Robert Dufalo has a new title with defi SOLUTIONS as the company recently elevated the tech industry veteran to be its new chief technology officer. Dufalo previously was director of quality for the browser-based loan origination system.
In addition to Dufalo’s promotion, defi SOLUTIONS also enacted other strategic changes in its technology and products teams in preparation for growth and the continued delivery of customer experiences.
Prior to joining defi, Dufalo spent more than 14 years in various engineering roles at Microsoft. His accomplishments include the successful management to release of multiple V1 projects and the design and implementation of DevOps strategies and automation platforms.
Dufalo also holds two patents in Wi-Fi location resolving and geofencing logic and has been featured at industry-leading conferences, such as the Consumer Technology Association CES, Microsoft Build Developer Conference and the internationally recognized Microsoft Research Faculty Summit.
“Rob was our top choice for CTO for many reasons. Not only does he possess excellent credentials and proven ability, he constantly works to rally our technology team around our goals in ways that add to our culture and create success for our customers,” defi SOLUTIONS chief operating officer Georgine Muntz said.
Commercial banks and credit unions typically work with customers in the prime space, but recent analysis shared by Equifax and Moody’s Analytics was geared to give executives and managers with those institutions some evidence in order to consider borrowers who might fall in the non-prime or even subprime tiers.
Before going into a series of charts and graphs 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.”
Loquasto highlighted how much banks and credit unions have grown their auto portfolios already, noting how these institutions had about 32 percent of the entire market back in 2006. But thanks to the overall auto industry surge between 2010 and 2015, Equifax pinpointed that share at nearly 46 percent.
“The segments that know their customers most intimately — banks and credit unions; segments that most people consider to be the most conservative — they’ve held a very steady market share since 2010. We view that as a very healthy sign,” Loquasto said.
The Equifax expert acknowledged concerns banks and credit unions in particular might have about the additional risk now baked into auto finance nowadays since terms are lengthening and outstanding balances are growing.
“When things are getting written about subprime, loan size or terms, that can trigger concerns that our lenders have to respond to — whether it’s concerns from senior management, regulators or others,” Loquasto said. “As it relates to loan size, cars are more expensive now. The loan sizes are going to be higher. But they’re being built much better than in the past so there’s less risk of a vehicle breaking down and causing very expense repairs or a customer to walk away. There’s also less need to trade up or upgrade quickly. Ten years ago a customer might be in a vehicle thinking in a year or two I’ll go ahead and get the car I really wanted. With the loan sizes going up, those cars have more features.
“We expect the duration of those loans to continue to increase. That’s a good thing for lenders and lender profitability,” he continued.
“At Equifax, we do believe that there is a great opportunity for banks and credit unions in particular to better serve their near-prime and non-prime customers. For subprime, there’s not a ton of lending being done by the banks and credit unions, but the lending that is being done has very low losses, representing a great opportunity going forward,” Loquasto went on to say.
Part of why Loquasto emphasized why banks and credit unions should consider being prudent when buying deeper down the credit spectrum is something both he and fellow webinar presenter Cristian deRitis touched on: Vehicle sales are about to slow. It’s what deRitis, the senior director at Moody’s Analytics, described as the difference between “pent-up demand” and “spent-up demand.”
Because of an anticipation that interest rates will rise later this year and into next year, deRitis said, “that will slow volume somewhat as buyers who may be taking advantage of the cheap financing today decide in the future either to pay cash or to use other financing vehicles such as home equity to finance their transactions. There are some other factors that are going to drive demand as well: pent-up demand, or really the exhaustion of pent-up demand.
“Prior to the recession, we had sales volume in excess of what the trend would say,” he continued. “From a period of around 2000 until 2008, we would have classified this excess as a period of spent-up demand; essentially, consumers were buying too many vehicles or more vehicles that needed to keep up with equilibrium and pulling sales forward.
“Then we had the recession, which certainly created a collapse in new-vehicle sales,” deRitis went on to say. “It gave us some time to work off some of that spent-up demand, so from about 2008 until 2011, we worked off much of that excess spending, those pulled forward type of vehicle sales. At that point we started to accumulate pent-up demand, we were still well below the equilibrium level of sales.
“Based on the analysis, even today, we’re in a period of pent-up demand. There’s still buyers out there that put off purchase of a vehicle during the recession and recovery period that still want a vehicle. They’re still going to fuel vehicle sales in the short term,” he added.
Closing the thought, deRitis shared that Moody’s projects that level of equilibrium sales to be about 16.5 million to 17 million new vehicles, a figure the firm expects the market to generate through 2018.
Later during his portion of the webinar, Loquasto added, “If lenders want to continue healthy growth rates, lenders are not going to be able to rely on increasing car sales and pent-up demand. They’re going to have to look to tweak their strategies — banks in particular.”
Charlie Wise, vice president of TransUnion’s innovative solutions group, acknowledged that if auto finance executives examine industry-wide data, it’s likely they will focus their attention on vehicle financing, watching metrics such as originations and delinquencies.
But Wise suggested that auto finance executives watch mortgage trends, too, based on findings from TransUnion’s latest project released on Thursday. TransUnion found 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.
All told, TransUnion’s study showed that consumers applying for a new mortgage are on average two to three times more likely to open a new auto loan or credit card account over the next 12 months. In fact, many of these consumers open these accounts as soon as one month after their existing mortgage payoff.
“You wouldn’t normally think to look at mortgage attributes,” Wise told SubPrime Auto Finance News ahead of when TransUnion released this study. “But what we’ve seen is that act of applying for a mortgage triggers an inquiry on that person’s credit file and is visible to other lenders, including auto lenders.
“If an auto lender sees that inquiry on the consumer’s file, that means over the next several months that consumer is mostly likely to have that mortgage origination. What does that mean? It means that consumer, based on this data, is far more likely to open auto loans soon after. That might be a good time to market to those consumers because they’re much more likely to be in demand for auto loans.”
TransUnion’s study included 16.7 million consumers who paid off their mortgages and moved with new mortgages or refinanced their existing mortgages between Q1 2013 and Q2 2015. Wise noted the timeframe for this project produced much different results as compared to studies completed based on data from the worst parts of the Great Recession as it’s commonly known.
“A lot of those studies we did pertained to consumers closing mortgages for less virtuous reasons,” Wise said. “There were a lot of consumers coming out of the recession who were having their homes foreclosed on or short sales or strategic defaults, less pleasant reasons for mortgages to close.
“What we’re seeing is kind of a return to what’s closer to normal activity in terms of that mortgage payoff and origination activity,” he continued. “We’re definitely seeing much more function in the mortgage market now so you’re seeing more consumers behaving at what I’ll call normal.”
And what might be considered normal is consumers delaying a vehicle purchase that would require financing until after their mortgage arrangements are closed.
“If you look at just the data, it’s difficult to see what’s actually going through the consumer's mind,” Wise said. “But we know anecdotally that many consumers when they’re talking with their mortgage lender or broker about a move or refinance, they’re coached to say, ‘Don’t open any new accounts between now and when your mortgage closes. We don’t want a lot of new accounts showing up that may adversely impact your credit score. Essentially, keep your nose clean until after that mortgage is completed.’”
But when that mortgage process is completed, Wise explained that auto finance companies can use that information to identify consumers who now might be looking for vehicle financing because they’re back in the demand stream for it.
And if the consumer refinanced their existing home, they might be an even better vehicle-financing prospect.
“When consumers refinance, they typically do that to lower their monthly payment and taking advantage of lower interest rates, whatever the reason,” Wise said. “A material drop in monthly mortgage payment means more cash flow you can use for your other obligations. It would not be unreasonable to think that consumer would have a slightly improved ability to pay on a new auto loans and other obligations.”
Wise recommended that auto finance companies could partner with their contemporaries in the mortgage space or work with credit bureaus that cover their footprint to mine for potential origination prospects.
“If you want to go to (consumers), this is a really interesting and we think pretty innovative way for auto lenders who want to identify more prospective borrowers,” Wise said.
All study findings were released Thursday at TransUnion’s Financial Services Summit in Chicago, attended by more than 300 financial executives from across the globe.
“Our research found that consumers either purchasing new homes or re-financing their mortgage loans are far more likely to open a new auto loan or credit card soon after this major life event, many within one month,” said Ezra Becker, co-author of the study and senior vice president of research and consulting for TransUnion.
“This finding is important, both because it quantitatively confirms the conventional wisdom and because it illustrates how necessary it is to look across products to get the full picture of consumer credit behavior,” Becker continued.
“Clearly consumers who are planning to move or refinance their mortgage wait until after that event to seek new credit, but once that new mortgage event occurs, their demand far outstrips the overall population,” he went on to say in a press release from TransUnion. “This information is particularly valuable for lenders who are seeking credit-active consumers with higher demand for new credit cards and auto loans; this population is much more likely to respond to new offers, making them an attractive segment that lenders can now identify.”
For more insights on TransUnion’s study and additional information on how lenders can use this information, visit www.transunioninsights.com/mortgageimpact.
The Consumer Bankers Association is hosting a webinar featuring auto finance experts from Equifax and Moody’s Analytics.
CBA officials said attendees can expect three main takeaways from the session, which is titled “Automotive Credit Trends and Lending Solutions to Improve Your Competitive Position in the Market."
—The latest automotive economic credit trends presented by Moody's
—Auto finance trends and solutions to help your organization better assess risk and opportunity
—The latest alternative data solutions to automate more approvals and improve operational efficiency
The webinar scheduled for 2 p.m. EDT on Thursday will include:
—Lou Loquasto, automotive finance leader at Equifax
—Cris deRitis, senior director at Moody's Analytics
“Are you leveraging the latest auto finance insights to gain a competitive edge in today's market? Don't miss this opportunity to get updates from Moody's Analytics and Equifax, and learn how you can compete more effectively in this competitive automotive environment,” CBA officials.
The webinar is free for CBA members and $95 for nonmembers. Registration can be completed here.
The surge of non-prime and subprime loans and leases helped to push Experian Automotive’s total open balance reading above the trillion dollar mark for the first time.
According to the most recent State of the Automotive Finance Market report released Thursday, total open balances jumped 11.1 percent in the first quarter of 2016 as the figure reached $1.005 trillion, up from $905 billion in Q1 2015.
The overall climb came in part because the volume of vehicle loans and leases held by non-prime and subprime consumers increased by 9.5 percent and 10.9 percent, respectively.
Also propelling Experian’s figure was how open leases grew by 27.55 percent to an all-time high of $76.9 billion, up from $60.1 billion the previous year.
“Automotive financing certainly has started off the year with a bang, seeing steady growth in balances and loan volumes throughout the first quarter,” said Melinda Zabritski, senior director of automotive finance for Experian.
“With more and more consumers relying on financing, it is important for lenders to keep a close eye on delinquency trends to ensure the market remains healthy,” Zabritski continued. “Likewise, consumers need to continue making their monthly payments on time to keep affordable financing options open and available.”
Findings from the report also show that while there were increases in both 30- and 60-day delinquency rates, the overall percentage of total delinquent loans remains relatively low when compared to pre-recession levels.
In Q1 2016, the percentage of loans and leases considered 30-days delinquent was 2.1 percent, up from 2.02 percent in Q1 2015.
Additionally, the percentage of loans and leases considered 60-days delinquent grew from 0.57 percent to 0.61 percent over the same time period.
Some additional insights from the Q1 2016 report:
—Prime consumer loans and leases increased by 8.9 percent.
—Finance companies and credit unions saw the largest growth in loan and lease market share, growing 25.6 percent and 15.9 percent, respectively.
—Banks continued to hold the top position in automotive loan and lease volume, growing 7.9 percent over the previous year to reach $349 billion in market share.
Santander Consumer USA president and chief executive officer Jason Kulas insisted the finance company has “more data than almost anyone else in the subprime space.” So when SCUSA cut back on its core non-prime retail originations by 15 percent during the first quarter, Kulas emphasized how that data helped to maintain “disciplined” underwriting standards.
"What we constantly do is we look back to prior vintages and leverage the performance that we are seeing into how we price new originations to make sure we’re doing everything we can to maximize the value going forward of those new originations," Kulas said when SCUSA hosted its first-quarter conference call with investment analysts.
“And so that process of optimizing the risk return happens right now to be impacting our subprime capture,” he continued. “But it’s not an effort to reduce our exposure to subprime. It’s again a result of this optimization process that we go through constantly.”
As much as Kulas and the SCUSA team examine their own data, the finance company boss acknowledged that Santander also is watching what other players in the subprime space are doing.
“On a comparative basis, it seems that there are markets willing to be a little bit more aggressive on certain pockets of those than we are right now,” Kulas said. “Look, we don’t see any concerning overall trend in terms of individual players. But I will point out that we are seeing some of the same trends we mentioned in the last quarter, where in general the larger players, the more sophisticated players with more data as a group have lost share to the smaller, maybe less sophisticated and in some cases less disciplined competitors.”
“We will continue to focus on maintaining the right risk, we’re balanced, and making sure we originate assets that come through cycles. And in future quarters, it could be a different result; it’s booking less subprime loans as a result of that process, not the overwriting goal,” he went on to say.
More of SCUSA’s data pointed to a retraction in the subprime space. Santander reported that its Q1 2016 net charge-off rate rose to 8.2 percent, up from 6.1 percent in the year-ago quarter. Meanwhile, because of the pressure from declining wholesale used-vehicle prices, SCUSA’s recovery percentage dipped to 51 percent in the first quarter, down from 59 percent a year earlier.
“Our losses are driven by the higher concentration of deeper subprime assets that we originated in early to mid-2015,” SCUSA chief financial officer Izzy Dawood said. “Based on our analysis and historical experience, we anticipate the deeper subprime assets will have this deeper loss curve earlier in the last cycle of the loan and then transition to follow a normal loss curve over the full life.”
Dawood also touched on how all the data SCUSA has at its disposal prompted him to describe 2016 as a “transition year” in regard to the ABS market.
“Clearly I think the market — especially the capital markets — are going through a transition phase as the Fed raises rates and as investors evaluate the risk return thresholds,” he said.
DriveTime Automotive Group ownership is eliminating its subprime auto finance company that originated paper with franchised and independent dealerships for the past five years. GO Financial president Colin Bachinsky said the company stopped accepting applications from dealerships late on Wednesday.
During an exclusive phone conversation with SubPrime Auto Finance News, Bachinsky emphasized why DriveTime owners chose to wind down GO Financial, which launched back in 2011. Bachinsky explained the reasoning behind ownership's decision in light of GO Financial pushing out a pair of securitizations last year.
“This is not a performance-based decision at all,” Bachinsky said. “There’s obviously been some negative news tied into the ABS market over the last six months. This is not at all in our belief regarding the stability or the overall sentiment of the ABS market. It has nothing to do with that. It’s all to do with the uses of resources and capital.”
GO Financial currently has about 65,000 accounts in its portfolio, which the company still will continue to collect payments from those consumers until terms are expired “to maximize the return on that asset that we’ve built,” according to Bachinsky.
“We’re happy to see that those loans are continuing to perform and those pools are continuing to perform better than expected and better than what the ratings agencies placed those expectations,” Bachinsky said. “Our securitizations are performing better than expected, and we have not seen any deterioration in our portfolio. We would expect that positive continuing.”
Bachinsky explained that GO Financial soon would finalize the underwriting process stemming from the dealership applications it accepted through Wednesday. By May 27, he expects that the company would have all of its originations completed.
“If we have some straggling documentation requests over the next several months, we’ll be working through those with our dealers. We have a project plan pulled together to mitigate our risk there,” Bachinsky said.
Bachinsky told SubPrime Auto Finance News that DriveTime leadership discussed what to do with GO Financial for the past several months and reached a decision last week. GO Financial’s 530 employees were notified on Monday.
Bachinsky indicated that GO Financial will retain about 250 workers who will manage the current outstanding portfolio, oversee collections and handle other chores associated with customer service. The company plans to have its account holders continue to make payments as they have been while keeping its online payment portal open as well.
“Nothing changes for those people. They will continue to pay GO just like normal,” Bachinsky said.
What eventually will change are the positions for GO Financial’s workforce. Bachinsky highlighted that more than 90 percent of that group is destined for posts within DriveTime’s portfolio of companies. That collection includes:
— Carvana, an online vehicle retailer with a growing network of distribution locations in states such as Florida and Texas.
—SilverRock Holdings, which provides F&I products such as extended vehicle service contracts, global positioning system (GPS) theft recovery products, guaranteed asset protection products (GAP) and auto insurance solutions to consumers through independent and franchised dealers as well as the newly rebranded.
—Bridgecrest Acceptance, which launched earlier this year as a licensed third-party servicer for servicing installment contracts for DriveTime and other affiliated finance companies.
“It’s definitely difficult, being a part of GO since the very beginning,” Bachinsky said. “From that perspective, it’s difficult, but I recognize it’s a business decision. It’s just a continuous evolution of our overall model and family of companies.
“The good news is we’re a part of this larger group of growing companies,” he continued. “All of those companies are continuing to grow. Our owners are looking at it from the standpoint of looking at the different businesses that are growing and what resources are available; just trying to reallocate those resources both in the form of capital as well as people back toward these other businesses.”
NADA Used Car Guide gave SubPrime Auto Finance News an exclusive look at its latest white paper that examines a new way of financing in light of lengthening terms and deeper negative equity positions.
During a conversation on Monday, executive analyst Jonathan Banks explained what NADA UCG found in terms of how much negative equity is becoming an issue in auto financing, especially if the contract is attached to a car as opposed to a truck. Banks said his team reviewed data from J.D. Power’s PIN Network, which covers about 35 percent of the total auto finance market. Through the first quarter of last year, Banks indicated about 29 percent of originations included trades that carried negative equity. Through the first quarter of this year, that level ticked up to 31 percent.
While a 2-percent year-over-year rise might not seem overly noteworthy, Banks pointed out how the situation is much more dramatic when cars are involved as opposed to trucks and SUVs, which have not seen their used-vehicle prices decline as much.
Banks noted that about 60 percent of car contracts had an equity position through the first quarter of both last year and this year. However, the amount dropped by 50 percent, sitting at about $1,000 during Q1 of 2015 and $500 at the first quarter of this year.
“Even the people who are trading in with an equity position, that’s declined dramatically,” Banks said. “And arguably $500 as an equity position, likely a lot of time that’s what the dealer is giving to the customer to facilitate the loan. It’s definitely an issue on the cars and we’re seeing that changing pretty quickly.”
For trucks and SUVs, it’s a much different scenario. Banks relayed J.D. Power data that showed about 80 percent of originations for those units during Q1 2011 included trades with equity. This past quarter, the level dropped to 70 percent but Banks pointed out that the amount of equity was much more robust, as trucks and SUVs brought about $4,000 to the table.
“People coming in with a trade-in with trucks, SUVs and even compact SUVs, we think are going to be in a strong equity position in 2016. It’s a much different situation when you’re looking at the car versus the truck segment,” Banks said. “We expect it to continue. A lot of that is the used prices on cars are dropping, and that’s going to continue as the lease maturities for those segments are going to be quite high.”
What’s triggering all this concern about negative equity? It’s a metric finance companies have been watching for some time — lengthening contract terms.
“Roughly when you extend a loan from 60 to 72 months, that pushes back the equity position by about the same amount of time by about 12 months,” Banks said. “When you consider about one-third of the loans represent 72 months or longer, according to PIN data, this is problematic, especially when considering the negative equity trends especially in the car segments.
“Someone in a car loan with a longer term is unlikely to be in an equity position coming back into the market in 2016,” he continued. “We think it’s going to get a bit worse if our forecasts are correct for used-vehicle prices, where we’re anticipating about a 6 percent decline in 2016 and more declines in ’17 and ’18 that probably will be less dramatic than the 6 percent but declines nonetheless.
“Consumers that are in these longer-term loans who want to come back into the market this year or next year or 2018 especially in car loans — truck loans are a little bit better — the chance of more negative equity is greater,” Banks went on to say.
Compounding the matter is the behavior NADA UCG is seeing from automakers. Banks indicated overall incentive levels are up about 10 percent so far this year with a 5-percent rise for lease subventions.
“Manufacturers have been very reliant on lease subvention to keep sales humming,” Banks said. “I don’t believe this is sustainable. When you look at incentive as a percentage of MSRP, they’re reaching close to 10 percent of MSRP. It’s truly a bad signal.
“You do not want to get people into your vehicles through discounting,” he continued. “Our research suggests that when you do that, it tends to make consumers think high discounts means more discounting and they say, ‘I’ll wait on the sidelines until I get that optimal discount.’ That’s not really what you want to do. You want to get consumers buying your product for the attributes of that product.”
What should the industry do instead? NADA UCG recommended in its white paper that will be distributed later this month that finance companies “can mitigate some of the risk associated with lower equity levels by fine-tuning the amount of credit extended on a new automotive loan at origination by complementing current processes with market-based data.”
Banks mentioned during the conversation with SubPrime Auto Finance News that these current trends aren’t necessarily out of left field. He noted that the industry witnessed such developments during the early 2000s as well as during the middle of the 1990s.
“Bottom line: When the customers come back to the market, they’re going to be coming back in a car loan likely with negative equity, coming out of a longer-term loan which likely has a lower payment due to the interest rates,” he said. “They’re going to be expensive to get into a replacement vehicle.
“What we’ve seen already, and likely one of the reasons we’ve seen incentives shoot up in the car segment, is a lot of the consumers might stay on the sidelines and delay their purchase because of their negative equity,” Banks went on to say.
Released a day after AutoData Corp. indicated April new-vehicle sales rose both sequentially and year-over-year, Black Book released results of its recent survey taking the pulse of the finance company community.
And that community is pretty upbeat about its prospects for continuing to fill portfolios. A total of 61.29 percent of finance company executives surveyed by Black Book said loan balances should climb this year.
“You never fully know what to expect when you produce a survey like this,” said Barrett Teague, vice president of Black Book Lender Solutions, which surveyed dozens of auto finance company executives in February.
“The first thing that is very encouraging is that our lenders are looking at the marketplace, and they’re very optimistic,” Teague continued during a phone conversation with SubPrime Auto Finance News. “They see a good year coming ahead for them. They feel like they’ve got a nice plan for how they will address the year. They look like they’ve gone in and made some contingency plans in case the market does plateau a little bit.
“I would say the overall lending market is quite optimistic,” he added.
There is a population that thinks sales might plateau this year. The Black Book survey found that level to be at 35.48 percent.
Black Book highlighted four other key findings from its 10-question survey, including:
• If loan balances remain flat, loan profitability is priority for majority (35.48 percent).
• Most will focus on extending terms or explore leasing if fewer loans booked in 2016.
• 38.7 percent of lenders are now conducting monthly portfolio analysis.
• 52 percent of lenders are likely or somewhat likely to look for external portfolios for purchase.
AutoData reported that the new-vehicle seasonally adjusted annual rate (SAAR) in April was 17.42 million units versus 16.75 million units in April of last year. The firm noted total industry deliveries of new models increased by 3.6 percent over last April and 5.5 percent versus March’s delivery figures.
Industrywide, AutoData determined 1,506,977 light vehicles were sold in April, up from 1,454,951 in April 2015.
“Despite continued headwinds that include failures of national retailers, wage stagnation and almost flat-line economic ‘growth,’ the auto industry continued to vault ahead in April,” said Jack Nerad, executive editorial director and executive market analyst for Kelley Blue Book.
“Low-cost loans, a burgeoning leasing market and low fuel costs all combined to convince a near-record number of consumers to buy a new car, truck or SUV during the month,” Nerad continued. “It seems that nothing short of a quick hike in interest rates or a sudden fuel crisis can stop the momentum of vehicle sales in the wake of last year’s record total.”
To work toward any kind of sales record, Teague emphasized how much finance companies are using data and analysis provided by firms such as Black Book. He defended his thinking by returning to the survey results.
“As you know, that’s a very important part to us and everyone who is in the industry providing data to lenders, dealers and the entire marketplace. The survey came back and told us that more lenders were planning on using more data refreshing portfolios more often, keeping an eye on how their portfolios perform from a delinquency standing as well as from an equity standing,” Teague said.
“We feel like lenders have reached out and are starting to use data significantly more than they used to. And of course that’s exciting because we feel like the data drives a lot of the decisions being made out there and gives lenders a great opportunity,” he continued.
While Black Book regularly converses with its client base, this survey gave a glimpse into what finance companies are saying.
“We do listen to the marketplace,” Teague said. “Without the input and hearing the needs of our lender market, Black Book is not as capable of bringing new items that will give them the strength to succeed. Without the strength of our partners out there succeeding, there’s not a lot of room for us.
“We ask questions and we want to listen to the needs and try to do everything within our power to fulfill those needs,” he went on to say.
Here are complete results of the Black Book Lender Solutions survey:
1. What do you expect to happen to loan balances in 2016?
Plateau – 35.48 percent
Decrease – 3.23 percent
Continue to increase – 61.29 percent
2. If growth in the market does not continue and loan balances remain flat or decrease, what is your biggest concern?
Market share loss – 16.13 percent
Loss of interest income – 12.90 percent
Focus only on loans that yield maximum profitability – 35.48 percent
Want to maintain market share but will book fewer loans – 19.35 percent
Other – 6.45 percent
3. What is your strategy for profitability if you book fewer loans in 2016? Check all that apply
Alter parameters of your program guidelines – 22.58 percent
Consider different geographic markets – 19.35 percent
Look for profitability by extending terms – 29.03 percent
Organic growth through marketing to current customers – 25.81 percent
Explore more alternative finance options such as leasing – 29.03 percent
4. What is your expectation for interest rates in 2016?
Low rates – 67.74 percent
Steady climb to 2008 levels – 32.26 percent
Steep drastic incline – 0.00 percent
5. What data are you leveraging currently to navigate the changing market?
Real-time data – 64.52 percent
Longer-term residual forecasting – 35.48 percent
6. How important is collateral data to you currently?
It will become more important in the next 6 months – 25.81 percent
We've already started to leverage collateral data for our portfolios – 32.26 percent
We're relying on collateral data more for residual forecasting – 22.58 percent
It’s not very important to me – 19.35 percent
7. How frequently will you do a portfolio analysis in 2016?
Weekly – 16.13 percent
Monthly – 38.71 percent
Quarterly – 35.48 percent
Annually – 9.68 percent
8. If your portfolio is shrinking, how likely is it that you will look for external portfolios to buy?
Not likely – 16.13 percent
Somewhat likely – 25.81 percent
Likely – 25.81 percent
Extremely likely – 9.68 percent
Very likely – 6.45 percent
N/A – 16.13 percent
9. How likely are you to mine your current portfolio for additional organic growth?
Not likely – 19.35 percent
Somewhat likely – 9.68 percent
Likely – 41.94 percent
Extremely likely – 16.13 percent
Very likely – 12.90 percent
10. Options you would consider for altering parameters. Check all that apply
Expanding credit eligibility criteria – 57.14 percent
Financing older model vehicles – 57.14 percent
Extend loan terms – 42.86 percent
Other – 28.57 percent
Ally Financial chief executive officer Jeffrey Brown articulated a host of reasons why the finance company’s $800 million decline in originations year-over-year is not a cause for concern, as it set records in other metrics associated with first-quarter originations.
Brown asserted that Ally’s originations “remained strong” as they came in at $9.0 billion, down from $9.8 billion in the prior-year period.
Brown said when the company hosted its quarterly conference call that the finance company received a record number of applications during Q1. What did drive originations, according to Brown, were gains in what Ally classifies as its Growth channel: paper coming out of non-General Motors or non-Chrysler dealerships.
Furthermore, Brown mentioned another record as 45 percent of Ally’s Q1 originations were attached to used vehicles — the highest level in company history.
Brown reiterated points the company made during its annual Investor Day that Ally is deploying what it’s dubbing a disciplined originations strategy with an emphasis on asset quality and loan profitability in its continued effort to allocate capital efficiently.
“We are prioritizing at expanding profitability not targeting specific origination levels and you will see that came through our metrics this quarter,” Brown said during Ally’s latest call with investment analysts. “We are committed to using capital efficiently, generating business that drives the right returns while also preserving our leading position in the marketplace.
“We continue to maintain robust credit discipline,” Brown continued. “The aggregate net loss rate was up slightly to 64 basis points in the quarter and fully in line with expectations. Nonprime originations were 12.6 percent. Nonprime, in particular, is a space you have to be constantly focused on smart risk allocation and only book assets when you can generate the appropriate economics.”
The Ally CEO then elaborated about the less-than-prime paper the finance company is bringing into its portfolio nowadays.
“As we sought to expand margins during the quarter by raising pricing, we simply originated less nonprime volume and we are completely fine with that. But generally, we feel good originating in this range and we continue to focus on the higher end of nonprime contracts,” Brown said.
“Overall application flow was the strongest in the history of the company. So, we are able to book the kind of business that fits within our holistic strategy. Our approval rates and even book-to-look rates declined this quarter, as we are being even more selective on what comes to the balance sheet,” he went on to say during his opening comments.
Later during the call, a Wall Street observer still wondered why Ally chose to pull back on subprime originations at the same time the company raised pricing.
“I wouldn’t characterize it that way,” Brown replied. “I would characterize it like that we were looking to expand margins across the credit spectrum and we did that with price. As we did that, we saw less volume come in on the nonprime originations and less volume come in really on the super prime originations. So there was no credit concern in our mind. It was much more about making sure we get the appropriate risk-adjusted profitability and we start to really expand our margins. And because of that, we lost some business.”
Overall Q1 performance
Ally reported that its first-quarter net income came in at $250 million. That’s down from the year-ago figure $576 million, which included a one-time gain of $397 million from discontinued operations resulting from the completed sale of the Chinese auto finance joint venture.
The company computed its core pre-tax income at $412 million in the first quarter of 2016, increasing from $299 million in the comparable prior year period, which included a $190 million repositioning expense related to the early extinguishment of high-cost legacy debt. The company reported core pre-tax income, excluding repositioning items, of $419 million in the first quarter of 2016, compared to $490 million in the prior year period, primarily due to a $65 million net gain on the sale of Troubled Debt Restructuring (TDR) mortgage loans a year ago that did not repeat.
Within just its auto finance division, the company indicated pre-tax income rose to $337 million in Q1, up from $306 million in the year-ago period. Ally highlighted that results for the quarter were primarily driven by strong net financing revenue due to continued growth in both new and used retail loans, which more than offset lower lease volume.
“Ally’s first quarter results demonstrate the strengths of our operations, and highlight the significant progress made to further diversify and grow as a leader in digital financial services,” Brown said. “We remain fully committed to exploring all options to enhance shareholder value. From our announced acquisition of TradeKing, which will further expand our digital offerings, to efforts to rationalize our capital structure and pursue share repurchases and shareholder dividends, our priorities remain centered on driving enhanced returns and growing shareholder value for the long term.
“Ally’s auto finance operation continued to post consistently strong profitability,” Brown continued. “As a result, pre-tax income was up 10 percent over last year, and risk adjusted returns far outpaced losses. This is a testament to our ability to adapt to an evolving marketplace, including expanding relationships with online auto retailers that specialize in offering used vehicles in an innovative way to a growing base of customers looking for a digital auto experience.”
Assessment of stock price
As presumably well that Ally appears to be doing on the performance side, investment watchers still questioned why the company’s stock price is not as strong as perhaps it could be. One call participant asked Brown about what more Ally could do to enhance its value.
“Obviously, it drives all of us mad inside the company and at the board level as well because we see how much value is here,” Brown said. “I think it comes back to continuing to execute the path we are on and adjust if needed. And so we heard a lot of feedback from shareholders last quarter about making sure capital is front and center and we took some additional actions. Again hopefully you saw that in the first quarter on what we did on pricing, what we did in moving some lower returning assets off balance sheet.
“So part of that is just continuing to remind the world that we get it,” he continued. “Also emphasizing that credit is not nearly an issue like maybe is perceived in the markets today.
“I think what's one of the big questions what's on the minds of investors and obviously we spent a lot of time talking to investors and I think, frankly last year the fact that we were able to offset the lease dynamic,” he went on to say. “A lot of people questioned, ‘Did you do something stupid on credit?’ We try to remind the world, no, we haven’t. We are very disciplined on what we underwrite . We feel very comfortable with that. And so part of this is, continuing to prove that credit really is not going to be an issue.”
Brown closed his thought by touching on his overall perception of auto financing.
“We don’t fear that there is some credit bubble or burst that's going to come at us,” he said. “And we still think the auto sales environment can be healthy.”
