The Consumer Financial Protection Bureau and Department of Justice just took a big bite out of the F&I income Honda dealerships can generate through the financing of vehicle installment contracts by their captive.
CFPB and DOJ officials said on Tuesday that they resolved an action with American Honda Finance Corp. they believe will put new measures in place to address discretionary auto loan pricing and compensation practices.
The agencies indicated Honda’s past practices resulted in thousands of African-American, Hispanic, and Asian and Pacific Islander borrowers paying higher interest rates than white borrowers for their installment contracts, without regard to their creditworthiness.
As part of the order, officials said Honda will change its pricing and compensation system to substantially reduce dealer discretion and minimize the risks of discrimination, and will pay $24 million in restitution to affected borrowers.
According to the consent order, Honda’s captive will limit dealer participation to 125 basis points for installment contracts with terms of 60 months or less. For contracts longer than 60 months, the cap is set at 100 basis points.
Officials maintained that Honda permitted dealers to mark-up consumers’ interest rates as much as 2.25 percent for contracts with terms of five years or less, and 2 percent for contracts with longer terms.
The agencies explained the enforcement action is the result of a joint CFPB and DOJ investigation that began in April 2013. The agencies investigated Honda’s indirect auto lending activities’ compliance with the Equal Credit Opportunity Act, which prohibits creditors from discriminating against loan applicants in credit transactions on the basis of characteristics such as race and national origin.
The investigation concluded that Honda’s policies:
• Resulted in minority borrowers paying higher dealer markups: Honda violated the Equal Credit Opportunity Act by charging African-American, Hispanic, and Asian and Pacific Islander borrowers higher dealer markups for their auto contracts than non-Hispanic white borrowers. These markups were without regard to the creditworthiness of the borrowers.
• Injured thousands of minority borrowers: Honda’s discriminatory pricing and compensation structure meant thousands of minority borrowers from January 2011 through July 14, 2015 paid, on average, from $150 to over $250 more for their auto loans.
Reaction from Honda
In a statement posted on its website, American Honda Finance officials said their consent agreement with federal agencies, “shows our commitment to work together to be part of the solution and to establish the path forward that best supports our Honda and Acura customers and dealers with clear and convenient financing options.
“AHFC strongly opposes any form of discrimination, and we expect our dealers to uphold this principle as well. We firmly believe that our lending practices have been fair and transparent,” they continued.
“AHFC has a difference of opinion with the CFPB and the DOJ regarding the methodology used to make determinations about lending practices, but we nonetheless share a fundamental agreement in the importance of fair lending,” the officials went on to say.
Honda Finance didn’t mention the specific figures regarding dealer participation that the CFPB and DOJ did in the consent order. Rather, officials said, “In cooperation with the CFPB and the DOJ, AHFC will be working closely with our Honda and Acura dealers in proactively adjusting our pricing programs to continue to give our customers the ability to choose the loan that is best for supporting their purchase of Honda and Acura products.
“As part of this new program, AHFC will announce later this year adjustments to our caps for dealers in setting the rate for retail installment contracts lower than the present level,” they continued.
“We will be implementing this change in combination with other adjustments and modifiers in a way that continues to support our Honda and Acura dealers' present business compensation with a full array of financing options,” captive officials added.
American Honda Finance also pointed out that as a result of this settlement, no civil penalties have been assessed.
Along with establishing a $24 million fund that will be used to compensate customers identified by the CFPB and the DOJ, the captive indicated it will continue to enhance our long-standing commitment to support financial literacy education and ensure that the future generation of customers is well informed about the process of financing vehicles.
More details of enforcement action
Officials reiterated the Dodd-Frank Wall Street Reform and Consumer Protection Act, and federal fair lending laws, authorize the CFPB and DOJ to take action against creditors engaging in discrimination.
The CFPB’s order was filed on Tuesday as an administrative action, and DOJ’s proposed order was filed in the U.S. District Court for the Central District of California.
The agencies contend the measures provided in the orders will help ensure that discrimination does not increase the cost of auto loans for consumers on the basis of race and national origin.
Under the CFPB order, Honda must:
• Substantially reduce or eliminate entirely dealer discretion: Honda will reduce dealer discretion to mark-up the interest rate to only 1.25 percent above the buy rate for contracts with terms of 5 years or less, and 1 percent for auto loans with longer terms. Honda also has the option under the order to move to non-discretionary dealer compensation.
“The bureau did not assess penalties against Honda because of Honda’s responsible conduct, namely the proactive steps the company is taking that directly address the fair lending risk of discretionary pricing and compensation systems by substantially reducing or eliminating that discretion altogether,” CFPB officials said.
• Pay $24 million in damages for consumer harm: Officials said Honda will pay $24 million to a settlement fund that will go to affected African-American, Hispanic, and Asian and Pacific Islander borrowers whose auto loans were financed by the captive between January 2011 and Tuesday.
• Administer and distribute funds to victims: Officials said Honda, through American Honda Motor Co., will contact consumers, distribute the funds and ensure that affected borrowers receive compensation. Honda will make reports to the bureau regarding this victim compensation activity.
“The CFPB is committed to creating a fair marketplace for all consumers, and other auto lenders should take note of today’s action,” CFPB director Richard Cordray said. “Honda’s proactive decision to move to a new pricing and compensation system demonstrates industry leadership and represents a significant step towards protecting consumers from discrimination.”
The head of DOJ’s Civil Rights Division, principal deputy assistant attorney general Vanita Gupta, also reacted to Tuesday’s development.
“We commend Honda for its leadership in agreeing to impose lower caps on discretionary markups and for its commitment to treating all of its customers fairly without regard to race or national origin,” Gupta said.
“We recognize that dealerships perform a valuable service in connecting customers with lenders and that they should be fairly compensated for that service,” Gupta continued. “We believe that Honda’s new compensation system balances fair compensation for dealers and fair lending for consumers.
“We hope that Honda’s leadership will spur the rest of the industry to constrain dealer markup to address discriminatory pricing,” Gupta went on to say.
In March 2013, the CFPB pointed out that it issued a bulletin explaining that it would hold indirect auto finance accountable for “unlawful discriminatory” pricing. Bureau officials reiterated the bulletin also made recommendations for how indirect auto finance companies could ensure that they were operating in compliance with fair lending laws.
Last September, the bureau also issued an edition of supervisory highlights that explained that the bureau’s supervisory experience suggests that significantly limiting discretionary pricing adjustments may reduce or effectively eliminate pricing disparities.
“Substantial limits on discretionary pricing like those imposed by today’s order can address the type of fair lending risk identified in the CFPB’s bulletin and supervisory highlights,” officials said.
Officials mentioned Tuesday’s action is part of a larger joint effort between the CFPB and DOJ to address discrimination in the indirect auto lending market. In December 2013, the CFPB and DOJ took an action against Ally Financial and Ally Bank that ordered Ally to pay $80 million in consumer restitution and an $18 million civil penalty.
Cox Automotive chief economist Tom Webb didn’t reference the Federal Reserve’s revamped consumer credit report that includes more details about auto financing when he conducted his quarterly conference call this week.
But the metrics the Fed reported probably didn’t provide Webb with much evidence to alter his assessment about lengthening new-vehicle installment contracts.
The Fed indicated the average new-car deal in March contained terms lasting 65 months, the same duration as the first quarter of this year and the fourth quarter of last year.
The Fed added in its report that officials said covers most captive and non-captive finance companies that the average amount financed in these new-model contracts was $27,272 in March, which was flat compared with the first-quarter reading and $517 higher than the fourth-quarter figure.
Furthermore, the Fed pinpointed the average APR on contracts for new vehicles at 5.2 percent in March; again the same reading as Q1.
In his Q&A segment that also delved into where wholesale prices might be headed, Webb answered questions about new-vehicle sales and the financing environment that helped the industry sell new cars and light-duty trucks at a seasonally adjusted annual rate (SAAR) of 17.1 million in June.
“Longer terms loans,” Webb said as he paused for a couple seconds before continuing with, “I have a lot of thoughts about that. Personally, I don’t like them. I don’t think the lenders are going to get too burned on them. The underwriting is still pretty good. People are paying their loans.
“Customers probably won’t hold the car until the note is paid off so lengthening the trade cycle, I’m not too sure what it does for that,” Webb continued.
Webb then followed up with the part about these growing contract terms that solidified his opinion.
“What bothers me about them most is it probably hurts customer satisfaction in the long-run,” he said.
“New-vehicle buyers want to trade out on a relatively short period of time,” Webb continued. “Wholesale prices obviously are going to show some weakness. There are going to be people who put themselves into a long-term loan who are going to find it rather painful to get out into another new vehicle. They’re going to have little equity, no equity or negative equity.”
Western Funding closed the first half of the year with the biggest origination month in company history, fueling plans to grow its footprint and workforce.
Western Funding — a specialized subprime automotive finance company and subsidiary of Westlake Financial Services — reported that it funded 906 deals in June for $11.2 million worth of contracts.
The company tabulated that its portfolio size now stands at $84 million, a 154-percent increase over last year. Western Funding president Guerin Senter highlighted the portfolio continues to outperform expected losses.
“We are excited to announce June as our biggest originations month, as it makes an immediate impact on the growth of our company,” Senter said.
“We attribute this strategic growth to the development of our sales team and expansion into new markets,” he continued.
Western Funding currently operates in 18 states and has a 45-person sales force. The company’s goal is to be operating in all 50 states by the end of 2016.
Western Funding plans on hiring another 30 sales reps by the end of the year, with the majority of those starting in August.
“We’re just starting to gear up our next start-group and embark on the interviewing and recruiting process right now,” Senter said.
Senter emphasized Western Funding’s sustainable growth requires a need for new talent to lead the company into prosperous national growth. Individuals with what the company calls a “purpose and a passion” for the industry and interested in joining the Western Funding team are encouraged to call the company directly at (702) 322-9883.
All of those vehicle installment contracts with terms of 72 months or longer are prompting one of the top federal regulators of commercial banks to keep a close eye on auto financing.
The latest report from the Office of the Comptroller of the Currency indicated that agency officials continue “to closely monitor underwriting practices and loan structures.” They made the statement as part of the 41-page semiannual risk perspective by the OCC’s national risk committee.
The OCC based its assessment on data through the end of last year, which showed total outstanding balances in the industry’s portfolio reached $956 billion, increasing 1.4 percent for the quarter and 8.8 percent for the year. The OCC acknowledged outstanding balances have grown for 17 straight quarters, a trend that began in the third quarter of 2010.
Officials pointed out auto origination volumes at commercial banks followed a similar pattern with a 9.5-percent increase during 2014 and a “long-term pattern mirroring the industry.” To date, they added delinquency and loss rates remain within “manageable” levels, aided by declining unemployment, low gasoline prices and “resilient” used-vehicle prices.
While installment contract performance currently remains “reasonable,” the OCC discussed what negatives might be percolating within the industry.
“Extended rapid growth is difficult to maintain and can sometimes mask early signs of weakening credit quality,” officials said in the report. “Too much emphasis on monthly payment management and volatile collateral values can increase risk, and this often occurs gradually until the loan structures become imprudent.
“Signs of movement in this direction are evident, as lenders offer loans with larger balances, higher advance rates and longer repayment terms,” they continued. “Each on its own may be manageable depending on the particular case, but combining the factors substantially increases risk.”
As dealer finance office managers and finance company underwriters often see, those contract terms regularly need to be stretched to place the buyer into an affordable monthly payment. The OCC reiterated this practice can increase risk to banks and borrowers.
The agency mentioned 60 percent of auto loans originated in the fourth quarter of 2014 had a term of 72 months or longer.
“Extended terms are becoming the norm rather than the exception and need to be carefully managed,” officials said.
The OCC noted in its reported collateral advance rates are a concern, too.
The agency referenced Experian Automotive data on origination loan-to-value (LTV) ratios, which showed average advance rates were “well above” the value of the vehicles financed.
In the fourth quarter of 2014, the average LTV for used vehicle contracts was 137 percent. Moreover, advance rates for borrowers across the credit spectrum are trending up, with used vehicle LTVs for subprime borrowers (individuals with credit scores 620) averaging nearly 150 percent at the end of 2014.
“Sales of add-on products such as maintenance agreements, extended warranties, and gap insurance are often financed at origination. These add-on products in combination with debt rolled over from existing auto loans contribute to the aggressive advance rates,” the OCC said.
The regulator closed its report segment focused on the auto space by projecting how commercial banks might act going forward.
“As in the mortgage markets, the OCC expects banks to fully consider cycles and trends in the auto markets and respond in a prudent and sound manner,” officials said.
“Underwriting standards and product structures established in times of low interest rates and unusually high used car values may not prove prudent when conditions normalize or during times of stress,” they continued. “Competitive factors are important realities, but lenders also need to consider the results objectively and ensure that loan terms, underwriting standards, and portfolio concentrations remain within established and prudent risk appetite levels.”
The entire OCC risk report can be downloaded here.
In a move targeted at the subprime market, Spireon on Wednesday formed a strategic partnership with P360, a provider of loan-level data management and analytics. The companies highlighted the collaboration will provide a comprehensive portfolio solution to help auto finance companies to identify, calculate and monitor risk before it affects their business.
By coupling P360’s data-driven Mosaic loan intelligence platform with Spireon’s Goldstar GPS vehicle tracking, officials explained that finance companies can leverage business intelligence to significantly reduce risk and safely lend to previously overlooked borrowers.
By increasing penetration and yield to customers in lower credit tiers, the companies projected that finance companies can expand their overall portfolio production and performance, deploying more capital and increasing loan originations.
Meanwhile, Spireon and P360 claimed that institutions such as credit unions and regional banks can help their members build and improve their credit by providing better loan rates than other subprime finance companies.
“As the auto finance industry evolves, our customers are demanding more sophisticated tools to measure their risk and improve their ability to expand their portfolios,” said David Meyer, executive vice president of sales and services for Spireon’s automotive solutions group.
“Spireon is pleased to partner with P360 to be the first to offer tools that can improve decision making, increase return on capital, and streamline risk processes,” Meyer continued.
P360 president and chief executive officer Carl Meiswinkel added, “P360 and Spireon’s combined technologies will allow credit unions and other financial institutions drive better business outcomes by offering an unprecedented combination of live modeling tools for underserved consumer markets.”
If buyers keep their vehicles for the duration of the installment contract, dealerships and finance companies likely won’t see these consumers again for another purchase until 2020 or possibly beyond — an assertion stemming from the record-setting term metrics Experian Automotive reported on Monday.
Analysts determined longer-term loans for both new and used vehicles are on the rise. According to the latest State of the Automotive Finance Market report, the average loan term for new and used vehicles originated during the first-quarter increased by one month, reaching new all-time highs of 67 and 62 months, respectively.
Findings from the report also showed that longer loans — those contracts with terms lasting 73 to 84 months — accounted for a record-setting 29.5 percent of all new vehicles financed, marking an 18.6 percent rise above Q1 2014 and the highest percentage on record since Experian began publically tracking this data in 2006.
Long-term used-vehicle loans also broke records, with loan terms of 73 to 84 months, reaching 16 percent in Q1 2015, rising from 12.94 percent the previous year — also the highest on record.
“While longer term loans are growing, they do not necessarily represent an ominous sign for the market," said Melinda Zabritski, Experian’s senior director of automotive finance and a keynote speaker for the SubPrime Forum later this year during Used Car Week.
“Most longer-term loans help consumers keep monthly payments manageable, while allowing them to purchase the vehicles they need without having to break the bank,” Zabritski said. “However, it is critical for consumers to understand that if they take a long-term loan, they need to keep the car longer or could face negative equity should they choose to trade it in after only a few years.”
Experian pointed out the average amount financed and the average monthly payment for a new vehicle also increased to record heights.
The average new-vehicle loan was $28,711 in Q1 2015, compared to $27,612 in Q1 2014. The average monthly payment for new vehicles also rose, moving from $474 in Q1 2014 to $488 in Q1 2015.
Additionally, analysts reported leasing continued to increase in popularity during the quarter, jumping from 30.22 percent of all new vehicles financed in Q1 2014 to a record high of 31.46 percent in Q1 2015.
During the same time period, the average monthly lease payment dropped to $405, down from $412 the previous year.
Furthermore, leasing credit loosened, as the average new vehicle lessee had a credit score of 718 in Q1 2015, down from 721 the previous year.
“Increases in vehicle financing are signs of a strong automotive market,” Zabritski said.
“By gaining a deeper understanding of current financing trends, lenders are able to stay competitive and better meet the needs of the marketplace, while consumers can use the data to become more educated on the different vehicle financing options and make a more informed purchasing decision,” she went on to say.
Zabritski mentioned a trio of other findings from Experian’s latest report, including:
— The average credit score for a new-vehicle loan dropped slightly, going from 714 in Q1 2014 to 713 in Q1 2015. The average used vehicle score moved slightly higher, from 641 in Q1 2014 to 643 in Q1 2015.
— The average used-vehicle loan was $18,213 in Q4 2015, up from $17,927 in Q4 2014.
— The average interest rate for new vehicles was 4.71 percent in Q1 2015, up from 4.54 percent in Q1 2014. Similarly, the average interest rate for used vehicles increased from 9.01 percent in Q1 2014 to 9.17 percent in Q1 2015.
While praising financing companies for their underwriting prowess, TransUnion’s latest auto report — viewed one quarter in arrears to ensure all accounts are included in the data — showed notable origination growth in the subprime risk tier.
Contracts extended to subprime buyers — those consumers with a VantageScore 3.0 credit score lower than 601 — increased 6.2 percent from Q4 2013, comprising 15 percent of newly originated contracts in Q4 2014.
While being able to look at data from this year for the metric, TransUnion also highlighted subprime delinquency rates increased just slightly from 5.14 percent in Q1 2014 to 5.19 percent in Q1 2015.
“The growth in both the number and size of new loans across all risk tiers reflects Americans’ continued appetite for new cars,” said Jason Laky, senior vice president and automotive business leader for TransUnion.
“As subprime originations grow, the delinquency rates have remained relatively steady,” Laky continued. “While lenders appear to be effectively managing risk across all credit risk tiers, consumers may also be benefitting from an improved employment environment.”
TransUnion’s latest report released this week also indicated more than 71 million consumers had an auto loan in Q1 2015, an increase of 1.2 million from Q1 2014 and the largest growth since the Great Recession.
Analysts also noticed consumers below age 30 experienced the largest increase, with 8.5 percent year-over-year growth.
In Q1 2015, TransUnion noticed auto loan delinquency rates (the ratio of borrowers 60 days or more delinquent on their vehicle installment contracts) remained steady at 0.99 percent, unchanged from Q1 2014.
On a quarterly basis, the delinquency rate dropped from 1.16 percent in Q4 2014, a decline of 14.6 percent.
“Even as more consumers have access to an auto loan or lease, we’re seeing a continued low level of delinquencies on a year-over-year and quarterly basis,” Laky said.
Laky went on to mention auto loan debt per borrower rose 3.8 percent from $16,865 in Q1 2014 to $17,508 in Q1 2015. On a quarterly basis, auto loan debt increased from $17,453 in Q4 2014, marking the 16th straight quarter of increases.
Geographically, TransUnion found auto loan balances rose in every state from Q1 2014 to Q1 2015.
Among the nation’s largest cities, Atlanta (up 5.9 percent) and Houston (up 5.4 percent) experienced the largest increases in auto loan balances, according to analysts.
Laky pointed out that Dallas, an oil-rich market, experienced a 1.7 percent decline in its delinquency rate, down from 1.05 percent in Q1 2014 to 1.03 percent in Q1 2015.
“We have yet to see a negative impact on auto lending in the areas with high exposure to the oil industry,” Laky said. “Loans and balances continue to grow, while delinquencies continue to remain in check.”
TransUnion recorded 66.1 million auto loan accounts as of Q1 2015, up from 64.8 million in Q4 2014. On a year-over-year basis, auto loan accounts increased 8.4 percent from 60.9 million in Q1 2014.
Analysts added new account originations increased 8.3 percent year-over-year to 6.2 million in Q4 2014, up from 5.7 million in Q4 2013.
“Following a harsh winter that dampened economic activity in parts of the U.S., the demand for auto loans remained strong,” Laky said.
Laky also mentioned the youngest consumer group — those below age 30 — continued to experience average balance growth in Q1 2015.
The average auto loan balance for this group was $14,995, up 3.1 percent from $14,550 in Q1 2014.
The number of younger consumers with an auto loan balance also grew in Q1.
Nearly 900,000 more of these consumers had an auto loan than in Q1 2014, an 8.5 percent year-over-year increase.
Evidently, dealerships and finance companies aren’t just giving cars away to just any consumer who arrives on the lot and completes a vehicle installment contract application, inflating that “bubble” some observers continue to mention.
On Monday, Experian Automotive reported that the percentage of automotive loans that fell within the subprime and deep subprime risk categories made up 19.7 percent of the market in the first quarter, representing its lowest share since 2012.
According to the State of the Automotive Finance Market report for Q1 2015, subprime loans made up 16.2 percent of the market, while deep subprime loans captured 3.5 percent.
Experian defines subprime as individuals with VantageScore 3.0 credit scores between 501 and 600 and deep subprime consumers as coming in between 300 and 500.
“Over the last year, there has been a tremendous amount of conversation around the growth in subprime loans, and the concern over the automotive finance industry approaching a potential ‘bubble,’” said Melinda Zabritski, senior director of automotive finance for Experian.
“While it’s true that the volume of subprime loans is up, the same can be said for the rest of the risk categories. It’s important to keep in mind that, while we should continue to watch them, the percentage of subprime loans make up a small portion of the market,” Zabritski continued.
Findings from the report also showed that finance companies continued to grow their overall portfolios, as total outstanding balances for automotive loans reached a record-high $905 billion in the first quarter 2015, up 11.3 percent from a year ago.
Additionally, despite an increase in the numbers of loans put into play, analysts found that both 30- and 60-day delinquencies saw slight decreases in the first-quarter report. Experian said 30-day delinquencies were down 4.1 percent from a year ago, while 60-day delinquencies dropped 3.2 percent over the same time period.
“The current stability in the automotive loan market is a testament to consumers making timely payments on outstanding loans, which is evident in the improvement in delinquency rates,” Zabritski said.
“While the market is in a positive position right now, dealers and lenders will want to want to keep an eye on these data sets and use them for the good of their business, as the insights enable them to make better decisions in terms of loan terms and interest rates,” she went on to say.
At a state level, Experian noticed the highest delinquency rates occured primarily in the South, while the states with the lowest rates were typically found in the Midwest and Northwest.
|
30-day delinquencies
|
60-day delinquencies
|
|
Highest delinquencies
|
Lowest delinquencies
|
Highest delinquencies
|
Lowest delinquencies
|
|
Mississippi
|
3.1%
|
North Dakota
|
0.9%
|
Washington, D.C.
|
1.0%
|
South Dakota
|
0.2%
|
|
Washington, D.C.
|
2.9%
|
Oregon
|
1.0 %
|
Mississippi
|
0.9%
|
Oregon
|
0.2%
|
|
Louisiana
|
2.7%
|
South Dakota
|
1.0%
|
Louisiana
|
0.8%
|
Minnesota
|
0.3%
|
|
South Carolina
|
2.6%
|
Washington
|
1.1%
|
New Mexico
|
0.7%
|
Arkansas
|
0.3%
|
|
Alabama
|
2.6%
|
Minnesota
|
1.1%
|
Alabama
|
0.7%
|
Iowa
|
0.3%
|
Equifax is reporting two main indicators of auto finance market health — outstanding balances and severe delinquency rates — continue to move along steady upward courses.
According to analyst data available through March, outstanding balances on total auto loans and leases increased 9.9 percent year-over-year to $985.6 billion. Equifax also indicated the number of outstanding accounts as of March came in 6.6 percent higher than compared to a year ago, totaling 71.6 million.
Equifax highlighted the severe delinquency rate — contracts more than 60 days behind — stood at 0.96 percent in March, which is down 9.2 percent from a year ago. Similarly, Equifax mentioned write-offs declined 5.4 percent from March 2014 to 20.1 basis points of balances outstanding.
Slicing deeper into the subprime space, Equifax shared data with SubPrime Auto Finance News that showed 418,600 auto loans were originated in January to consumers with an Equifax Risk Score below 620. That monthly amount represented a 7.2-percent increase above the same month last year.
Those January subprime contracts have a corresponding total balance of $7.4 billion, according to Equifax. Analysts added that 21.1 percent of auto loans issued in January were associated with consumers with a subprime credit score, the same share as last year.
“When you start talking in the subprime space, it’s not so much about how the much the vehicle costs. It’s more about the affordability and the payment,” said Jennifer Reid, senior enterprise channel partner manager for automotive at Equifax
“I think we get really caught up in large numbers but for these folks, they’re looking at a payment. Doing what you can to help make that vehicle affordable in their month to month budget is much more relevant to those consumers than what the average loan balance is,” Reid continued during a conversation earlier this year at the Vehicle Finance Conference hosted by the American Financial Services Association.
“People so quickly forget, what was the alternative if you didn’t lend to subprime? The economy is so driven by the car and financial industry,” she went on to say. “Quite frankly, I think we have a massive success story just in the fact that consumers are getting loans. They’re getting lower interest rates. They’re getting better vehicles.
“With the evolution of risked based pricing and having those tools, folks are understanding what the risk is,” Reid added. “That’s one of the big stories is that it’s OK to take risk. You have to take risk. If we didn’t have delinquencies, we wouldn’t be buying the right loans. I think the case is, do I understand what that risk I’m taking and priced accordingly for it. Then it becomes a numbers game at that point.”
Rather than just attributing double-digit growth in unit and dollar volumes as well as the number of active dealers using its platform only to market conditions and the possibility some competitors pulled back during the first quarter, Credit Acceptance Corp. leadership applauded the efforts of its nationwide salesforce.
Credit Acceptance reported that unit and dollar volumes grew year-over-year by 28.4 percent and 32.5 percent, respectively, during the first quarter. The company’s number of active dealers climbed 18.5 percent, and average volume per active dealer moved 8.5 percent higher.
All of those increases pushed the number of financed contracts Credit Acceptance originated in the first quarter to 83,854, an amount coming from 5,996 dealerships.
Furthermore, 857 stores joined Credit Acceptance’s network in Q1.
“I'd like to think our salesforce is maturing and getting more productive,” Credit Acceptance chief executive officer Brett Roberts said. “Certainly the number of dealers that we enrolled, the new actives during the quarter was a sign of that. We can’t enroll a new active without a salesperson out in the field having some success. So it was nice to see that number.
“The other thing it’s nice to see is we are not losing as many dealers, and that’s not necessarily obvious from the release,” Roberts continued. “But if you look at the sequential increase in our active dealers and you compare that with historical quarters, you would see it was a very strong quarter from a dealer retention standpoint. We were happy to see that as well.
“I think we hear a lot of positive feedback about our program from the dealers that we are signing up,” he went on to say. “They are signing up for a reason, because they feel like we can help them. The fact that we signed up so many dealers this quarter is a positive sign there.”
The performance of Credit Acceptance’s representatives in the field helped to push the company to a Q1 consolidated net income figure of $71.5 million, or $3.41 per diluted share. Those figures are up from $49.8 million, or $2.12 per diluted share, in the year-ago quarter.
Management reported its Q1 adjusted net income, a non-GAAP financial measure, came in at $72.1 million, or $3.44 per diluted share, compared to $63.4 million, or $2.69 per diluted share, in the first quarter of last year.
Beyond the top-line numbers, investment analysts inquired several times during Credit Acceptance’s quarterly conference call about the company’s salesforce. Senior vice president and treasurer Doug Busk explained the company has about 265 employees in the sales area, 235 of which were salespeople, what the company calls market area managers. Busk indicated those levels haven’t changed much in the past couple of years.
So why is the group performing so well now?
“As Brett mentioned, we increased the salesforce pretty dramatically back in 2011 and 2012, not planning for any significant expansion of that sort in the near term. We will perhaps opportunistically increase it a little bit but nothing of the magnitude that we saw several years ago. In terms of turnover, it's something we are focused on, something that we attempt to, obviously, minimize,” Busk said.
“We are continuing to make sure we have the right compensation plans in place, provide the salespeople with the right tools to make them more effective. I'd say at this point it's just one of those things you are focused on in trying to build a healthy organization.” Busk went on to say.
Roberts also touched on what areas Credit Acceptance is enjoying the most success.
“I know that the markets we are most successful in grew faster than the markets where we have had less success,” Roberts said. “What I take from that is I think there is a little bit of momentum that develops in a market, that sometimes the first dealer that you sign up is the toughest in a market because nobody knows who you are and you can’t point to dealers in the area that have had success on your program. But then once you get a critical mass in a market and you have a lot of dealers using your program and enjoying success, it's sometimes easier to grow it from there.
“I think the performance by salesperson probably reflects that dynamic as well as the skill and experience and ability of the individual salespeople, which obviously varies as well,” he went on to say.
