The fourth significant development coming from defi SOLUTIONS in the past month arrived on Tuesday morning. This time, defi SOLUTIONS finalized a partnership with eOriginal in an effort to bring secure eContracting and eVaulting capabilities to its growing finance company community.
In a blog post revealing the news, defi SOLUTIONS explained that the integration of eOriginal with the defi loan origination system means finance companies can eliminate costly paper processes and accelerate their funding times. The companies pointed out that the new capabilities are designed to help finance companies meet stringent compliance requirements and put them on the “leading edge” of all buying and funding processes by going 100 percent digital.
Georgine Muntz, COO and strategy leader at defi SOLUTIONS, elaborated about what the latest developments mean for both finance companies and dealerships. Muntz insisted the partnership will streamline loan processing and enable accelerated funding cycles through fully digital collateralizations and securitizations.
“defi’s software enables lenders to respond quickly to loan applications and improve their existing auto lending programs," she said.
“The partnership with eOriginal will accelerate funding, while eliminating costs associated with paper processes and allowing lenders and dealers to meet stringent compliance requirements,” Muntz continued. “Moreover, it lays the vital foundation for lenders and dealers as they prepare for the inevitable move into a fully digital buying and lending process.”
Muntz went on to mention that defi’s loan origination system (LOS) allows finance companies to focus on the “actual lending part of business” by taking care of the more technical aspects of processing and decisioning applications.
In addition, the technology can offer the speed and performance to make the loan origination process as simple as possible. With its new digital financial transaction solution, the partnership empowers customers to better address regulatory compliance and optimizes lenders’ flexibility to move assets on to the secondary market via collateralization or securitization.
“eContracting and the automotive industry go hand-in-hand,” eOriginal president and chief executive officer Stephen Bisbee said.
“By connecting digital loan origination systems and dealer management systems, funders can more rapidly link with dealers and, in some cases, complete the financing process before the borrower even drives off the lot in their new vehicle, which empowers dealers to improve operational efficiencies and reduce floor plan costs,” Bisbee continued.
Randy Crow, senior vice president of sales at eOriginal, added, “With eOriginal, loans can be executed in minutes and dealers are funded by lenders in hours, not days.
“Taking paper out of the vehicle buying processes improves the customer buying experience, reduces dealer overhead costs and expedites funding cycles,” Crow went on to say.
The relationship with eOriginal comes on the heels of defi SOLUTIONS announcing that the company will be expanding its product offerings to include a full-service analytics and reporting platform. The company also landed a new finance company client, completed an integration with another industry service provider and promoted one of its executives to be the chief technology officer — all since the end of June.
General Motors Financial previously discussed how its subprime exposure would be declining as the finance company continues its strategy pivot to prime paper as the parent automaker’s captive provider.
The company’s second-quarter financial statement reinforced the approach as GM Financial reported that it originated $1.614 billion in subprime contracts during Q2 — deals with consumers with FICO scores of 620 and lower. That Q2 amount constituted 18 percent of its quarterly originations. For comparison, GM Financial indicated 20.6 percent of its originations a year earlier fell into subprime, a figure that amounted to $1.698 billion.
“Despite the competitive environment, GM Financial did maintain credit and pricing discipline,” president and chief executive officer Dan Berce said when the company discussed its results last week.
The company reported that its total retail loan originations came in at $4.2 billion for the quarter that ended June 30, compared to $4.1 billion for the quarter that wrapped up on March 31 and $4.3 billion in the year-ago quarter.
GM Financial highlighted that its retail loan originations at the halfway point of 2016 stood at $8.3 billion, compared to $8.4 billion at the midpoint of last year.
The company’s outstanding balance of retail finance receivables was $30.9 billion on June 30. GM Financial determined the subprime loan portfolio represented approximately 16 percent of its earning assets, down from 19 percent when 2015 closed.
“We expect that subprime mix to continue declining with growth in our commercial, lease and prime portfolios in North America,” GM Financial executive vice president and chief financial officer Chris Choate said.
On the leasing side, GM Financial mentioned Q2 operating lease originations climbed year-over-year to $6.5 billion, up from $5.6 billion in the year-ago quarter. During Q1, the finance company produced $6.8 billion in operating leases.
Through six months, GM Financial posted $13.3 billion in operating lease originations, up from $8.6 billion a year earlier.
All of that activity helped GM Financial to generate $189 million in net income, a $3 million rise year-over-year.
The company’s net income at the 2016 midpoint came in at $353 million, up $17 million compared to the same juncture a year ago.
“GM Financial again reported strong operating results, earning $266 million in pretax income in our second quarter. Importantly, we continued expansion of our captive presence with GM customers and dealers,” Berce said.
The company added that the outstanding balance of commercial finance receivables was $9.4 billion when the second quarter closed, up from $9.2 billion a quarter earlier and $7.8 billion a year earlier.
As far as how that consumer paper is performing, GM Financial noted retail finance receivables 31 to 60 days delinquent constituted 3.4 percent of the portfolio as of June 30, down from 3.6 percent a year earlier. Accounts more than 60 days delinquent represented 1.5 percent of the portfolio, down from 1.6 percent when last year’s Q2 finished.
The company indicated its annualized net charge-offs were 1.7 percent of average retail finance receivables for the second quarter, up from 1.6 percent for the quarter a year earlier. For the first six months of 2016, annualized retail net charge-offs stood at 1.8 percent, down from 1.7 percent a year ago.
“The credit performance we're seeing does reflect the portfolio mix shift to prime,” Berce said. “In fact, the subprime portion of our portfolio, defined again as FICO scores less than 620, is now 55 percent of the North America portfolio compared to 71 percent a year ago.
“Recovery rates for the quarter were 55 percent, slightly higher seasonally than the March quarter, but down from 59 percent a year ago. We do expect recovery rates to continue to trend down throughout 2016,” he continued.
GM Financial added its total available liquidity stood at $15.4 billion as of June 30, consisting of $3.1 billion of cash and cash equivalents, $10.7 billion of borrowing capacity on unpledged eligible assets, $0.6 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.
In an effort to help dealers and finance companies benefit from the use of digital technologies, Dealertrack announced this week that Volvo Car Financial Services is now available for eContracting with Volvo dealers nationwide on the Dealertrack platform.
The company highlighted the decision to go national was based on the results of a completed regional pilot, during which participating dealers expressed satisfaction with the enhanced customer experience and streamlined process in Dealertrack’s Credit Application Network, leading to faster and often same-day contract funding.
From generating contracts for execution to the electronic verification, signature, submission and storage of contracts, Dealertrack emphasized that it can deliver a “true, end-to-end” eContracting solution for dealers and finance companies. Since introducing its eContracting solution several years ago, Dealertrack has helped finance companies and dealers book more than 3 million eContracts.
“We see eContracting as an important part of the vehicle buying process today and in the future,” said Peter Wexler, vice president of sales and marketing at Volvo Car Financial Services.
“The ability of Volvo Car Financial Services to now offer eContracting via the Dealertrack platform will help Volvo dealers improve their contract process, receive faster funding and enhance the overall customer experience,” Wexler added.
According to Mark Furcolo, senior vice president of lender solutions at Dealertrack, “Through the years, Volvo dealers have leveraged a broad range of Dealertrack solutions and services, including our Dealertrack DMS, eMenu, Aftermarket and Compliance solutions, as well as our Credit Application Network, as part of their overall sales and F&I workflow.
“The ability to electronically contract through the Dealertrack platform builds upon our long-term partnership with Volvo to further help their dealers transform and streamline the financing process across each of their dealerships,” Furcolo went on to say.
Dealer Marketing Services, the makers of ProMax Unlimited, recently released the third solution in a line of three consumer credit soft pull products. The latest addition is the Instant Auto Credit App, an Equifax-powered version of the popular online soft pull solution.
Since the entire trio is now available, ProMax Unlimited indicated the three products can be deployed by dealers individually or as an entire product suite.
The Instant Auto Credit App can allow visitors to a dealership’s website to pre-qualify for auto financing. Consumers who wish to be pre-qualified are required to fill out a short application and verify their identity, in exchange for an offer that includes a maximum loan amount and a range of possible interest rates.
The dealership in turn can receive a pre-qualified lead.
“Leads are the lifeblood of the auto business,” ProMax chief operating officer Shane Born said. “This powerful soft pull tool goes a long way toward converting anonymous website visitors into auto sales and can be used for customers already at the dealership, showroom walk-ins and service lane customers.”
Instant Score, which was the first of the three Equifax-powered credit solutions to be released, can function as a simple plug-in to any page on a dealership’s website. Using Instant Score, visitors to a dealership’s website are able to see their Equifax credit score free of charge. This simple process only requires consumers to fill out a short form and verify their identity, but does not require some personally identifiable information, such as a social security number.
Upon completing the form and having their identity verified, the consumer may view their credit score, and the dealership receives a high quality authenticated lead.
“Our dealership customers highly value prospects that are sourced from their own websites and service lanes,” ProMax chief executive officer John Palmer said. “The PowerLead service from Equifax enables us to help validate consumer identities and performs a soft pull of a customer’s credit file to assess customers quickly and easily. This is why we are so excited to offer our dealerships the valuable services of each of these three products.”
Back in April, the company highlighted Instant Screen powered by Equifax; a solution that can enable dealers to provide a firm offer of credit at the dealership level. Customers shopping for a vehicle or in for a service appointment can be prescreened according to finance company’s predetermined credit criteria.
“The release of these three solutions solidifies our status as the industry leader in automotive dealer soft pull credit products,” ProMax chief technology officer Darian Miller said. “No one else boasts as wide a variety of automotive pre-screen tools.”
For more details, go to www.ProMaxUnlimited.com.
TransUnion senior vice president and automotive business leader Jason Laky indicated auto refinancing still is a “small” portion of all new quarterly originations. However, start-up companies such as SpringboardAuto.com are aiming to boost the volume figure by creating online opportunities for consumers to apply for refinancing anywhere, anytime and receive a response in seconds.
During a conversation earlier this week with SubPrime Auto Finance News, Laky estimated that auto refinancing composes about 5 percent to 10 percent of quarterly originations.
“But we’ve seen it grow year-over-year since 2010,” Laky said. “We believe that this is a combination of both a favorable interest rate environment as well as more lenders seeing auto refinancing as an opportunity to create value for consumers, especially when consumers have long-term loans.”
Long-term contracts certainly are the norm nowadays. Experian Automotive’s first-quarter data indicated the average term for a subprime borrower who financed a new vehicle came in at 72 months. If a subprime buyer made a financed purchase of a used vehicle at a franchised dealer during Q1, the term was 67 months. If the subprime used-vehicle transaction took place at an independent store, the average term was 56 months.
Perhaps if those subprime borrowers improved their credit standing after a time, they might seek refinancing options to reduce their monthly payment. Laky explained how TransUnion can keep track of originations that are, in fact, refinancing deals.
“One of the criteria is a different lender,” Laky said. “This isn’t modifying a loan for an existing consumer as much as it is this conquest piece.
“When we see it, it tends to be certain finance companies that specialize in auto refinance as opposed to offering it side-by-side with an indirect program. It can be hard to do both,” he continued.
Companies such as SpringboardAuto.com are trying to reduce the difficulty of obtaining financing altogether.
Unlike the traditional refinancing process that only has static single terms (such as a fixed interest rate and payment), SpringboardAuto.com insisted that it can put the consumer in control of displayed loan term options. The application process is automated, transparent and can be done 24/7 from anywhere using a smartphone or computer.
SpringboardAuto.com chief executive officer Jim Landy explained that approved consumers configure selected financing terms to meet their individual objectives, which can be to lower an existing monthly payment or reduce the amount of interest paid. Landy also stressed there’s no obligation to commit and no impact on a consumer’s credit score to receive an offer.
“Refinancing an auto loan shouldn’t involve any smoke and mirrors. We educate buyers up front on interest rate, loan duration and even include a slider tool to help them see how more or less money down changes the terms of the loan,” he said.
“The bottom line: We will either be able to give a consumer a loan that better meets their needs or not,” Landy continued. “If not, there’s no harm to the consumer’s credit score and no obligation.”
During the refinance process, SpringboardAuto.com can provide a side-by-side presentation of the consumer’s estimated current loan compared to their new loan term preferences; and, because there is full transparency, the consumer knows if the loan is beneficial or not.
“The reasons to refinance are unique to every individual — it might be that you’re about to become a new parent and the costs associated with the new baby mean you really need a lower monthly payment, or perhaps you’re ready to shorten the loan duration and pay the vehicle off faster. Whatever the need, our tool lets you easily configure the loan to fit,” Landy said.
SpringboardAuto.com’s refinancing auto loans are available via website or smartphone. The company leverages technology, data and analytics to expedite and secure the entire financing process.
Once approved and the contract configured, SpringboardAuto.com can guide the borrower through the rest of the refinance process and the loan agreement is signed online for everyone’s convenience.
Equifax and Moody’s Analytics recently suggested commercial banks should consider borrowers who might fall in the non-prime or even subprime tiers to enhance their auto-finance opportunities. Evidently, officials from the Office of the Comptroller of the Currency (OCC) disagree stemming from what they shared in their Semiannual Risk Perspective released this week.
The report indicated auto finance risk is increasing because of “notable and unprecedented growth” across all types of institutions. The OCC’s concern stems from auto delinquencies beginning to increase as used-vehicle values have started to decline.
“As banks have competed for market share, some banks have responded with less stringent underwriting standards, or both, for direct and indirect auto loans,” OCC officials said in the report. “In addition to the easing of underwriting standards and potential layering of risks (higher loan-to-value ratios combined with longer terms), concentrations in auto loans have been increasing.
“These factors create the potential for increasing levels of embedded credit risk in auto loan portfolios,” they continued. “The elevated risk results in higher probable credit losses and may warrant additional provisions to the allowance for loan and lease loss or higher capital allocations.
“Supervisory work to date has noted that some banks’ risk management practices have not kept pace with the growth and increasing risk in these portfolios,” OCC officials went on to say in the report, which can be downloaded here.
During a recent webinar hosted by the Consumer Bankers Association, Equifax auto finance leader Lou Loquasto emphasized how a healthy mix is important for any part of the credit market, especially automotive.
“If our industry makes all of the loans at 800 credit, losses are going to be super low. But if they make them all at 500 credit, losses are going to be super high,” Loquasto said.
“If you look at the mix over the past five years, we have been really steady since 2011,” he continued. “What that tells us — because auto loans are short term and losses, when they come, may come sooner rather than later in the loan term — we at Equifax expect the future performance of the recent pools of business to look very similar to what happened in 2014 and 2015. That’s one of the reasons we’re very optimistic about where we’re going.”
After releasing the Semiannual Risk Perspective, Comptroller of the Currency Thomas Curry acknowledged the challenge banks have, but he still took a cautious approach.
“The banking environment continues to evolve, with growing competition among banks, nonbanks, and financial technology firms,” Curry said. “Some banks are struggling to find viable business models, while others are increasingly adopting innovative products, services and processes in response to evolving customer demands and the entrance of new competitors.
“Doing so often involves assuming unfamiliar risks, including expanded reliance on third-party relationships,” he continued. “Banks may face heightened strategic planning and governance risk if they do not use sound risk management practices that align with their overall business strategies. It’s at this stage of the cycle that we also see strong loan growth combined with easing underwriting to result in increased credit risk.
“While the OCC strongly encourages responsible innovation that provides fair access to financial services and fair treatment of consumers, we have also stressed that banks should have effective risk management to ensure such innovation aligns to their long-term business strategies,” Curry went on to say.
Jason Laky, senior vice president and automotive business leader for TransUnion, explained that there are generally two reasons why consumers would want to take on a longer-term vehicle installment contract. One reason can be a positive for a finance company; the other motive perhaps not so much.
“One is that they plan to hold onto the car for a longer period of time so the term of the loan matches the useful life of the vehicle. And that’s a good thing,” Laky said.
“There’s another set of consumers that extended terms are the only way in which to get a payment they can afford. And that’s a little riskier for a lender,” he continued.
“We’re suggesting that lenders as a part of their check-up consider tools that help better understand how a consumer can afford a monthly payment,” Laky went on to say during a conversation with SubPrime Auto Finance News ahead of the newest study TransUnion released on Tuesday.
TransUnion’s latest research project found that even as the term of new auto loans has increased, the duration of time a consumer remained in these loans has declined.
The study indicated that the average term for new auto loans rose from 62 months in 2010 to 67 months in 2015. In the third quarter of 2015, seven in 10 new auto loans had terms longer than 60 months. Five years prior, only half of all loans had terms longer than 60 months.
The study found that, despite the proliferation of longer loan terms, auto loan duration — the length of time a consumer keeps a loan and such loan remains in a finance company’s portfolio — has declined. For contracts originated in 2012, the average spread between term and duration has grown by nearly one month compared to loans originated in 2010. The study explored contracts in this period to provide sufficient time for the loans to mature to payoff.
Laky insisted this trend is important for finance companies because as borrowers remain in their auto loans about one month less, finance companies may not be capturing the benefits of more payments and greater interest income they might expect from longer-term loans.
“I think the industry is not surprised when longer-term loans have higher delinquency,” Laky said. “I think the question is — and each lender has to answer this one — is this a lot more than you would have expected?
“From a lender’s perspective, it’s ensuring that for those changes in credit risk that you’re getting compensated from an APR perspective,” he added.
TransUnion’s study found that auto loan terms between 73 and 84 months have more than doubled between 2010 and 2015. One quarter of all loans originated in Q3 2015 were between 73 and 84 month terms, compared to just 10 percent in Q3 2010.
TransUnion also mentioned that even as average new auto loan amounts increased between 2010 and 2015, the average monthly payment declined as consumers selected extended terms.
In Q3 2015, the average new auto loan amount was $21,368, compared to $18,008 in Q3 2010. By the third quarter of 2015, the average new auto loan payment had declined to $398 per month from $420 per month in Q3 2010.
Even with smaller monthly payments, the study found that consumers with longer loans are more likely to be seriously delinquent (defined as ever 60 days or more past due) than borrowers with shorter terms, even when controlling for credit risk score.
Serious Delinquency Rates for Auto Loans by Term
| Loan Term |
Subprime |
Prime |
Super-prime |
| 49-60 months |
22.4% |
3.4% |
0.4% |
| 61-72 months |
22.8% |
5.0% |
0.9% |
| 73-84 months |
30.7% |
7.1% |
1.8% |
“Longer auto loan terms allow consumers to keep payment levels reasonable as they finance more expensive vehicles,” Laky said in a TransUnion news release. “However, consumers who cannot afford the monthly payment on a shorter term for the same loan are riskier, and we see this manifested in the higher delinquency rates for 72- and 84-month loans.
“We encourage lenders to use readily available risk analysis tools to identify borrowers who are more likely to go delinquent with an extended term, to ensure consumers are receiving loans that they can manage,” he continued.
TransUnion’s study also revealed that the risk from longer-term loans lessened when consumers had sufficient cash flow for a new auto loan.
TransUnion used its CreditVision aggregate excess payment (“AEP”) algorithm, which incorporates monthly payments from mortgages, credit cards, student loans and other debt obligations, to determine a consumer’s capacity to afford a new auto loan payment.
The study determined that across all risk tiers, consumers with a positive AEP — meaning they have money available after their monthly minimum payments are made — performed better. Consumers across all risk tiers who had negative AEP values were more likely to be delinquent on their auto loans.
Delinquency Rates and AEP of Loans Originated between 73 and 84 Months
| Aggregate Excess Payment |
Subprime |
Prime |
Super-prime |
| Positive |
23.3% |
5.0% |
1.4% |
| Negative |
30.0% |
8.5% |
2.6% |
“Aggregate excess payment is a powerful, predictive tool for determining whether a borrower is likely to repay a loan,” Laky said. “Lenders can use solutions such as CreditVision aggregate excess payment to understand the differences between consumers who choose a longer loan term and those who need a longer auto loan term.”
This study is the latest in recent projects TransUnion has rolled out since the initial launch of Prama Insights, which includes anonymized information on virtually every credit active consumer in the U.S. The data set leverages the power of CreditVision and a seven-year historical view of data, providing finance companies with what TransUnion calls “dynamic” insights that can translate into “clear” benefits at every touchpoint.
Earlier this summer, TransUnion leveraged its new tools to find that average daily auto originations are 84 percent higher in the 30 days after mortgage payoff compared to the 30 days prior to that event.
“We are emerging from our transformation from a corporate IT system and a mainframe to an open-systems environment,” Laky told SubPrime Auto Finance News. “That’s enabled us to create very broad and very deep analytic databases. Those are allowing us to do much more research in much closer to real time.
“Hopefully it will allow us to increase the pace at which we can do studies like this to support our auto finance community,” he went on to say.
To learn more about TransUnion’s auto study and solutions for finance companies, visit this website.
Subprime Analytics recently reported the largest reduction in subprime auto finance down payments since 2011. Subprime auto finance down payments experienced a 15 percent year-over-year decrease in 2015. While down payments are down, the amount financed is up. According to Experian Automotive, the average used-vehicle loan amount for franchised and independent dealers increased to $18,424 in Q1 of this year.
With the combination of these two trends, it’s no wonder that average subprime loan terms have increased by 4.5 percent year-over-year since 2012, according to Subprime Analytics. Now lenders are looking to extend loan terms to 84 months.
What do these trends mean for the long-term? For the last year, industry analysts have been telling everyone to wait and see. But, when does waiting and seeing turn into putting our heads in the sand?
Rather than waiting for the market to turn, and reacting to the circumstances that arise, smart lenders are taking proactive steps now to protect their lending portfolios from potential market changes.
Now, you might think, “I don’t want to be the first lender to start tightening lending requirements and lose loan volume and market share.” The good news is you don’t have to jump the gun. Rather, take a step back and look outside the box for solutions that can protect your portfolio and increase loan volume.
One such “out-of-the-box” approach is the use of consumer protection products, like a vehicle service contract or vehicle return protection. Loans that offer complimentary consumer protection products can help you address the challenges of differentiating yourself from the competition and managing delinquency rates, while also providing additional streams of revenue.
As far as dealers are concerned, whether you provide complimentary products or not, they will want a lender that funds enough money for them to either increase their profit through upgrades or selling their own F&I products. Offering loans to dealers that help them achieve their goals has the potential to make you their preferred lender, meaning increased auto loan volume.
From the consumer side of things, subprime buyers tend to struggle with budgetary constraints. For example, when a significant mechanical breakdown occurs, these consumers often have to choose between paying for the repair or paying a monthly bill like their auto loan. A complimentary vehicle service contract or other related program could alleviate that cost, and potentially protect the loan from delinquency, thereby protecting your loan portfolio.
By providing dealers and consumers what they need, you can essentially set yourself up for long-term success. It’s a win, win, win! Rather than waiting to see what the market brings, take control of your financial future with consumer protection products.
Steve Roennau is the vice president of compliance EFG Companies. This commentary originally appeared on the company’s website.
Heritage Acceptance hopes to increase its financing efficiency and speed by teaming up with defi SOLUTIONS.
The subprime finance company announced recently that it is now utilizing the defi SOLUTIONS loan origin system (LOS), after going live with the solution on June 4. The company hopes this move will translate into a better experience for its dealership network across the country.
“The system’s flexible design and performance reliability has made it possible for us to start automating our processes without sacrificing who we are as a finance company,” Mike Monaghan, Heritage Acceptance vice president of sales and marketing, said in a news release. “Now we can offer dealers more speed and efficiency as we continue our efforts of providing service excellence for our dealer partners.”
Heritage Acceptance, based in Elkhart, Ind., works with dealers across five states to help their customers obtain auto financing. Heritage is one of many firms to implement the defi SOLUTIONS system.
“The defi LOS is completely configurable because no two lenders are alike,” Stephanie Alsbrooks, defi SOLUTIONS chief executive officer, said in a news release. “We’ve intentionally created our system to complement and enhance a lender’s unique capabilities and value proposition in the marketplace. Lenders get leading-edge LOS technology that works to make them better at what they do best.”
The size of the U.S. subprime population is getting smaller — at least that’s what FICO says. And large finance companies such as General Motors Financial again acknowledged that the segment of its portfolio composed of subprime paper will continue to diminish, too.
However, dealerships that participated in KeyBanc Capital Markets’ monthly survey indicated that they’re still able to obtain financing for their vehicle buyers, even if they fall into the subprime credit tier.
In fact, KeyBanc reported that 100 percent of respondents who participated in the May survey said financing availability remained intact or is even increasing.
“Commentary from the field is that larger players are pulling back on subprime as smaller financing companies are becoming more aggressive and gaining share,” KeyBanc said in its latest survey recap shared with SubPrime Auto Finance News.
“The commentary from the larger lenders, such as Santander, suggests they will not be chasing market share,” KeyBanc continued. “So in the end, who is lending to the subprime consumer is changing, but the auto industry continues to have access to financing.”
Santander Consumer USA shared its stance about subprime volume not only when it announced its first-quarter results back in April, but also when chief executive officer Jason Kulas reiterated the position during the Morgan Stanley U.S. Financials Conference in New York earlier this month.
“We are only concerned about volume to the extent that we want to make sure we get volume that will be profitable through cycles — volume that has the right price and the right structure, the right return,” Kulas said.
Meanwhile, GM Financial noted its stance again last week when chief financial officer Chris Choate hosted a presentation titled “Behind the Charts” in which he touched on several elements of the finance company’s business operations. When it came time for Choate to answer questions from Wall Street observers, multiple analysts wanted to know about GM Financial’s plans for subprime originations.
“We at GM Financial have sort of, particularly in the used-vehicle financing space, we have allowed our market share in that space to erode dramatically. We still have a presence, but it’s way down from what it was,” said Choate, who referenced a portion of his presentation that highlighted how GM Financial’s subprime business outperformed the track of the Wells Fargo Subprime Auto Index going back nearly six years.
“If you go back over a two- or three-year time period, our presence in that used-vehicle financing space as the market got a little frothier and really became too narrowly priced … we just kind of have sidled off to the sideline a bit,” he continued. “So we think that’s certainly one of the reasons why we’re outperforming this index that we showed in the chart is we’ve just maintained a lot of pricing and credit discipline.
“And that's not to necessarily say that others didn’t,” Choate went on to say. “A lot of the newer entrants in the space — and they do end up in the industry part of this index that we showed — target a different level of subprime. So subprime is big; it’s a word that covers a fairly broad swath of territory, generally from 620 FICO all the way down south of a 500 FICO. And so you have some of the newer entrants that necessarily have to grab onto the credit scale down lower in order to get a toehold and have a viable value proposition to dealers. So it’s not all apples and apples, quite frankly.”
Choate continued his response alluding to trends that KeyBanc referenced in its latest dealer survey: whether or not finance companies might be pulling back in how much subprime paper they’re originating. Choate insisted “it’s a little more complex than kind of a blanket observation there,” as to whether or not the majority of the industry is deciding to take its foot off the subprime pedal.
“If you look at the market data kind of month by month by month by month, there are any number of smaller and larger players that mash on the gas and then pull back,” he said. “It kind of ebbs and flows a decent amount, and that includes Santander and (Capital One) and Wells Fargo and Chase Auto Finance and us and Ally (Financial) and all the others, not just the small guys, who will express through their buying habits a little more desire for a certain credit tier or a credit mix in one month or two.
“And then for whatever reason sort of pull back on that a little bit two or three or four months down the road,” Choate continued.
Then the GM Financial executive took the view of a dealer, “be it CarMax or somebody else.” Choate acknowledged, “You can certainly develop a view that the market has tightened just because one of your primary lenders may have ebbed versus flowed over a certain period of time.
“We certainly don't view at GM Financial that there's going to become a lack of credit availability in subprime,” Choate declared. “It’s certainly possible, and I think we would stay hopeful that pricing will firm a bit in subprime in order to fatten the margins back up a bit.
“But I don't believe that you're going to see any dramatic tightening,” he went on to say. “I think generally credit appetite at least across the larger, more established players of which we and the others I rattled off are those guys, we think it will be fairly stable.”
While FICO indicated the total subprime population dropped to the lowest point in about 10 years when analysts compiled their April data, Choate described the kind of subprime customer GM Financial will book a contract with nowadays.
“The demographic of a subprime borrower today for us is generally better than what a subprime borrower looked like for us 10 years ago. They have better household income, a little more stability on residence, a little more down payment going into the deal,” Choate said. “So we have a better through-the-door subprime consumer now than we did 10 years ago.”
