from certain dealerships
—Types of loans most and least frequently initiated at those dealerships
—Current and historical loan performance
—Positive and negative selection among their dealer network
—Commercial risks of each dealership
Sims, the Equifax auto lending sales leader, explained the tool capabilities this way: “Am I the first choice lender or am I the last choice lender? Am I getting the best deals or am I getting the worst deals? Now lenders will be able to see that performance within a single dealership or dealer group.”
Loquasto added that finance companies will be able to see if a top competitor “is getting aggressive with this (specific) dealership. Then I need to spend more time with this dealership. We may need to do something because I need to compete with the other folks.”
Sims insisted TradeSight was built to evolve with the needs of the auto finance industry, and Equifax plans to continue to incorporate more data sources into the platform over time. Along with this pledge, Sims mentioned finance companies have the option of directly accessing the market intelligence tool or requesting customized reports based on their individual needs. He added this customized approach will enable them to acquire the specific data they need to manage the specific risk that may exist within their dealer network.
Touching on why it took such an effort and collaboration, Sims said, “It just takes a while to pull all of those pieces together to make sure they’re buttoned up and ready for prime time.”
For more information about TradeSight, finance companies and dealerships can contact their Equifax sales representative.
“Automotive lending has long been a highly competitive market and with the industry becoming increasingly more complex, driving an increasing need for more relevant and timely market insights,” Loquasto said in Equifax’s announcement.
“As a result, we recognized an opportunity to incorporate the loan-level data on hand and pair it with some of our industry partners to create TradeSight, which delivers a comprehensive snapshot of the auto lending marketplace,” he went on to say.
Along with adjustments of its top management, White Clarke Group announced on Tuesday that Five Arrows Principal Investments — the corporate private equity business of Rothschild & Co. — made what is being described as a “significant equity investment” in the global provider of specialist technology and software solutions to the automotive, asset and consumer finance markets.
Having invested substantially in its CALMS product range during the last few years, White Clarke Group highlighted that it has achieved “considerable” growth globally and has now reached a point where the business will benefit from greater scale to meet growing customer demand.
Officials highlighted Five Arrows Principal Investments will leverage its capabilities to support White Clarke Group in its transition into the next stage of growth. Five Arrows Principal Investments has a focus on supporting software and technology platforms with recurring revenue streams underpinned by high customer satisfaction and retention rates.
As part of the transaction, White Clarke Group has announced that Brendan Gleeson, currently executive vice president of the group, will take on the role of chief executive officer. Ed White, currently president and chief executive officer of the group, will transition into the role of chairman.
“Five Arrows Principal Investments’ confidence in White Clarke Group and its CALMS product is a significant endorsement of our strategy and the way we have transformed the business over the last five years. The Rothschild & Co. partnership will give us the platform we need to achieve the next phase of our growth strategy and help scale the business,” Gleeson said.
“I very much look forward to working with the leadership team to ensure White Clarke Group achieves its considerable potential,” he continued. “We will continue to invest in our people, our product and our customers to ensure this happens.”
Meanwhile, White touched on what it means that the company is elevating Gleeson to his new post as this “significant” equity investment arrives.
“With a strong executive leadership team and Brendan’s passion for this business, White Clarke Group is well-positioned to move to the next stage of its growth trajectory,” White said. “I believe Five Arrows Principal Investments will be an ideal shareholder. Under their stewardship, the legacy of my late business partner, Dara Clarke, and myself — which bears both our names — will be protected and our business can move from strength to strength.
“I am very proud of what the people in our organization have achieved and grateful for our customers’ continued faith in us,” White went on to say.
When Equifax looked at its most recent auto finance data, analysts considered the trend that finance companies might be tightening their underwriting a bit.
Still based on the August Equifax National Consumer Credit Trends Report, analysts noticed what they called “healthy growth” in originations. Equifax indicated that newly opened auto loans and installment contracts year-to-date through June and reported to Equifax as of August represented a rise of 3.5 percent versus the same period a year ago.
Analysts noted that balances on new originations grew 5.5 percent. Perhaps what triggered the tightening thought, they added that the share of financing originated to borrowers with an Equifax Risk Score of less than 620 — generally considered to be subprime accounts — fell 0.6 percent versus the first six months of 2015.
“Lenders in general have been very risk averse since the Great Recession, with more and more using all the tools available to accurately rate and price the risks they are taking and to sensibly decide which ones they don’t want to take,” said Amy Crews Cutts, chief economist at Equifax.
“Lending in the subprime segment can be done well and to the mutual benefit of consumers and lenders, provided the whole credit-collateral-capacity picture of the loan is healthy. In recent months there has been a shift in the share of new loans going to higher-credit quality borrowers, possibly indicating tightening of lending standards,” Crews Cutts continued.
Equifax indicated performance of the auto finance market is holding steady at very low levels.
As of August, the severe delinquency rate (defined as share of balances that are 60 days or more past due) stood at 1.05 percent, which is a slight increase of 7 basis points over August of last year.
The write-off rate is at 21.2 basis points, which is an increase of 1.8 basis points year-over-year.
Delinquencies, including seasonal variations, have stayed tightly within the range of 0.8 percent to 1.25 percent since March of 2013 while write-off rates have varied between 18.2 and 23.0 basis points.
“The market is starting to see slowing demand, which means lenders will have to contend with increased competition for consumer loans which will drive a need for increased market intelligence to properly identify and mitigate risk in this environment,” said Lou Loquasto, vice president at Equifax, who will be one of the experts on hand for the SubPrime Forum during Used Car Week at the Red Rock Resort and Casino in Las Vegas on Nov. 14-18.
Equifax insisted that consumer credit data is the most accurate way to assess a consumer’s financial health and a useful tool in assessing current performance of the auto lending industry. In line with this assessment and in response to the need for enhanced market intelligence in the auto lending environment, Equifax plans to announce details around its new auto finance market intelligence platform later this week.
Other highlights from the report include:
—As of August, auto finance portfolio balances are growing at a higher rate year-over-year for banks than finance companies (10.6 percent and 6.8 percent respectively). Year-over-year growth rates in the number of auto accounts are slightly lower for finance companies (4.9 percent) than banks (7.0 percent).
—In August auto leasing showed signs of growth for both banks and finance companies, with a 14.1 percent and 16.1 percent year-over-year increase, respectively.
—Year-over-year consumers are spending more on the vehicles they are purchasing. The average origination amount for all auto contracts issued in June was $21,392. This figure marked a 3.5 percent increase over June of last year.
The latest report from Fitch Ratings indicated U.S. auto loan and lease credit performance will likely continue to deteriorate in the second half of 2016 and into 2017.
Analysts noted year-over-year credit performance deteriorated for auto finance companies in the first half of 2016, despite improved loss rates in the first half of this year relative to the second half of last year, which Fitch attributed primarily to seasonality.
“Fitch expects credit performance to continue to deteriorate going into 2017, particularly in the subprime segment as less tenured auto finance companies with looser underwriting standards have entered the market in recent years,” Fitch Ratings director Michael Taiano said.
Strong vehicle installment contract as well as lease portfolio growth for Fitch-rated auto finance companies continued in the first half of this year due to strong vehicle sales, low interest rates and continued consumer demand for leases and extended loan terms. Although analysts acknowledged the growth rate decelerated slightly from last year.
Fitch is expecting financing growth to continue to moderate, particularly should interest rates rise and used-vehicle values decline, which could impact lease pricing.
Despite the recent credit deterioration, Fitch-rated auto lenders' ABS credit performance continues to be strong relative to historical norms as the average net loss rate increased a modest 8 basis points to 0.73 percent in the second quarter of this year from 0.65 percent in the year-ago period.
The firm pointed out average 30-day delinquencies actually decreased slightly to 3.16 percent from 3.25 percent during the same period.
“Losses among the largest auto lenders remained low, but continue to normalize due to an increase in both loss frequency and severity,” Fitch said. “The average net charge-off rate on the managed portfolios for lenders cited in the report increased to 0.53 percent from 0.43 percent year-over-year.”
Fitch went on to mention that Huntington Bank, Chase and American Honda Finance ended the first half of the year with the lowest credit loss rates largely due to the prime nature of their portfolios and consistent underwriting standards.
“Credit losses and delinquencies for the auto finance industry will likely trend higher as more recent vintages continue to season and recovery values decline from historic highs,” Taiano said.
FactorTrust is looking for finance companies to add another consumer definition to their lexicon, encouraging lenders to examine the underbanked population with a new lens.
FactorTrust is advocating that the 113 million U.S. consumers with FICO credit scores currently below 700 should be recognized as CreditClimbers — consumers determined to improve their credit scores in order to advance their situation and access more credit options.
“Lenders must adjust their perception about the underbanked and no-score consumers,” FactorTrust chief executive officer Greg Rable said. “There are 26 million U.S. adults who have no credit history with the Big 3 bureaus. This is a massively underserved population that, when taking alternative credit data into account, deserve credit options."
FactorTrust’s data demonstrates these Americans indeed are striving for a better financial standing,” Rable continued. “Using alternative credit data, lenders can grow their business by strategically evaluating and marketing to CreditClimbers.”
While the percentage of unbanked consumers has decreased over the past five years, the number of underbanked consumers has remained relatively stable, according to the FDIC. Rable insisted the historical perception that the underbanked are all risky customers has harmed both consumers and finance companies, impeding industry and economic growth.
“Every time a CreditClimber does something positive, they deserve to improve their credit score,” he said. “The problem is that the vast majority of these customers and their credit performance are simply unrecognized and untracked by the Big 3 bureaus.
“We’ve seen people improve their credit scores — at every scoring level — by having alternative credit data factored in during the underwriting process. More data is better for both the consumer and the lender,” Rable went on to say.
DPG Investments — a company that currently has 26 private equity holdings while overseeing $1.5 billion in capital commitments since 2004 — closed on a line of credit on Friday so it can dive deeper into the non-prime auto finance business.
Spring Tree Lending, a portfolio company of DPG, secured the line of credit provided by the Spartan Financial division of American Credit Acceptance.
Spring Tree, based in Atlanta, buys and services non-prime auto loans from small and midsize dealers and finance companies in the southeastern U.S.
DPG chairman Dan Galvanoni said, “This line of credit will further the growth of Spring Tree by providing an additional source of funds to acquire loans from our vast dealer network. We anticipate an excellent relationship with Spartan and look forward to expanding that relationship up to as much as $10 million.
Jerry Hudspeth, managing director of DPG and CEO and managing partner of Spring Tree, added, “The non-prime auto lending market is an important part of the economy. We are now poised for rapid growth in this dynamic segment while providing best-in-business practices.”
Research recently released by TransUnion found that two in three lenders feel that data and analytics are evolving faster than their own internal capabilities. TransUnion surveyed 309 banks, credit unions and consumer finance companies to learn more about their use of data and analytics.
The survey found that 61 percent of lenders feel that the vast amounts of data now available to them are overwhelming, and more than half — 54 percent to be exact — say it is difficult to discover useful insights when there is so much data.
Yet TransUnion discovered that 70 percent of lenders want direct, immediate, self-service visibility into their analytics.
The need for real-time data is real, according to TransUnion’s research. Nearly three in four respondents (73 percent) report that their analytics capabilities — or lack thereof — affects their ability to compete in the marketplace. Virtually all (92 percent) respondents agree there are new or hidden opportunities in today’s market, but struggle with uncovering opportunities in a timely fashion due to massive data volume and limited resources.
Versta Research surveyed 309 lenders about how they are using analytics to compete, how they prioritize data and analytics, and their strengths and weaknesses in data and analytics. Respondents included risk, compliance, lending, finance, marketing, and analytics executives and managers responsible for optimizing growth.
Versta Research conducted the survey from Feb. 12 to March 15.
“Our research found half of lenders say their organizations are driven mostly by intuition and the experience of managers rather than by analytics. Yet, 80 percent of lenders believe that improving their analytics capabilities would make their organizations more competitive,” said Steve Chaouki, executive vice president of TransUnion’s financial services business.
“We believe our Prama suite of solutions addresses these needs, and the industry is beginning to recognize the importance of having access to analytic services that facilitate faster decisions and strategy adjustments,” Chaouki added.
To meet the changing demands of the lending market, TransUnion launched Prama, what the company thinks is a groundbreaking suite of solutions changing how companies explore data and act on insights.
“Prama puts the power of broad, deep data and the reliability of superior analytics at the customer’s fingertips — giving them the information they need to make better decisions at the speed their business requires,” TransUnion said.
The Prama suite of solutions currently consists of Prama Insights, which includes two modules — Market Insights and Vintage Analysis. The Market Insights module can provide quarterly views on key lending metrics at a state, regional and national level.
The Vintage Analysis module can allow users to view seven years of their own performance data spanning the life of each loan such as delinquency, charge-offs and bankruptcy. Leveraging a full depersonalized national credit file, users can compare or benchmark vintage performance against their peer groups and the industry as a whole.
The next step in the Prama journey — Prama Studio — is planned to be generally available later this year. Its first module, Attribute Manager, will include capabilities for custom attribute development through a convenient web-based portal.
To learn more about the TransUnion data analytics study visit solutions.transunion.com/analytics.
As more off-lease vehicles hit the wholesale market, dealers and finance companies are likely to be challenged to find buyers who will purchase these potentially certified pre-owned units even as CPO sales continue to set records. In an effort to help the industry consider another option — used-vehicle leasing — Black Book released a white paper on Tuesday aimed at helping finance companies identify which vehicles will make good candidates for a used-lease program.
In the white paper, titled “How to Grow a Profitable Used Leasing Portfolio,” Black Book acknowledged that not all vehicles depreciate alike. And with fluctuating residual forecasts across all segments, analysts emphasized that it’s imperative finance companies, dealers and industry professionals rely on collateral data to identify the right vehicles for a used-lease portfolio.
“As the off-lease inventory of three- and four-year-old vehicles continues to increase this year and over the next few years, lenders, dealers and remarketers will need to find alternative channels to return these vehicles out into the market,” said Anil Goyal, senior vice president of automotive valuation and analytics for Black Book, who also will be one of the many experts coming to Las Vegas this November for Used Car Week.
“Used leasing may be the right choice for some of these vehicles, but the wrong decision can be detrimental to the profit margins of a portfolio, which is why collateral data can mitigate any vehicle profit risk,” Goyal continued.
Black Book’s white paper offers specific data examples that address certain scenarios:
• Where used leasing would not make sense: A comparison of a new vehicle finance environment against the same vehicle after 36 months, with data showing how the monthly payments offered would not differ greatly based on a number of criteria.
• Where used leasing would make sense: A similar comparison of a new vehicle with its counterpart at 36 months of age; this time, factors such as mileage and a residual without subvention show where the monthly payment would show a noticeable difference.
• How to leverage residual data to find used lease candidates: An explanation into residual forecasting and depreciation trends that can lead to the identification of optimal used lease opportunities based on collateral insight.
In light of those examples, we asked Goyal to speculate a bit. What if a large captive or other finance company that already holds a significant market share would “go all-in,” so to speak, with used leasing? What kind of ripple effect could it have on the market?
“This is why collateral data plays a key role, and it’s a big reason why we decided to investigate the issue through the new white paper,” said Goyal, who will be leading discussions during both the CPO Forum presented by Autotrader and the SubPrime Forum presented by Digital Recognition Network.
“Lenders that wish to increase their portfolio with more used leases need to rely on collateral data to identify which vehicles make good candidates,” Goyal continued. “By identifying the models that make the most sense, lenders will increase their chances of gaining profit potential with their portfolio.”
As many wholesale experts have said, off-lease volume is on the rise primarily because so much new-model leasing is occurring. In fact, Experian Automotive recently reported that new-vehicle leasing reached a new threshold during the second quarter as 31.44 percent of new-model financing was delivered as a lease. It’s situations like those that Goyal surmised as potential impediments preventing used-vehicle leasing from gaining significant momentum in the past.
“Volume plays a large role here. Because there is so much off-lease inventory available now, compared with six or seven years ago, lenders are now interested in identifying the different ways to move off-lease inventory,” Goyal said.
And if a vehicle ends up being connected to two leases, Goyal believes those units still will have life remaining for dealers to retail, perhaps with more financing attached.
“It would be no different than if those same vehicles went through a CPO program and then ended up on a buy-here, pay-here lot. In many cases, a used lease program might keep the mileage on a vehicle in check between months 36 and 60,” Goyal said.
To download Black Book’s latest white paper focused on used-vehicle leasing, go to this website.
