AFS Acceptance chief executive officer Dov Szapiro explained why his company’s decision to sell 65 percent of its equity to Mexican finance institution Credito Real “could not have occurred at a better time.”
With growth expectations stemming from originations as well as possibly buying portfolios from related finance companies buy-here, pay-here dealers might have, Szapiro shared his enthusiasm about the developments with Credito Real exclusively with SubPrime Auto Finance News late on Thursday.
“This is a major development for AFS and all its stakeholders,” Szapiro said about the deal made public on Wednesday afternoon. “It’s a great leap forward for AFS to become part of a best-in-class company with deep credit and consumer finance roots, broad experience providing credit to the underbanked and the no-credit segment and with a strong balance sheet.”
Szapiro then described the landscape AFS Acceptance navigates nowadays; one that’s supported by the data compiled from Equifax.
Analysts indicated 3.17 million vehicle installment contracts have been originated through June to consumers with an Equifax Risk Score below 620, which are generally considered subprime accounts. The amount marks a 9.8-percent increase over the same span a year earlier.
Equifax added this newly issued subprime paper has a corresponding total balance of $56.4 billion, a 12.5 percent increase year-over-year. Through June, Equifax added 22.5 percent of auto loans were issued to consumers with a subprime credit score.
With those industry-wide figures in mind, here’s more of the reasoning why AFS Acceptance decided to part with 65 percent of its equity for $18 million.
“Our industry is currently being flooded by aggressive lenders who we believe may be taking too much risk,” Szapiro said. “We see non-industry players such as hedge funds and private equity firms who might have not experienced the cycles that AFS has that are simply reaching for yield. This phenomenon is likely fueled by the vast liquidity in our financial system.
“With the backing of Credito Real’s financial might and AFS’s industry specific experience, this transaction positions AFS perfectly to take advantage of the opportunities that the current excess will create such as portfolio purchases and acquisitions,” he continued. “We have the experience, the appetite and now, the financial backing.”
Credito Real indicated that AFS Acceptance’s outstanding portfolio stood at about $74 million at the time of the transaction. Szapiro described it as a “great and rewarding journey” as to how the company forged its way to that portfolio level.
Szapiro recalled that AFS Acceptance took root back in 2001 when he and his brother joined forces with a cousin and his business partner. In the earliest days, a five-person team serviced five dealer partners in south Florida.
“While the road hasn’t always been a smooth ride, we have learned from our mistakes and by investing in our people and continuously improving our dealer-centric business model and platform,” Szapiro said. “We have been able to survive difficult periods like 2008 and emerge stronger.
“We have also partnered with the best vendors in our space to build a robust, efficient and scalable platform,” he continued. “This is a unique industry where we have found many competitors and peers to be very open to sharing ideas and lessons to make this a better industry for all.
“We have formed great friendships with fellow competitors and can even think of at least three peers that have been great mentors. I’m proud to call them friends,” Szapiro went on to say.
“Last but certainly not least, we have built a great team and strong relationships with key stakeholders like our 12-plus year relationship with our senior lenders,” he added. “Without them and the loyal support of our shareholders, we would have not been able to get to this point.”
This point also includes a dealer network of about 300 dealerships in 40 states; levels Szapiro is hopeful grow steadily now with Credito Real a part of the equation.
“This is great news for our existing dealer partners and those dealers that are not yet our partners,” Szapiro said. “This new partnership with Credito Real enables us to continue to expand our dealer-centric business and to provide them with solutions for their various financial and cash flows needs.
“We will also be looking to purchase portfolios from dealers and their related finance companies as well as independent finance companies looking for liquidity,” he continued.
Originations, liquidity and yield aside, Szapiro made one other point about why AFS Acceptance’s deal with Credito Real is important for all involved.
“It is also important to highlight the culture match between the two companies,” he said. “AFS was a finalist as best place to work for in South Florida and Credit Real has been named a Best Place to Work for in Mexico for three years in a row.”
F&I Express announced this week that it will provide its dealer clients with access to products from the Penn Warranty Corp. through F&I Express’ eContracting platform.
Through this new relationship, dealers using the F&I Express eContracting platform will have the ability to sell Penn Warranty service plans, which offer a wide range of coverage options.
Officials explained all of the forms necessary to complete the sale of a Penn Warranty service contract will be built into the F&I Express eContracting platform solution. Additionally, F&I Express noted that it will remit warranty premiums for vehicles financed through its portal directly to Penn Warranty.
“Penn Warranty’s integration with F&I Express will save time and money in the F&I department through eContracting with a single sign-on process,” F&I Express chief executive officer Brian Reed said.
“By integrating Penn Warranty products with the F&I Express eContracting platform, we offer our dealers another convenient way to serve their customers, while providing another layer of protection for lenders, which is critical in the current marketplace,” Reed continued.
Currently, F&I Express has aggregated a network of nearly 100 automotive aftermarket insurance providers in an online portal accessible by its dealers.
“All of us at Penn Warranty are enthusiastic for the opportunity to partner with F&I Express,” Penn Warranty president and CEO Jude Tuma said.
“Our goal is to exceed expectations for our more than 6,000 dealers,” Tuma went on to say. “We want to make the F&I process as simple and compliant as possible. F&I Express will enable us to deliver that expectation for every customer.”
This week, credit report and compliance solutions provider Credit Bureau Connection (CBC) rolled out dealer access to income and employment data instantly, at point-of-sale through The Work Number, an Equifax service.
CBC highlighted that having fast access to income and employment data can enable dealers to close more sales by eliminating the risk of losing the deal because a customer was sent away from the showroom to collect proof of documentation and never seen again.
Additionally, with the potential of almost 25 percent of borrowers purposely or inadvertently inflating their stated income on auto loan applications by 15 percent or more, CBC insisted the risk of fraud increases dramatically for both dealers and finance companies.
The Work Number can provide dealers with the ability to verify their consumers' reported income and employment. Verifying this information can help the dealer clear common finance company stipulations generated during the financing process and validate data reported on loan applications to ensure accuracy.
The Work Number is a proprietary database owned by Equifax that has grown to include employer-direct payroll records from more than 4,800 employers nationwide.
“The odds of a buyer returning to complete a vehicle purchase decrease substantially if they are forced to leave the dealership,” CBC president and chief executive officer Mike Green said.
“Having the ability to satisfy this requirement of obtaining necessary income and employment proof, while the buyer is in the buying mode, is vital to a dealership’s closing ratio,” Green continued.
Green added that the ability to quickly verify income and employment information at the point-of-sale, versus sending away ready-to-buy prospects to retrieve paystubs or W2's, is advantageous from a strategic standpoint. This scenario can help ease the challenges of finance company “stips” and other potential roadblocks to financing.
“Our mission is to serve the dealer and lender communities alike through access to the highest quality database of income and employment data available in the marketplace,” Equifax senior vice president Michael Kuentz said.
“By partnering with CBC, our auto dealer customers are empowered to close more loans and create a better experience for auto buyers — while effectively protecting themselves from the negative impact of misstated income,” Kuentz continued.
Green added, “Moving forward with Equifax to offer instant income and employment verifications to the automotive industry takes CBC to yet another level of superior products and services as we all understand the value of retaining the customer at the dealership to finalize the deal.”
Wells Fargo spokesperson Natalie Brown told SubPrime Auto Finance News late this summer that the company doesn’t “grow for growth’s sake.” So it’s likely the company made a concerted effort with its due diligence as it opened its 57th regional business center (RBC) this week.
Wells Fargo Dealer Services chose to make its expansion in Texas, adding the RBC as the fifth location in the Lone Star State and the second one in the Houston market. The facility — located at 12603 Southwest Freeway, Suite 315, in Stafford — will serve approximately 100 existing dealerships in the region.
“Our new RBC reflects Wells Fargo’s continued commitment to providing localized service to the dealership community through a team of in-market auto finance experts who understand the market because we live and work in the communities we serve,” said Mark Beedlow, greater Texas market manager for Wells Fargo Dealer Services.
“Through this new RBC and four others in the state, we will continue to offer solutions that meet the dealers’ needs, so they can provide vehicle financing for their customers across the credit spectrum,” Beedlow said.
Steven Kannenberg was appointed to lead the new RBC that will initially house 11 Wells Fargo Dealer Services team members. Kannenberg has more than 15 years of industry experience.
Wells Fargo Dealer Services now operates 57 RBCs nationwide staffed with teams of in-market auto finance experts who provide financial solutions for the dealer community, including indirect auto financing, real estate and floor plan financing with access to commercial banking services designed to help dealers operate more efficiently.
“Our story is one of consistency and discipline, and we are pleased with how we’re performing and growing,” Brown said. “We are committed to responsibly providing consumers access to a broad credit spectrum of financing through our network of dealers in all economic cycles.
“We are located in the communities with our dealers and customers,” Brown continued. “Being in the same market helps us understand the local economy, industry, employment and pay scales and this information helps us make responsible lending decisions. It also helps us remain a leader in serving the transportation needs for millions of customers.”
FNI’s David Bafumo dissected a class action complaint involving Santander Consumer USA filed in the U.S. District Court for the Northern District of Illinois (Eastern Division) and uncovered three important questions that might impact other auto finance companies.
To recap, the matter that reached the court system on Aug. 31 is associated with allegations that a dealership’s failure to properly disclose the terms and conditions of a GAP debt-cancellation agreement resulted in federal Truth in Lending and Illinois State Retail Installment Sales Act violations, for which SCUSA — the holder of the retail installment contract — should be liable.
Before going into his trio of potential implications, Bafumo spelled out that the plaintiff's case is based on the following key factual allegations about the vehicle finance transaction that originated at Al Piemonte Super Car Outlet in Northlake, Ill. Those allegations included:
• Before consummation of the credit transaction, plaintiff was not delivered a copy of the required TILA disclosures "in a form she could keep."
• Plaintiff was not given any information regarding the GAP debt cancellation addendum, and specifically the amount charged ($895).
• Instead of being advised of required TILA disclosures, plaintiff, “was presented with a stack of documents (including the GAP addendum) containing signature lines marked by the letter ‘X.’”
• Plaintiff alleges she was told the entire stack of documents constituted her retail installment contract and were required to complete the vehicle purchase and finance transaction.
• The GAP addendum’s program limits include a maximum APR of 24 percent and the plaintiff's APR was 27 percent.
• The GAP addendum did not state the payment of the GAP charge was voluntary, but rather stated, “(a)lthough not required to do so, you elect to purchase this addendum.”
“The plaintiff’s core argument is that the plaintiff was sold a product that had no value in their particular situation — a GAP policy with program limits that are exceeded by the customer's actual loan APR,” said Bafumo, an expert in F&I products with more than 15 years of experience who now runs his own firm.
“Essentially, a TILA violation for inaccurately disclosing amount financed and finance charges because the GAP charge was not paid for coverage with any value, it must be excluded from the ‘amount financed and cannot be excluded from the calculation of the ‘finance charge,’” he continued.
“The complaint seems to also lift language from recent consumer rights lobbying efforts, alleging, almost as an aside, without any factual allegations in support, that GAP generally is a ‘deceptive product primarily used to pad loan transactions and improperly increase the amount financed with what is really profit, and part of the finance charge,” Bafumo went on to say.
“Interestingly, that statement is also posed as a ‘question of law and fact’ in the complaint’s justification for class action status,” he added.
In light of that backdrop, Bafumo elaborated about the three questions auto finance companies should ask if they are offering or underwriting GAP products similar to what SCUSA does.
What specifically makes this GAP contract allegedly worthless to this customer?
Bafumo indicated the GAP “program limits” set out on the front page of the contract states a maximum loan APR of 24 percent, and in the contractual list of exclusions, part “K” states that the GAP addendum does not provide coverage if the finance contract APR exceeds that maximum APR. Court paperwork showed plaintiff Joyce Pettye’s loan included a 27-percent APR.
“From a GAP product perspective, the limitation found in the contract at issue is fairly unusual,” Bafumo said. “Most GAP contracts do not specify such a limitation on the face of the contract.
“More typically, GAP benefits are contractually limited by loan-to-value percentages and vehicle type, value, or use classifications,” he continued.
Is the GAP contract at issue Santander's own private labeled program?
Bafumo noted the GAP contract at issue does not appear to be Santander's private branded S-Guard GAP program. Instead he said it appears to be a dealer selected product administered by a California company, Partners Alliance.
“That may raise some problems for the plaintiff’s class certification,” Bafumo said. “Their argument for class certification contends that a large percentage of Santander’s loans include this particular APR-limited GAP policy, which seems unlikely if it is indeed a dealer selected program rather than Santander's preferred program.
How is Santander supposed to prevent these kinds of alleged errors or improper disclosures that occur at dealerships?
Bafumo emphasize an indirect auto finance provider cannot monitor product disclosures and F&I practices inside every dealership that originates loan transactions.
“But the instant case is avoidable,” he said. “With established product funding approval policies and processes that include minimum product contractual requirements and benefits (amongst other product and administrator due diligence) and internal funding verification and audit, the GAP contract in this case would have been rejected and the deal returned to the dealership.
“Santander presumably has such policies and processes in effect for their own S-Guard suite of products but apparently none — or perhaps a failed policy — for dealer-selected products,” Bafumo added.
Bafumo also mentioned that less than 20 years ago, setting basic approval guidelines for add-on products like GAP and vehicle service contracts was a common practice among indirect auto finance providers. If a product contract form number and/or product administrator was not on the “approved” list, he indicated the product simply would not be financed.
“Mysteriously, this smart business practice has diminished and largely disappeared at many financial institutions — over the same time period that consumer protection litigation and regulatory interest has substantially increased —and remains consistently implemented only by auto manufacturer’s captives and some experienced operations, mostly in the subprime market,” Bafumo said.
Even one of the experts who specializes in the certified pre-owned vehicle market and is set to appear at Used Car Week for the fifth year in a row joined the discussion about what moves the Federal Reserve might make associated with interest rates.
Joe Derkos, director of the Power Information Network, a division of J.D. Power and Associates, touched on interest rates during a Used Car Week sneak peek webinar hosted by Paul Potratz, chief operating officer of Potratz Advertising.
“Who knows really in the short run if and when that rate increase will occur. How big it will be is the real critical question,” Derkos said. “Directionally, I think the industry is bracing for that increase to come sooner rather than later.”
By the time Derkos appears at Used Car Week, perhaps the Fed will have made a decision since the meeting of the Federal Open Market Committee begins on Wednesday. Cox Automotive chief economist Tom Webb also weighed in about the topic in this report from SubPrime Auto Finance News in which Stifel Nicolaus & Co. chief economist Lindsey Piegza called gathering “arguably the most widely anticipated event in the aftermath of the Great Recession.”
Meanwhile, Derkos again has a prime spot at Used Car Week, which includes the SubPrime Forum, the CPO Forum, the Re3 Conference and the National Remarketing Conference. Derkos, who is delivering the opening day keynote at Used Car Week on Nov. 16, will go into everything from an overall industry overview and the parallels between the new- and used-car markets to the top factors driving the pre-owned market, like extended-term financing, lease maturities and the impact of younger buyers and more subprime buyers.
During the recent webinar, interest rates weren’t the only finance oriented topic Derkos and Potratz broached. In light of Equifax reporting earlier this summer that total outstanding balances on vehicle installment contracts and leases surpassed $1 trillion, Potratz asked, “Is it that they’re buying more expensive vehicles or is it that all vehicles have increased in price?"
Derkos replied, “It’s really both. If you break it down year-over-year, it’s almost an even split between those two drivers. We do see a shift to larger, more expensive segments like pickup trucks. There’s been a lot of action there as well as SUVs.
“Additionally, everyone from the low end to the high end in terms of price are seeing their prices go up. In terms of technology, CAFE requirements, those costs are being passed on to the consumer in terms of higher prices,” Derkos continued.
“It sets the tone for the overall industry,” he went on to say during the webinar, which can be watched in its entirety through the window at the top of this page.
Potratz will be talking even more about auto finance when he hosts his next Used Car Week sneak peek webinar coming up at 3 p.m. ET on Oct. 1. That’s when one of the keynote speakers for the SubPrime Forum will be the special guest, Melinda Zabritski, senior director at Experian Automotive. Finance companies executives and dealers can catch the online conversation by registering for the session here.
Zabritski has been one of the experts annually at the SubPrime Forum, which is orchestrated in partnership with the National Automotive Finance Association.
Used Car Week runs from Nov. 16-20 at the Phoenician in Scottsdale, Ariz. To view conference agendas, make reservations for accommodations and more, go to www.usedcarweek.biz.
To hear Pelican Auto Finance chief executive officer Troy Cavallaro explain the impact, the $100 million warehouse funding facility with Wells Fargo Securities the company announced on Wednesday will help the deep subprime auto finance provider in two places.
The facility represents Pelican’s chance to advance both on Wall Street as well as dealerships that often gather along major thoroughfares in the markets within the 30 states the company is licensed.
In a conversation with SubPrime Auto Finance News, Cavallaro indicated how Pelican has been working on this deal with Wells Fargo “for a few months” as a way to enhance a previous senior debt facility.
“With the growth that’s underway, we were looking at the next step,” he said. “I think Wells Fargo certainly is that. We’re looking at it from a rising interest rate environment. The potential access to the securitization market becomes more attractive.
“The Fed is obviously on course to raise rates at some point, whether it be in September or later this year. I think locking in and having the potential to securitize is very important,” Cavallaro continued.
“With that, Wells Fargo and their group of professionals have enormous experience with bringing deals to market and providing these warehouse facilities as a major force in the industry,” he went on to say. “That’s really why we chose them because they have the great reputation and what they can do for us in the long term with securitization and advisement can go a long way.”
Furthermore, with the funding injection, Cavallaro highlighted Pelican now can offer another way to reduce the number of times this scenario unfolds, especially at franchised dealerships. Imagine a customer who is eager to buy a vehicle or really needs upgraded transportation but their credit score is in the 500s so the store can’t get the deal bought by its collection of financing sources.
Now Pelican has the capacity to fund originations at 60 months and 66 months depending on the quality of the vehicle collateral.
“For franchised dealers, we’re going to allow them the opportunity to finance customers who are probably walking off their dealership lots today,” Cavallaro said.
About 90 percent of Pelican’s volume resides in indirect auto financing at both franchised and independent stores. But the development with Wells Fargo also is giving Pelican a lever to pull within a smaller part of its business, too, working with buy-here, pay-here dealers.
“We continue to work selectively with the buy-here, pay-here dealers,” Cavallaro said. “We’re looking for something different than being a traditional bulk purchase buyer. What we really seek out in the industry is buy-here, pay-here partners that want to build a relationship and sell seasoned paper from their portfolios on a monthly basis to replenish their credit lines. Our current book of business from buy-here, pay-here partner dealers is unique in terms that the performance allows us flexibility to structure and be creative with them.
“It’s not a traditional bulk purchase platform. It’s more of a partner platform, and hence, that’s why we call it that,” he went on to say.
The upward trajectory for all segments of Pelican’s business as well as the relationship with Wells Fargo also delighted the leadership of Flexpoint Ford, a private equity investment firm with offices in Chicago and New York that pushed its resources behind Pelican two years ago.
“Pelican is building a best-in-class subprime auto finance platform through a focus on high customer service standards. We remain extremely excited about our partnership with Troy and his team,” Flexpoint Ford managing director Chuck Glew said.
“The new Wells Fargo credit facility will allow the company to offer a more complete lending solution to dealers and will support further geographic expansion,” Glew continued.
Now with this warehouse funding milestone achieved, Cavallaro is eager to watch what happens as Pelican strives to be “a major, long-term player in the deep subprime auto finance space.”
He added, “We really have the runway in terms of financial backing that we need for the disciplined growth that’s in front of us.”
Along with an inkling about what its auto lending prospects might be, initial findings from the 2015 Growth Strategy Survey orchestrated by Bank Director showed the traditional banking industry may find itself unable to attract what orchestrators called a “decidedly untraditional digital generation.”
The survey showed 60 percent of the executives and board members who participated say their bank might not have the right products, services and delivery methods to serve millennials, many of whom are already in their early 30s.
In addition to the generation gap between bank boards and executives, many of them baby boomers, and younger adult consumers, a technology gap exists.
The survey noted 70 percent of bank directors don’t use their bank’s mobile channel. Even fewer use newer services, such as Apple Pay.
The U.S. Census Bureau announced earlier this year that millennials surpassed baby boomers as the largest segment of the population.
The 2015 Growth Strategy Survey, sponsored by technology firm CDW, revealed how bankers perceive the opportunities and challenges in today’s marketplace, and technology’s role in strategic growth. The survey was completed by 168 chief executive officers, independent directors and senior executives of U.S. banks with more than $250 million in assets in May, June and July of this year.
Two other key findings included:
— Apple is the nonbank competitor respondents worry about most, at 40 percent. Just 18 percent of respondents indicate their bank offers Apple Pay.
— Bank mobile apps may not keep pace with nonbank competitors. Features such as peer-to-peer payments, indicated by 28 percent of respondents, or merchant discounts and deals, 9 percent, are less commonly offered within a traditional bank’s mobile channel. The survey showed 49 percent of respondents indicate their bank offers personal financial management tools.
More survey details about auto segment
According to the survey, only 8 percent of banks that participated believed indirect auto lending was one of its three greatest organic growth opportunities. Just 3 percent of direct auto lending fell into that category.
However, the larger the institution, the higher auto financing climbed on the growth prospect list.
For banks with more than $10 billion in assets, 31 percent of them thought indirect auto lending was one of the top three growth outlets. For institutions with assets between $5 billion and $10 billion, that level came in at 29 percent.
By far where banks surveyed thought their most significant profitability potential might reside in real estate.
A total of 85 percent of respondents see opportunities to grow through commercial real estate loans. Executives and board members also expect to grow through commercial & industrial (C&I) lending, for 56 percent, and residential mortgages, at 45 percent.
The entire survey can be viewed here.
Experian Automotive noticed captive finance companies increased their appetite for risk a bit during the second quarter.
According to the latest State of the Automotive Finance Market report, the year-over-year change for captives in the highest risk segment — buyers with credit scores below 600 based on the VantageScore 3.0 scale — showed a jump of 10.1 percent. The only other provider category to register an uptick at all was commercial banks, but it was just a minimal upward drift of 0.2 percent.
Going in the other direction, Experian indicated the year-over-year change in high risk originations declined most for credit unions, softening by 5.6 percent in Q2.
Looking deeper into the numbers, analysts pointed out that captives’ portfolios aren’t overflowing with non-prime paper despite the uptick in Q2. Experian indicated just 21.1 percent of their current used-vehicle financing contracts fell into the highest risk category while only 12.2 percent of their new-model deals did.
As executives might expect, the highest risk used-vehicle financing in Q2 settled mostly within the buy-here, pay-here industry (70.7 percent) and finance companies such as Credit Acceptance and Westlake Financial Services (70.6 percent).
All told, Experian determined the three highest risk segments all posted year-over-year increases in outstanding balances as of the second quarter. The metrics of open loans are as follows:
— Non-prime: 18.20 percent, up 6.35 percent
— Subprime: 16.35 percent, up 6.98 percent
— Deep subprime: 3.57 percent, up 7.42 percent
American Auto Guardian — a provider in developing, marketing and administering vehicle service contracts and other automotive aftermarket products — rolled out its newly developed mobile application to its agents during the company’s product launch earlier this month.
Company officials highlighted that “storing paper contracts in the glovebox is now a thing of the past” because AAGI Mobile is a customer‐facing mobile application that can interact with all of AAGI’s products.
In the first release available now, users can photograph and register their contracts within the app. AAGI’s system can update the user’s contract details and vehicle information for their electronic convenience.
These features, paired with the selling dealer’s contact and location details (including interactive maps) and the ability to immediately connect to the program’s roadside assistance service, can allow users to have secure electronic information at their fingertips when they need it most.
AAGI’s creation of the app furthers their technology push for both agents and dealers to utilize AAGI’s online rating/contracting/remittingQR360, as well as partner menu and DMS systems.
AAGI president Tim Brugh insisted that used together, the app can provide a more comprehensive experience for the consumer.
“Our creative team has developed AAGI Mobile to be intuitive and valuable from the consumer’s perspective, while giving our dealer partners a more visible customer presence,” Brugh said.
“Within the app, one of the first things a customer will see is the dealer's phone number and address,” he continued. “Our goal is to drive the customer back to the selling dealer for repairs, service, questions and future sales. This is the just the first generation of what is a one of a kind tool for our dealers.
“I’m proud to offer this product to our agents, dealers, and end users, the car buying public,” Brugh went on to say.
For more details, visit www.aagi.com.
