Seen as the raw material to generate more originations, Consumer Portfolio Services announced this week that it has entered into a new two-year revolving credit agreement with Credit Suisse AG and Ares Agent Services.
Executives indicated loans under the new credit agreement will be secured by automobile receivables that CPS now holds or will purchase from dealers in the future. They noted CPS may borrow on a revolving basis through November 2017, after which the company will have the option to repay the outstanding loans in full or to allow them to amortize for a further two-year period.
“We are pleased to have established this new facility and to have forged new relationships with partners such as Credit Suisse and Ares,” CPS president and chief executive officer Brad Bradley said.
“With this transaction, we now have three revolving credit facilities with aggregate capacity of $300 million, paving the way for future growth in originations volume,” Bradley added
During the third quarter, CPS purchased $287.5 million of new contracts, an increase of 2.9 percent, compared to $279.3 million during the third quarter of last year.
The company’s managed receivables totaled $1.941 billion as of Sept. 30, an increase from $1.822 billion as of June 30 and $1.519 billion as of the end of last year’s third quarter.
Reporting strong performance in the “no-score” segment of the credit spectrum, Equifax pointed out in a release this week lender vigilance is helping to drive auto loan market success.
According to the latest National Consumer Credit Trends Report from Equifax Inc., the auto finance market is growing at a rapid pace, and balances are reaching all-time highs month after month. Not to mention, write-off rates remain low.
Take this stat into account:
Total auto originations came in at $341.2 billion through July, which marks a 9.4-percent rise in balances over the same time last year. Equifax analyst mentioned this is also the highest level seen for the period since the company began tracking the data. And auto write-offs were at 20.4 basis points as of September.
When taking a look at these impressive stats, Equifax came to the conclusion that auto lenders are remaining “vigilant” in making sure their customers have the financial ability to pay an auto loan by leveraging alternative data to identify consumers’ monthly payments that are not found on one of the credit bureaus. Furthermore, lenders are also verifying income and job tenure using employment data services in the qualification process.
“Traditionally lenders have used consumer-provided pay stubs to confirm income or conducted no verification at all,” said Lou Loquasto, auto finance Leader for Equifax. “Utilizing verified income and alternative data provides the complete picture of a consumer’s financial standing, allowing lenders to see consumers’ true income, payment obligations and other attributes such as job tenure to determine if they have the ability and stability to keep up with payments.”
The company also found there has been success in the “no-score” credit category. In fact, auto originations to consumers in this segment are performing better than they have in the past. According to Equifax data, median write-off rates for “no-score” originations from 2012 to 2014 were 22.8 percent lower than from 2007 to 2009.
“Alternative data, verified income and other new tools to evaluate this very fast growing ‘no-score’ segment have enabled rich margins and good loan performance,” said Loquasto. “Lenders are using the tools available to make great lending decisions and give consumers the chance to establish their credit and acquire much needed transportation. Lenders are also using verified income and different sources of alternative data that exist throughout the industry to dramatically increase auto-decision rates.”
TransUnion’s Industry Insights Report found that outstanding auto loan balances surpassed $1 trillion in the third quarter, an 11.1 percent jump year-over-year. But contract holders appear to be maintaining their payments on that growing balance total since delinquencies — the rate of borrowers 60 days or more delinquent on their account — continue to remain flat, coming in at 1.16 percent in both Q3 2014 and Q3 2015.
During a phone conversation with SubPrime Auto Finance News, TransUnion senior vice president and automotive business leader Jason Laky said, “We don’t expect any surprises from a delinquency perspective.
“Auto lending and performance is correlated to the strength in the economy, particularly employment,” Laky continued. “As long as employment continues to grow strongly and consumers have confidence in the economy we’ll continue to see growth in auto sales and financing. Consumers who believe they’ll be employed for a considerable time are willing to go forth and take on a loan to pay for a car.”
In the past year, auto loan balances have increased $101 billion to $1.008 trillion in Q3, according to the latest data.
TransUnion reported nearly 75 million consumers have an open auto account, an increase of 5 million since Q3 2014 when the figure stood at 69.5 million. Analysts pegged the number of consumers with access to an auto loan grew 2 million quarter over quarter from 72.5 million in Q2 2015.
TransUnion also shared information for the subprime space.
Auto loan balances for the subprime risk tier — those consumers with a VantageScore 3.0 credit score lower than 601 — remain the smallest segment with 15.3 percent, or $154 billion, of the total balance. However, analysts pointed out this figure is the highest share of auto balance observed for the subprime risk tier since Q1 2011.
Consumers in the prime or better risk tiers —those with a VantageScore 3.0 credit score higher than 661 — represent $670 billion of the $1 trillion in balances.
The average balance across all auto loan accounts was $14,515 in Q3, a 2.7 percent increase year-over-year, and the slowest pace of average balance growth since Q4 2011. The average subprime auto loan balance increased 4.2 percent from $13,328 in Q3 2014 to $13,890 in Q3 2015, the lowest growth rate since early 2012.
“As total auto loan balance rises, we’re seeing controlled and deliberate growth by lenders,” Laky said. “Consumers continue to feel confident in their employment or job prospects, and their appetite for new auto loans reflects this confidence.”
“More consumers have access to auto loans, yet delinquencies remain low as they continue to responsibly manage their payments,” he continued. “Consumers are taking on more and bigger auto loans in today’s low-rate environment, but we see no cause for concern as delinquencies remain steady.”
Viewed one quarter in arrears (to ensure all accounts are reported and included in the data), TransUnion indicated new auto loan originations exceeded 7 million for the first time in Q2. Up 13.5 percent from Q1 and 6.4 percent from Q2 of last year, originations reached 7.3 million this past quarter.
Along with origination growth, the average new auto loan balance grew to $20,016 in Q2 2015. The average balance increased $567 from the average balance in Q2 2014 of $19,449. New subprime auto loan balances increased 3.7 percent year-over-year from $16,781 in Q2 2014 to $17,357 in Q2 2015.
Another element Laky highlighted with SubPrime Auto Finance News is how much younger borrowers are tapping the market.
TransUnion noted consumers age 30 and younger continue to finance vehicles at a healthy pace, with more than 1 million more young adults opening an auto loan or lease in the past year, analysts determined 11.7 million consumers under the age of 30 have an auto loan or lease reported to TransUnion. That figure is up 1 million, or 9.6 percent, from Q3 2014.
“Contrary to some of the messages about consumers buying and financing cars in this new sharing economy, it’s not true,” Laky said. “As younger consumers are getting settled and employed, building their lives and their families, they’re realizing that they need cars to get the things done that they want to do in their lives, and they’re out there taking loans for them.”
So whether the account holders are young or more mature, Laky maintains the health of the auto-finance market is good, even if some conditions deteriorate.
“If the economy begins to turn and employment increases, that’s when auto lenders can begin to worry about an increase in delinquency,” Laky said. “Even then, I wouldn’t expect a dramatic increase in delinquencies.
"Even in the prior recession, we didn’t see a large increase in delinquencies even as other asset classes were having a big jump,” he continued. “The reason is the auto loan remains the priority loan payment in the consumer’s wallet. It’s a question of how important cars are both in utility for getting to and from a job and getting your family to and from places as well as the lifestyle benefit of having a nice car.”
Before reaching a settlement with the Massachusetts attorney general who alleged the finance company charged “excessive” interest rates on its subprime vehicle installment contracts, Santander Consumer USA chief executive officer Jason Kulas discussed three specific industry-wide factors that impacted its third-quarter performance.
During Q3, SCUSA reported that total originations came in at more than $7.6 billion, a figure including $3.1 billion in Chrysler Capital retail loans and $1.6 billion in Chrysler Capital leases originated. Other originations, including other auto and personal loans, totaled $2.9 billion for the third quarter.
The company pointed out incentives on certain vehicle models drove strong prime auto originations in the third quarter.
But during Santander’s conference call after sharing its Q3 financial report, Kulas indicated the overall market overall has become “slightly” more competitive, particularly in the lease segment. He acknowledged some competitors are being more aggressive in all-in lease pricing.
Then, Kulas elaborated about two other factors SCUSA contends to have influenced its origination performance.
“We also want to remind everyone we put a lower cap on our rates for dealer compensation in October 2014. We believe this is a competitive disadvantage on certain deals that are closed among bidders as many of our top competitors allow higher dealer mark-up levels,” Kulas said during the portion of the call that included his prepared remarks.
“We’re also seeing increased pricing competition in some areas of non-prime,” he continued. “While we remain disciplined in our origination approach, we are also being more cautious given market conditions. However, we continue to have confidence in our ability to originate attractive assets that meet our return hurdles.”
More discussion about subprime market
The comments Kulas made during his prepared remarks triggered several follow-up questions from the investment community during SCUSA’s Q3 call. Analysts wanted more details since so much of Santander’s business is tied into the non-prime and subprime segments of the credit spectrum.
“Early this year, we had a nice pick up in non-prime originations. In this quarter, we gave a little bit of that back,” Kulas said. “Our capture rates in non-prime fell back a little bit as there were some price competition. We intend to take what the market gives us.”
When asked about the about the depth and duration of competition in the non-prime space and elsewhere, Kulas called it “a little bit of a developing story.” Kulas also made a reference to another finance company but did not specify the name of the operation.
“We’re encouraged by the stability of performance we're seeing, and that's where you tend to see competition sort of impact things over a longer period of time,” Kulas said. “The performance is really coming in very stable and in line or close to what we have expected.
“But we are looking at some things on the competitive front that we're watching very closely, and I would pick out one individual competitor across the board,” he continued. “But what we're seeing is on lease in general. What's happening is, as we look at the individual transactions of what appears to be happening is, people are taking a little bit more aggressive view on residuals and may be partially offsetting that with what they view on fees and the money factor rate in those kinds of things.”
No matter what might be happening in the underwriting departments at SCUSA and elsewhere, Kulas remains confident about his operation’s standing in non-prime and prospects going forward.
“We tend to talk about the core, non-prime auto part of our business as a mature business,” Kulas said. “We’ve had some success this year growing that business, and we’ve captured really wide net and we get that business from many different sources. “It’s a business that we like them and will continue to be a big driver for us.
“We don’t think of that business is a growth business,” he continued. “I would say outside of some new partnership that may come along a new proprietary flow of applications, those kinds of things. We just view it as real solid, high-performing business, and the way we maintain that is that is continue to be as conservative and rational and in our approach to pricing and structuring as always have been.
“What we see right now is we’re booking a good percentage of that business,” Kulas went on to say later in the call. “It’s slightly lower than it was in the second quarter, but it's still very solid and so we just have to watch it.
“We can’t really project exactly what's going to happen from this point forward,” he added. “We’ve seen the competitive environment stay fairly rational. We have no reason to believe that's going to change in any great way, but since we saw slight change, we wanted to mention it.”
Update on credit losses
SCUSA indicated its provision for credit losses increased to $744 million in the third quarter up from $739 million on a sequential basis but down from $770 million year-over-year. The company noted its allowance ratio decreased to 11.8 percent as of Sept. 30, down from 12.4 percent as of June 30 and 12.1 percent as of the close of the third quarter.
Executive also mentioned they removed the volatility associated with seasonality from its loss provisioning model for individually acquired auto retail installment contracts. They explained the impact of removing seasonality from the loss provisioning model was a $134 million decrease in the provision for credit losses and the credit loss allowance.
“Following extensive analysis on the methodology of our provisioning models, we have refined the model to remove volatility associated with seasonal assumptions, leading to a one-time reduction to provision expense,” interim chief financial officer Jennifer Davis said.
“It is important to note that under the prior methodology, this quarter’s provision expense would have been higher, and we likely would have seen a reduction in the provision line in the upcoming fourth quarter,” Davis continued. “However, due to the change we made this quarter, the seasonal benefit historically seen in the fourth quarter provision is not expected to occur. Similarly, all future quarters should not be impacted by seasonality assumptions in the provisioning process.”
Matter in Massachusetts
A week after sharing its Q3 performance, SCUSA agreed to provide $5.4 million in relief to more than 450 Massachusetts consumers over allegations that it charged excessive interest rates on its subprime auto loans, according to attorney general Maura Healey.
Under the terms of the assurance of discontinuance filed in Suffolk Superior Court, SCUSA agreed to eliminate interest on certain loans it purchased that allegedly included excessive interest rates due to the inclusion of GAP coverage. Santander has also agreed to forgive outstanding interest on the loans, and reimburse consumers for the interest they have already paid on the debts.
The consumers helped by the settlement are located across the state, with concentrations in Boston, Worcester, Springfield, Pittsfield, and Lowell. On average, the settlement will provide each consumer with approximately $11,000 in relief.
Under the settlement, Santander will also pay $150,000 to the state and must perform a supervised audit of its existing loan portfolio to make sure that no additional consumers have been overcharged because of GAP fees. The fees added to the consumers’ loans caused the effective interest rates to exceed the relevant 21 percent state interest cap.
“Consumers need to know that when they take out a loan, they will be treated fairly,” Healey said. “It is important that protections under state law are properly applied, especially when it comes to economically disadvantaged consumers in Massachusetts.”
Investment analysts thought Credit Acceptance Corp. leadership would be a good source to gauge what might be in the subprime auto finance space and gather any clarity about whether turbulence might be ongoing.
Rather than just offering his opinion, chief executive officer Brett Roberts pointed to Credit Acceptance data that compared the company’s forecasted collection percentage against what the firm actually brought into its coffers. And the data Credit Acceptance shares on a quarterly basis goes back almost 10 years, which Roberts said “is pretty unique. I don't think anybody in the industry provides that level of disclosure.”
The actual collection reading has been above the forecast level since 2009, a feat Roberts insisted is the best analysis Credit Acceptance can offer about performance and current conditions. The spread between the projection and actual collected funds has been as high as 7.5 percent back in 2009 but has softened to about 1.0 percent a year ago.
“We tell you exactly what we thought when we originated the loan, how we thought it was going to perform, then we compare that to how it actually performs over time and tell you whether we were optimistic or the opposite when we wrote the loan,” Roberts said during Credit Acceptance’s most recently quarterly conference call.
“What you learn from that is that over the last 10 years we have an overall favorable variance with eight years that were positive and two that were negative. The two years that were unfavorable I think are remarkable because they both occurred during the financial crisis when those loans were serviced during a period of severe economic distress,” he continued. “And the variances, although they were negative, were very small in terms of magnitude.
“So, what we see more recently is that every pool still has a positive variance, at least the last eight years, but the magnitude of that positive variance has been decreasing,” Roberts went on to say. “Typically, when you go through a period where there is more competition that can show up in loan performance, so we've been expecting that sort of strong positive variance that we've seen to diminish.
“And so if you look at those static pools we provide, you can certainly see that trend,” he added.
Thus far in 2015, Credit Acceptance is collecting on its vehicle installment contracts at a clip of 68.2 percent, marking the first time the level has been below the 70-percent threshold since 2007.
Third-quarter originations
The company’s origination volume continues to surge as Credit Acceptance brought 73,614 contracts into its portfolio during the third quarter, representing a 41.3 percent spike year-over-year.
Through the first nine months of 2015, the company’s originations are up by 33.1 percent, coming in at 223,948 contracts.
Credit Acceptance’s active dealer network also is considerably stronger, standing at 6,406 when the company closed its third quarter on Sept. 30. Those active dealers are averaging 11.5 contracts per quarter.
Roberts applauded the work completed by the company workforce, which also led to consolidated net income of $74.0 million, or $3.53 per diluted share.
“I think from a sales execution standpoint, we’re pleased with our progress there,” Roberts said. “We did grow the sales force very rapidly for a period of time. We had some work to do to make that successful, and we’re starting to see a pay off in terms of the productivity per salesperson. I think it shows up most visibly in the new dealers that we're signing up.
“You know, volume per dealer can be affected by a lot of different things, but I think when we sign up a new dealer, we can attribute that to the sales team,” he continued. “So, I think they're doing a great job. We made some program changes. I think the changes we've made with respect to terms have been popular with the dealers. We've begun to originate all of our contracts electronically, and that's been a very popular add for our dealers.
“I think there are a lot of things that we're doing internally that we're proud of,” Roberts went on to say.
Regulatory discussion
As often arises, investment observers also wondered how Credit Acceptance is navigating today’s regulatory environment, especially in light of the Consumer Financial Protection Bureau intensifying its action in connection with dealer markup.
Roberts reiterated that Credit Acceptance handles its compensation differently than other finance companies.
“It’s a different issue for us,” Roberts said. “We don't do the traditional buy rate, sell rate methodology that has been talked about by the CFPB. So, we don’t give the dealer a rate so he can mark it up, and we’ll pay him the difference. That's not the way our program works. We typically set the rate for the dealer.”
Nevertheless, Roberts emphasized that Credit Acceptance maintains its diligence in regard to the moves the CFPB might be making.
“I think the way we look at it is anything that is a priority for the CFPB becomes a priority for us, so we watch everything that they say, everything they do,” he said. “We read everything that they publish, and we pay careful attention to it and we make sure that we're comfortable with the way we address those issues.”
Outstanding car loans hit a high point in the third quarter and have climbed more than 53 percent in the last five years, which appear to be good signs for the industry. As does the increase in car sales that has come with this rebound in auto finance.
However, Experian’s Melinda Zabritksi says, whether these rosy times continue hinges largely on consumers continuing to make their payments.
And for the most part, they have done so.
According to the State of the Automotive Finance Market report from Experian Automotive, 30-day delinquencies fell from 2.7 percent in the third quarter of 2014 to 2.5 percent in Q3 2015.
Likewise, 60-day delinquencies showed a similar decline, moving from 0.74 percent to 0.73 percent.
Overall, outstanding auto loan balances were at $968 billion in the third quarter, which Experian said was its highest level. A year ago, total open balances were at $870 billion. The year before, $784 billion.
Perhaps most important, the Q3 2015 figure is more than 53 percent higher than the post-recession trough.
“Continued growth in the automotive finance market is a clear sign of improved consumer confidence over the past few years,” Zabritski, Experian’s senior director of automotive finance, said in the company's news release accompanying the study results.
“Since bottoming out in the recession, automotive sales have rebounded steadily, which is a good sign for consumers, automotive manufacturers, lending organizations and the overall economy. What’s critical to this success is that consumers stay on top of their payments,” she added. “If they can continue to manage their financial obligations and make timely payments, the automotive industry can continue to flourish and grow for quite some time.”
Breaking down the credit tiers of open loans
- 20.82 percent of open loans were super prime.
- 40.36 percent were prime.
- 18.42 percent were nonprime.
- 16.61 percent were subprime.
- 3.79 percent were deep subprime.
Experian said in its news release for the study that “the distribution of open loans by risk segment remains relatively unchanged, demonstrating that the surge in outstanding automotive financing is driven by consumers across the board, not a specific segment of the market.”
The super prime category had the biggest year-over-year jump in open loan volume (up 8.34 percent), but subprime (up 7.8 percent) and nonprime (up 7.7 percent) weren’t far behind.
CUNA Mutual Group recently told attendees during the sixth annual Discovery Conference about the five primary elements credit unions must address if they plan to originate more vehicle installment contracts with subprime borrowers.
CUNA Mutual Group director of loan growth products Steve Hoke pointed out that millions of subprime borrowers are entering the market for new vehicles presents a significant growth opportunity for credit unions to generate new loans while protecting and serving their members.
“Subprime customers took out $129.5 million in auto loans during the first 11 months of 2014, which represents more than one-quarter of all U.S. auto sales, the highest level since before the Great Recession,” Hoke said.
“If you aren’t reaching out to your members and potential members with an auto loan offer at a competitive rate, then you are basically telling them to go elsewhere,” he continued.
Hoke insisted credit unions entering the subprime auto lending market need to be aware of five components, including
1. Reward good behavior
Provide members with an educational financial plan to teach best practices and build credit scores, so members are rewarded with more affordable credit in the long run.
2. Mitigate risk
Offer insurance options for members to protect their auto investment while mitigating risk to a credit union’s loan portfolio.
3. Maximize digital technology
Utilize technology to instantly verify income and employment status. This will speed the underwriting process by indicating whether the member will be able to repay the loan.
4. Recapture existing loans
Capitalize on member loyalty by reaching out to current members who have refinanced at an outside institution through a pre-qualified, auto loan recapture program.
5. Leverage mobile technology
Increase direct loan activity by utilizing mobile apps. These apps allow members to research multiple vehicles, explore loan options and apply online. In return, credit unions reach tech-savvy members at the time of the purchase decision, manage the dealer relationship and provide quotes for insurance products. It’s a win-win situation.
“Our forecasts indicate approximately 35 percent of loan transactions on loanliner.com will come through mobile in 2015 because members want to be able to interact with your credit union on the spot,” Hoke said.
“Mobile lending not only engages tech-savvy members, it also leads to new opportunities to generate additional non-interest income for your credit union,” he went on to say.
The Discovery Conference is an annual event sponsored by CUNA Mutual Group that attracts a national and international credit union audience of more than 1,300. The virtual, no-cost event is designed to give credit union leaders valuable industry insight and trends in the insurance and credit union industries.
After the event, select content is available on-demand for attendees to leverage and share best practices through the end of the year.
Credit unions can learn more about subprime auto lending by viewing Hoke’s Discovery Conference session on-demand at cunamutual.com/registerondemand.
Without necessarily having to be too aggressive with underwriting to consumers lower down the credit spectrum, Ally Financial emphasized that it remains on track to reach its goal for originations this year despite the headwinds of not collecting as much business from direct relationships with General Motors and Chrysler.
The objective of hitting $40 billion worth of paper coming into the portfolio is within reach because Ally originated $11.1 billion in contracts during the third quarter. The performance pushed the company to $31.7 billion through the first nine months of the year.
“We remain on track to surpass our target for the year despite the shifts in the business,” Ally chief executive officer Jeffrey Brown said when the company hosted a conference call with investment analysts after sharing its Q3 financial statement. “The business is well-positioned in the marketplace, increasingly more diversified and poised to provide consistent returns.”
In his opening comments, Brown tried to nip any thinking that Ally would simply hit its targets by taking on more subprime paper.
“Yes, we’ve expanded risk appetite in the more non-prime flows, but we’re still fairly modest at sub-15 percent origination allocation and fully underwrite with the focus on the borrower’s ability and willingness to repay,” Brown said. “And that’s a fact not necessarily true with some of all the deep subprime players.”
Ally insisted that it generated 36 percent increase year-over-year consumer originations, which included $607 million of consumer loans and leases from Mitsubishi Motors Credit of America. Brown pointed out the company collected the highest application volume across all dealer channels in Ally history during Q3. That application flow came from about 17,000 dealers across all 50 states.
“Despite some of the media noise … dealer relationships remain robust, and that was reinforced as I spent several weeks visiting with dealers across the U.S. over the past few months,” Brown said. “We’ve been saying for quite some time this is truly a relationship business and partnering so closely with the dealers allows us to continuously learn and adapt.”
As far as how that portfolio is performing, Ally reported that its delinquencies and net charge-offs in the auto space rose modestly in the third quarter. The delinquency reading moved up to 2.60 percent in Q3, up from 2.28 percent while Ally’s net charge-offs in its auto segment ticked up from 1.01 percent from 0.93 percent a year earlier.
“We continue to feel very good about where we see credit trends. We’re staying disciplined in our buy box and asset quality continues to perform within our expectations,” Ally chief financial officer Chris Halmy said.
As an entire company, Ally said its net income came in at $268 million in Q3. The figure compares to net income of $182 million in the prior quarter and $423 million for the third quarter of last year, which included $130 million in income from discontinued operations.
The company reported core pre-tax income of $431 million, excluding repositioning items, in the third quarter, compared to $435 million in the prior quarter and $467 million in the comparable prior year period. Adjusted earnings per diluted common share for the quarter were $0.51, compared to $0.46 in the previous quarter and $0.53 in the prior year period.
Ally also reported generally accepted accounting principles (GAAP) earnings of $0.47 per common share in the third quarter.
“Ally’s third quarter results demonstrate the ongoing strength of the operations and continued progress on our goals to diversify the business, achieve our financial targets and build upon our leading digital platform,” Brown said
“As we look ahead, our opportunities lie in our inherent strengths — a strong culture of agility and innovation, a proven track-record in digital financial services, a respected customer-centric brand, and a foundation of 5.5 million customers. We have taken initial steps in deepening our customer relationships and expect to expand our customer offerings in the year ahead,” he went on to say.
General Motors Financial president and chief executive officer Dan Berce took multiple opportunities after the finance company reported its third-quarter performance to state that despite being elevated to be the captive for the parent OEM, the company remains a significant institution in the subprime space.
Berce first referenced subprime when GM Financial discussed its Q3 North American origination mix, which included $1.769 billion in leases and vehicle installment contracts to customers with FICO scores below 620. Berce elaborated about the figure since it constituted only 19 percent of GM Financial’s origination total in the quarter, a level less than half of what it was a year earlier when the company’s subprime penetration stood at 44.1 percent.
“I will point out that subprime lending has not decreased,” Berce said. “In fact in absolute dollars, it is higher year-over-year but as a percent of our total originations, it is down because of the growth in prime and near prime.”
All told, GM Financial’s North American Q3 origination figure spiked to $9.316 billion, more than double the year-ago figure of $3.669 billion.
But GM Financial not only generated more paper in absolute dollars in the subprime space, the company posted more in the near-prime space, too, booking deals with customers who have a FICO score between 620 and 670. That origination segment climbed from $533 million to $1.235 billion in the most recent quarter.
With still a significant amount of subprime and near-prime paper in its portfolio, GM Financial also touched on the impact that mix had on delinquencies and losses.
The company indicated consumer finance receivables 31-to-60 days delinquent stood at 4.0 percent of the portfolio as of Sept. 30 compared to 3.9 percent a year earlier. Accounts more than 60 days delinquent constituted 1.6 percent of the portfolio when Q3 closed, down from 1.7 percent a year ago.
GM Financial also reported annualized net credit losses were 1.9 percent of average consumer finance receivables for the quarter compared to 2.0 percent for the year-ago quarter. For the first nine months of 2015, the company’s annualized consumer net credit losses stood at 1.7 percent, compared to 1.8 percent at the same juncture last year.
“I want to point out though that finance receivables with FICO scores less than 620 or so called subprime do still comprise 65 percent of our North American portfolio, which is the reason losses are higher at 2.6 percent than what you would see in a prime portfolio. But our loss trends should be favorably impacted by the increasing mix of prime lending over time,” Berce said.
“Recovery rates at 56 percent for the quarter were fairly flat with the 57 percent number a year ago; still very strong from a historical perspective,” he continued.
“Our outlook continues to be moderation in that rate as we go through 2016. And I will point out that recovery rates are seasonal so that December of 2015 just like December of 2014 should be lower sequentially than the September quarter,” Berce went on to say.
As Berce referenced, GM Financial’s subprime and near-prime originations are being dwarfed by its prime paper additions. That trend is likely to continue since the company is enhancing its relationship with the parent automaker as GM winds down its relationship with Ally Financial.
“We have also taken further steps in our evolution as a captive,” Berce said. “Effective Nov. 3, we will expand our role in GM's loan subvention programs with the removal of Ally from this channel. GM and GM Financial remarketing organizations are now realigned under the GM Financial brand. GM Financial is responsible for asset remarketing, for GM Financial off-lease vehicles as well as GM company cars and rental vehicles.”
Other Q3 financial metrics
GM Financial reported that it third net income climbed from$158 million to $179 million on a year-over-year basis. Earnings through nine months came in at $515 million, compared to $478 million through the same span a year earlier.
The company indicated its outstanding balance of commercial finance receivables was $7.8 billion as of Sept. 30, up from $7.2 billion. Berce noted 607 dealers currently use company’s offerings in this space.
“Floor planning continues to represent 86 percent of the portfolio with the balance of the portfolio being dealer loans such as real estate and lines of credit,” he said. “We do believe our expanded product suite and increasing penetration in GM’s retail channels enhances our ability to continue to grow this business at the steady rate that we have been on.”
GM Financial also shared that it possessed total available liquidity of $11.6 billion as of the close of the third quarter. That figure consisted of $1.6 billion of cash and cash equivalents, $8.0 billion of borrowing capacity on unpledged eligible assets, $1.0 billion of borrowing capacity on unsecured lines of credit and $1.0 billion of borrowing capacity on a junior subordinated revolving credit facility from GM.
“That liquidity increased primarily due to increased borrowing capacity on unpledged eligible assets and again, we do expect our leverage to continue increasing as our earning assets expand in the higher credit tiers in advance of the earnings generated by those assets and as we continue to build our liquidity through unsecured debt issuances,” GM Financial chief financial officer Chris Choate said.
Equifax is expanding its marketing offerings with the launch of a new suite of credit-based marketing products for the automotive industry.
Fueled by Equifax’s consumer credit data and fraud processes, the products enable Dealer Service Provider (DSP) unique marketing solutions to help their dealers generate high quality, identity-verified leads sourced from their websites, and within their showrooms and service centers.
The suite consists of three products, deployed together or separately. In each case, the auto loan application process concludes as it does today: the consumer completes a credit application either online or in the dealership, and the dealer runs a full credit report to ensure final eligibility.
The new products include:
1. PowerLead Check
Equifax explained this tool enables an application that is built by the DSP to be integrated onto any webpage on a dealership’s website. DSP services based on PowerLead Check can engage consumers by offering them their free Equifax credit score as they begin researching vehicles online.
The tool can help turn anonymous website visitors into valuable, identity-verified leads for the dealership. Consumers simply fill out an online form, verify their identity and PowerLead Check returns their Equifax credit score while directing their contact information to the dealer.
Furthermore, the consumer can better understand their credit standing, and the dealer receives another high-quality lead sourced from their own dealership website.
2. PowerLead Qualify
Similar to PowerLead Check, Equifax highlighted PowerLead Qualify can enable an application that is built by the DSP to be integrated onto any webpage on a dealership’s website. PowerLead Qualify invites consumers to get prequalified for an auto loan in real-time.
Consumers can consent to have their credit accessed to determine if they should receive a prequalified offer that includes credit limit, interest rate and loan or lease term, and the contact information and vehicle information is directed to the dealership.
Once the consumer gets their prequalification answer, they can opt to share it and other credit elements with the dealership, further enhancing the already valuable contact information. The consumer can better understand their credit position and gains a prequalified offer if they qualify, and the dealer receives another high-quality lead sourced from their own dealership website.
3. PowerLead Offer
The company indicated this tool enables a DSP to create a process for dealers to initiate individual consumer pre-screens instantly and engage consumers that qualify with firm offers of credit.
Utilized on the showroom floor or in the service center, PowerLead Offer can enable dealers to deliver firm offers of credit to consumers that qualify. When consumers are in the dealership for a test drive or dropping their car off for a service appointment, the dealer can pre-screen that consumer.
Based on predefined criteria established by the dealer and backed by their lender partners, consumers qualify for firm offers of credit. The offers are delivered to the consumer directly by dealership personnel and via direct mail.
“Equifax has been closely studying the best ways to empower car shoppers both online and in-store, and we are proud to unveil the PowerLead products that benefit both consumers and auto dealers,” said John Giamalvo, vice president of dealer services at Equifax.
“This new suite allows DSPs to create valuable services for dealers, by personalizing the online shopping experience and creating the best offer or terms that will get customers into the showroom,” Giamalvo continued.
“In the end, dealers can receive a boost in the return on investment for their online and sales/service marketing efforts, while consumers benefit from experiencing more transparency in the financing process,” he went on to say.
