Two well-known names are continuing to collaborate to operate within the subprime auto finance space.
On Tuesday, White Clarke Group announced that Exeter Finance has extended its contract for the CALMS Loan Origination Software.
The company first implemented its loan origination software with Exeter back in 2013 and has continued to grow and evolve to meet Exeter’s changing business model and objectives.
“The contract extension is recognition of the great business partnership we have with White Clarke Group and the quality of software and service they deliver. We are excited to grow our business in partnership with them,” Exeter Finance chief information officer Michele Rodgers said.
Nick Ockwell, chief operating officer at White Clarke Group added, “We are proud of our long-term partnership with Exeter Finance and their continued confidence in us to support their ongoing business objectives.”
GWC Warranty is quite bullish on the subprime auto finance space.
The provider of used-vehicle service contracts sold through dealers went so far as to say that it’s “primetime for subprime” in a recent blog post.
“Subprime deals bring with them a unique set of challenges,” GWC Warranty wrote in this online offering.
“Whether it’s finding reliable lending, getting an advance for back-end products or simply working the deal to get a monthly payment your customer will agree to, there are plenty of reasons to tread lightly,” the company continued. “But if you look closely, you’ll see that the time is right to strike it big in the subprime market.”
GWC Warranty drilled deeper into the reasons for its optimism.
—Consumer confidence is riding high: GWC Warranty recapped that several reports released recently show that overall consumer confidence in the United States is approaching high-water marks not seen in decades. The company pointed out that the Conference Board Consumer Confidence Index, the Present Situation Index and the Consumer Confidence Survey all returned results that are nearing peaks they haven’t reached in almost 20 years.
—Default rates are holding steady: GWC Warranty maintained that a good indicator of how subprime customers are faring is how default rates move throughout the year. “This year, even outside the automotive industry, default rates have remained in acceptable ranges as customers continue to stay current on their loans,” the company said. “For credit cards, cars and mortgages, default rates are right where many economists expect them to be for this time of year.”
—Availability of financing: GWC Warranty acknowledged some “big players” may have backed out of the subprime space in recent months. “But this could spell more opportunity for the dealers willing to seek it out,” the company said. “With big national names backing off this market, it opens the door for local and regional lenders who know the sub-prime market well and understand how to successfully navigate these deals. These lenders will understand the value of back-end products to keep a customer on the road and will give you fewer headaches over including room for such products on your subprime deals.”
—Availability of back-end products: Once dealers land reliable financing that understands the value of a vehicle service contract on a subprime deal, GWC Warranty insisted that it’s all about finding the right product. “Some lenders may have one in mind that they prefer, but if you’re seeking it out on your own, you’ll be quick to find reputable providers that can provide quality coverage on vehicles with starting mileage as high as 200,000 miles,” GWC Warranty said. “These providers who specialize in high-mileage inventory will have the products designed to fit your subprime audience.”
When reacting to this week’s trade announcement coming from the White House, one of Edmunds experts cautioned that, “Given that new-vehicle prices are already stretched to record highs, things could take an ugly turn for consumer wallets, especially considering the trend of continuously rising interest rates.”
Well, that ugliness Edmunds referenced might have arrived just a day later.
Edmunds reported that high interest rates continued to put pressure on new-vehicle sales in September. The annual percentage rate (APR) on new financed vehicles averaged 5.8 percent in September, compared to an average APR of 4.8 percent in September of last year and 4.1 percent five years ago.
Edmunds also noted that interest rates have stayed above 5 percent for eight months in a row, mirroring APRs that the industry witnessed prior to the recession.
Analysts noticed an increase in the average down payment for new vehicles, a steep drop in zero percent finance contracts and a contraction of terms as signs of tightening credit conditions for shoppers. In September:
● The average down payment for a new vehicle soared to $4,198, compared to $3,817 in September 2017 and $3,555 five years ago.
● The availability of zero percent finance loans dropped to 5.6 percent compared to 10.1 percent in September 2017, hitting the lowest September level since 2005.
● Average loan terms contracted to their lowest levels all year, dropping to 68.7 months in September, compared to 69.4 months in September 2017 and 65.5 months five years ago.
“The trickle-down effect of elevated interest rates really started hitting car shoppers in September,” said Jeremy Acevedo, Edmunds’ manager of industry analysis.
“While new-vehicle prices continue to rise, favorable credit offerings are growing increasingly more difficult to come by,” Acevedo continued. “Buying conditions are far less amenable for consumers than they were before, which might come as a shock for shoppers coming back to the market for the first time in a few years.”
Edmunds experts reiterated that that the Fed rate hike that went into effect toward the end of September is a harbinger of worsening market conditions heading into the fourth quarter.
“The higher Fed effective rate means we can expect to see interest rates continue to inch up as we head into the rest of the year,” Acevedo said. “While strong economic factors like low unemployment rates and high consumer confidence have helped sustain healthy sales levels so far amid less favorable conditions, cheap and easy credit is really what shoppers zero in on when purchasing a new vehicle.
“As credit offerings grow more rigid for consumers, automakers are facing increased pressure on new vehicle sales through the end of the year,” he added.
New-Car Finance Data
|
|
September 2018
|
September 2017
|
September 2013
|
|
Term
|
68.70
|
69.36
|
65.51
|
|
Monthly Payment
|
$537
|
$511
|
$467
|
|
Amount Financed
|
$31,062
|
$30,736
|
$27,081
|
|
APR
|
5.80
|
4.83
|
4.07
|
|
Down Payment
|
$4,198
|
$3,817
|
$3,555
|
Used-Car Finance Data
|
|
September 2018
|
September 2017
|
September 2013
|
|
Term
|
66.95
|
66.81
|
64.28
|
|
Monthly Payment
|
$401
|
$386
|
$366
|
|
Amount Financed
|
$21,697
|
$21,380
|
$19,470
|
|
APR
|
8.38
|
7.52
|
7.81
|
|
Down Payment
|
$2,657
|
$2,494
|
$2,161
|
When roughly 70 percent of its applications resulted in turn downs, Prestige Financial Services responded by taking a significant step toward using machines instead of human manpower to examine applications and finalize underwriting.
ZestFinance, a leading artificial intelligence (AI) software company that uses machine learning to vastly improve credit underwriting, recently announced a partnership with subprime auto finance company Prestige Financial Services to implement a fully explainable machine learning model to predict borrower risk.
Prestige replaced legacy scoring techniques with Zest Automated Machine Learning (ZAML) software, allowing the finance company to harness thousands of data variables and advanced math in its credit models.
The new models enabled Prestige to achieve a 36 percent increase in new applicants, resulting in a 14 percent higher approval rate. Within six months of deploying the AI-based credit underwriting model, Prestige doubled its origination volume without added portfolio risk.
At the time Prestige engaged ZestFinance, the company said it had raised its underwriting thresholds to the point where roughly seven out of 10 applicants were turned down for a retail installment contract. Applying machine learning enabled Prestige to rank-order risk more effectively across all types of borrowers, allowing Prestige to swap out risky borrowers and replace them with thin-file and new-to-credit consumers who were more creditworthy than a traditional credit score might suggest.
“We had considered using machine learning models in the past,” said Steven Warnick, chief credit and analytics officer at Prestige. “We knew they were better at predicting risk, but had concerns because we couldn’t explain them.
“ZestFinance not only helped us build better models of predictability, but also provided a read-out of the key factors that led to the credit model’s output, so we can fully comply with all regulatory requirements. That was the game changer,” Warnick continued.
The work with ZestFinance has allowed Prestige to achieve its original goal of approving more borrowers without taking on more risk. It’s also resulted in greater interest from independent dealerships across the country.
As a result of the initial success, Prestige is developing plans for other ways to automate and innovate in traditional auto financing.
“It’s been shown over time that AI-based underwriting can help financial service organizations better evaluate the creditworthiness of applicants, expanding credit options to applicants who might not otherwise qualify using traditional credit scoring,” ZestFinance founder and chief executive officer Douglas Merrill said.
“But the historic lack of explainability and model-risk management tools has made lenders reluctant to transition to machine learning technology. We’ve focused on building technologies that provide clear and comprehensive explanations for every underwriting decision,” Merrill went on to say.
The amount of outstanding deep subprime paper slid to an all time low during the second quarter, according to Experian’s State of the Automotive Finance Market report released on Thursday.
Analysts discovered deep subprime softened to an all-time low of 3.54 percent of the $1.149 trillion that Experian tabulated to be the total amount of outstanding auto-finance balances as of the close of Q2. A year ago, 3.98 percent of all outstanding balances fell into the deep subprime category.
To reiterate, Experian classifies deep subprime paper to be attached to consumers with credit scores between 300 and 500.
Overall, Experian determined that outstanding subprime and deep subprime auto financing — individuals with credit scores below 600 — declined to less than 19 percent of the market. As a result, the report showed average credit scores for new- and used-vehicle financing continue to improve, reaching 715 and 655, respectively.
“Having access to quality credit is something every consumer deserves, regardless of the type of financing used. As the cost of vehicles rises, lenders need to make sure they’re leveraging all available data so they can offer comprehensive financing options to all consumers,” said Melinda Zabritski, Experian’s senior director of automotive financial solutions.
“Consumers can also take steps to make sure they’re financially ready when looking to buy a car. We’re seeing the positive trend of on-time payments, which is just one step toward improving credit scores.”
Meanwhile, as contract amounts and monthly payments continue to reach new highs, Experian thinks that consumers seem unfazed since the percentage of 30- and 60-day delinquencies improved during Q2.
Report findings showed 30-day delinquencies dropped to 2.11 percent from 2.2 percent a year ago, while 60-day delinquencies dropped to 0.64 percent from 0.67 percent over the same time period.
“As we monitor the health of the automotive market, delinquencies are one of the most telling metrics. If this downward trend continues, it can be an encouraging sign,” Zabritski said.
“Moving forward, lenders will want to keep a close eye on car buyers’ payment performance. Understanding these trends and leveraging the power of data helps lenders make the right decisions when analyzing risk,” she continued.
But while delinquencies trend downward, affordability remains a point of industry interest, as the average amount financed continues to rise across the spectrum.
The average new-vehicle installment contract amount jumped more than $700 year-over-year to $30,958 in Q2, while used-vehicle installment contract figures increased $520 to reach $19,708.
Moreover, Experian pointed out that new- and used-vehicle monthly payments hit record highs during the quarter, with the average new monthly payment increasing $20 year-over-year to $525, and the average used monthly payment increasing $13 over the same time period, reaching $378.
Taking an even closer look at the data, Experian explained that finance companies can gain insights from the gap between new and used financing payments, which continues to widen, reaching $147 in the second quarter.
“For some consumers, that gap can mean the difference between buying a new or used vehicle,” Experian said.
The report also showed that consumers are increasingly looking to credit unions to secure automotive financing.
Credit unions saw double-digit growth for new-vehicle financing (12.9 percent) and strong growth overall (4.9 percent), closing in on 21.3 percent of the market at the end of Q2.
The only other provider type to experience growth was captive finance companies, which grew 1.2 percent during the same time period.
Experian mentioned five other additional findings from its latest report, including:
— Outstanding loan balances hit a record high but experienced slowing growth, reaching $1.149 trillion in Q2 2018, up from $1.027 trillion in Q2 2016.
— Leases decreased slightly year-over-year, from 30.83 percent in Q2 2017 to 30.41 percent in Q2 2018.
— 72 months remains the most common loan term for both new and used installment contracts.
— Market share for banks dropped to 31.6 percent in Q2 2018 from 32.3 percent in Q2 2017.
— Interest rates increased across all contract types, with the exception of used-vehicle deals in the deep-subprime segment.
Finance companies that use the defi SOLUTIONS platform now have additional tools to combat fraud.
PointPredictive, a leading provider of machine learning fraud and misrepresentation solutions, announced on Wednesday that its Auto Fraud Manager 2.0 and DealerTrace 2.0 solutions are immediately available for production use by all defi SOLUTIONS customers.
“PointPredictive is one of our newest and most innovative AI technology partners. We’re excited to offer our lenders seamless access to these forward-thinking fraud and misrepresentation solutions through the defi LOS platform,” said Stephanie Alsbrooks, chief executive officer of defi SOLUTIONS. “This is yet another great example of the power of community.”
PointPredictive offers a suite of artificial intelligence (AI) predictive scoring solutions that can identify the presence of material misrepresentation and fraud within auto financing applications and dealer processes. The company insisted this predictive technology has been shown to streamline real-time auto financing decisions, while reducing finance company losses by 50 percent or more in fraud and first and early payment defaults due to material misrepresentation.
The defi SOLUTIONS platform of services can offer finance companies the flexibility and freedom to leverage leading-edge technologies to optimize decisioning efforts.
Officials added defi SOLUTIONS’ auto finance customers have been invited to participate in a limited-time, no-risk, production pilot of these two PointPredictive solutions.
“This initial offering through our partnership with defi SOLUTIONS allows us to deliver a real-time, actionable fraud and misrepresentation score for each auto loan application from nearly 100 auto lenders processing through defi SOLUTIONS — the fastest growing auto origination platform in the U.S.,” PointPredictive chief executive officer Tim Grace said.
“Our research indicates that fraud and misrepresentation in the auto lending industry is a $6 billion annual problem,” Grace continued. “We are excited to be able to help all defi SOLUTIONS customers make a substantial dent in their portion of that number.”
Grace went on to reiterate that defi SOLUTIONS customers will have real-time access to Auto Fraud Manager 2.0 and DealerTrace 2.0, that can increase fraud detection by leveraging enhanced predictive algorithms that evaluate the entire loan application, as well as recent activity from dealers. This strategy can enable finance companies to screen for, and detect, all types of fraud, including identity, employment, income, collateral and dealer risk.
In numerous customer evaluations, PointPredictive insisted that Auto Fraud Manager consistently identified more than 50 percent of fraud, first payment defaults and misrepresentation-related early payment defaults within the riskiest 7 to 10 percent of all applications, when rank-ordered by the Auto Fraud Manager score.
For further information on receiving Auto Fraud Manager through defi LOS, contact PointPredictive at [email protected] or Patty Jefferson at [email protected].
The market fundamentals in non-prime are signaling positive. A strong economy and low unemployment are contributing to stabilization in consumer credit scores. Auto defaults are at the lowest point with one full quarter of improvements under the belt.
There continue to be new auto bond issuances, and the spreads on these lowest-rated of these securities are tightening. Competition in the secondary market for non-prime portfolios is high, thanks to the portfolio quality of the underlying assets holding up.
By many measures beyond just these, the non-prime market is showing signs of a change in trend from bear to bull. Whereas private equity (PE) interest was ice cold, things are starting to thaw. Now PE wants back in. But, why now, and why do they want back in?
Let’s take a walk down memory lane
Competition for deals amongst private equity firms for unsecured lending opportunities for the past few years has grown more and more intense. In the prior market cycle just following the Great Recession, Private Equity had excess un-deployed capital that was intended for residential real estate. They pivoted their focus to high-yield, non-prime auto loans.
But, private equity returns in non-prime auto weren’t there. And, the exit wasn’t there either. So, they took their lumps and pivoted again, this time to unsecured assets like financing elective surgery and jewelry purchases. They also pivoted their focus to fintech, placing bets on disruption, and that big banks will adopt this tech. To private equity, fintech offers an exit path more like that of the subprime bureaus, where each major bureau has acquired at least one of these “big data / alternative bureau” providers.
The private equity bets on unsecured, and fintech have been good ones. So, why do they want back in on auto?
This time it will be different
The disruptive nature of fintech is the reason is why. Fintech is completely restructuring how consumers and auto finance companies engage. Fintech has commoditized the application process, the process to evaluate risk, and how customers are serviced. Whereas in the prior market cycle, PE would take equity position in a “soup to nuts” non-prime operations, now they are focusing more on the assets and balance sheet financing. The value of the traditional auto finance company has been morphed from one that has a superior scorecard, or collection process, PE knows that Fintech has largely outsourced and commoditized what were strategic assets. Why build your own custom loan origination or loan servicing system when myriad outsourced options exist? And, why re-invent the wheel? One must look no further than what Uber did to the value of a NY Taxi medallion, and you will see what they are seeing.
The “Amazonification” of financial services businesses is what fintech is all about.
Let’s hear it directly from the source
And who better to hear it from than from the PE folks themselves? Some recent conversations with PE firms and the investment bankers that work directly with them provide us some valuable insight as to why this next cycle will be different. It will be different because of their shift to unsecured options for higher yield (as a suitable replacement to auto), but more importantly due to Fintech disruption. What constitutes itself as an asset of a financial services company is different than just a few years ago. Heck, what comprises what we now call a financial services company is different than a few years back.
Let’s look at the top three themes from these conversations:
1. Balance sheet
PE interest is squarely on the balance sheet and resulting deal structures will continue to show it. Larger PE firms are looking to be a senior secured lender, with capital deployments north of $40 million — directly into collateral.
Loan originators that could use more balance sheet to originate more can benefit from PE investment. And, they can also be effective as a capital bridge to securitizations — as discussed before, a very healthy and stable market.
2. Fintech
Fintech firms trade on a multiple of revenues, while finance companies trade on a multiple of earnings. And, a good fintech solution done right can provide value to small finance companies and big banks, which provides a lot of click revenue. So, this is just a case of investing money into something that will return more money.
Not to be discounted is the actual value of the fintech being created and made available to the non-prime finance community. Take for example a small, regional finance company that just 10 years ago would be operating on spreadsheets and a small IT footprint. That same company can operate in a cost-efficient, cloud-based environment, and utilize AI-based solutions that root out fraud, improve credit selection, drive behavioral scoring — all on subscription or a per-click basis.
3. Confidence in outsourced servicers
Without confidence in outsourced servicers, PE would not be diving back into the non-prime asset class. The market for secondary whole loan trades has been hot and is not cooling down thanks to increasing interest from PE investors. And, that confidence is bolstered by a few key points:
• Outsourced servicers are complex; many are servicers of their own debt that rent out their additional capacity, and the result is a more stable place to park your portfolio
• Outsourced incentives are changing; we are hearing more and more about servicers putting “skin” in the game and taking compensation that is tied to targets shared with the portfolio owner
• What makes an outsourced servicer is less about geography, and more about supplementing specific skill sets, and this is providing cost savings while improving portfolio performance
• Outsourced servicers can deploy technology, training, and analytics in ways that benefit multiple companies in much the same way that Fintech can disrupt
• A more sympathetic Consumer Financial Protection Bureau changes the outlook as well
The PE firms interviewed agreed that their confidence in outsourced servicers is an enabler to giving them the confidence to get more aggressive on deploying their capital into auto assets and knowing that the results will be on target.
The democratization of auto finance
The retail car sales process is not what it used to be. You can find your car online and pick it up from a vending machine. Or, you can use your car as a taxi. Or, you can subscribe to a car service. Or, you can just rent a bike or a scooter. It is no longer about “car ownership.” It’s about mobility. The disruption of the retail car model and the democratization of mobility is in full swing.
The democratization of auto finance is just getting started. And increased PE interest has a track record of begetting more PE interest. Last time around, PE took some lumps along with the finance companies that they invested in. There were no winners. This time around the game board is set up a bit differently. Finance companies will win this time around if they can effectively utilize PE capital in its updated format. Fintech companies will continue to win, as the early cloud-based, and big-data companies already have. Finally, outsourced servicers will win by becoming a more mainstream and standard option that will see increasing demand as more and more PE firms choose to engage them.
Joel Kennedy is a director with Spinnaker Consulting Group. He has a passion for growing and improving auto finance ecosystem. He has more than 23 years of experience helping big banks down to start-up finance companies to build, grow, improve, and repeat. He can be reached at (240) 308-2169 or [email protected].
Embellishing “stips” to enhance the figures sent to finance company underwriting departments landed a quartet of dealerships in trouble with a top federal regulator.
This week, the Federal Trade Commission charged a group of four dealers operating in Arizona and New Mexico, near the border of the Navajo Nation, with a range of illegal activities, including falsifying consumers’ income and down payment information on vehicle financing applications and misrepresenting important financial terms in vehicle advertisements.
Officials pointed out this development is the FTC’s first action alleging income falsification by dealers.
The complaint also names the dealerships’ owner and manager, Richard Berry, as a defendant; and owner and president, Linda Tate, as a relief defendant.
According to the complaint, since at least 2014, Tate’s Auto has sought to increase its sales by falsifying consumers’ monthly income and down payments on financing applications and contracts submitted to third-party financing companies. The four dealerships named in the complaint are Tate’s Auto Center of Winslow, Tate’s Automotive, Tate Ford-Lincoln-Mercury and Tate’s Auto Center of Gallup.
The FTC charges that, during the sales process, Tate’s Auto asked consumers to provide personal information — including their name, address and monthly income — and told consumers they would submit the information to financing companies. According to the complaint, however, instead of using consumers’ actual information, in many cases Tate’s Auto falsely inflated the numbers, making it appear that consumers had higher monthly incomes than they really did.
Tate’s Auto often inflated the amount of a consumer’s down payment as well, according to the complaint.
The complaint also alleges that Tate’s Auto representatives often prevented consumers from reviewing the income and down payment information on the forms, such as by rushing consumers through the process of reviewing and signing the financing applications, having consumers fill out the forms over the phone and failing to give them the income and down payment portion of the application before they signed.
In other cases, the FTC said Tate’s Auto allegedly altered financing documents after consumers signed them, without their knowledge. Such consumers, the FTC alleges, often were approved for financing based on the false information Tate’s Auto provided.
As a result, financing companies extended credit to consumers who defaulted at a higher rate than qualified buyers. Many of the affected consumers are members of the Navajo Nation, according to the FTC.
The complaint also alleges that Tate’s Auto’s advertising deceived consumers about the nature and terms of financing or leasing offers. For example, Tate’s Auto allegedly advertised discounts and incentives to consumers without adequately disclosing limitations or restrictions that would prevent many customers from qualifying for them.
Finally, the FTC alleges that Tate’s Auto’s social media ads violated federal law by failing to disclose required terms.
The complaint charges Tate’s Auto with violating the FTC Act, the Truth in Lending Act (TILA) and the Consumer Leasing Act (CLA). The FTC is seeking an injunction barring the defendants from such practices in the future.
According to the FTC, acting as owner of the four dealerships, Barry formulated, directed, controlled, had the authority to control, or participated in Tate’s Auto’s allegedly illegal conduct.
The FTC charged that Tate has received hundreds of thousands of dollars from the other defendants, including funds directly connected to the alleged unlawful conduct.
The commission vote authorizing the staff to file the complaint was 5-0. The complaint was filed in the U.S. District Court for the District of Arizona.
“Buying a car is one of the biggest purchases consumers make. When consumers tell an auto dealer how much they make and how much they can pay upfront, the dealer can’t turn those facts into fiction,” said Andrew Smith, director of the FTC’s Bureau of Consumer Protection.
“The FTC expects auto dealers to be honest with consumers from the first advertisement to the final purchase,” Smith added.
The FTC reiterated that it files a complaint when it has “reason to believe” that the law has been or is being violated and it appears to the regulator that a proceeding is in the public interest. The case will be decided by the court.
GrooveCar Direct announced 17 new credit union partners have joined its online vehicle shopping and financing program during the second quarter.
Coming aboard the program in Q2 were institutions from 12 different states, serving 137,305 members, including:
— AAA Federal Credit Union, South Bend, Ind., with assets of $64 million serving 6,905 members
— Allegheny Health Services Employees Federal Credit Union, Pittsburgh, with assets of $13.1 million serving 3,647 members
— Bessemer System Federal Credit Union, Greenville, Pa., with assets of $38.1 million serving 4,467 members
— Central Communications Credit Union, Independence, Mo., with assets of $50 million serving 5,998 members
— Central Jersey Federal Credit Union, Woodbridge, N.J., with assets of $75 million serving 7,783 members
— Chief Financial Federal Credit Union, Rochester Hills, Mich., with assets of $154 million serving 26,478 members
— Complex Community Federal Credit Union, Odessa, Texas, with assets of $495 million serving 38,233 members
— CS Credit Union, Catawba, N.C., with assets of $31 million serving 2,855 members
— Department of Public Safety Federal Credit Union, Oklahoma City, with assets of 26.3 million serving 2,718 members
— G.A.P. Federal Credit Union, Johnstown, Pa., with assets of $46 million serving 5,163 members
— Kingsport Press Credit Union; Kingsport, Tenn., with assets of $69 million serving 6,641 members
— McIntosh Chemical Federal Credit Union, McIntosh, Ala., with assets of $24 million serving 2,425 members
— Michigan Columbus Federal Credit Union, Livonia, Mich., with assets of $46 million serving 4,281 members
— None Suffer Lack Federal Credit Union, Suitland, Md., with assets of $23 million serving 2,989 members
— Tri-Valley Service Federal Credit Union, Pittsburgh, with assets of $15.9 million serving 4,166 members
— Upper Cumberland Federal Credit Union, Crossville, Tenn., with assets of $64 million serving 7,486 members
— West Texas Credit Union, Odessa, Texas, with assets of $57.2 million serving 5,060 members
As members continue to perform daily tasks from the palm of their hand while on their phones or in front of their computers, GrooveCar Direct insisted that credit unions find the online buying program a perfect complement to meet members’ needs.
The GrooveCar Direct program can deliver five activities online vehicle shoppers are conducting, including:
— Researching prices
— Locating vehicles listed for sale
— Comparison shopping of different models
— Trade-in values
— Locating a dealer
Other means of lead generation the platform can include:
— Shoppers saving their searches
— Applying for financing online
— Finance calculator
— Free Carfax reports
— Installment contract refinancing
— Accessing credit union promotions
— Preferred dealer network price specials
“We recognize that a one-size-fits-all car shopping platform to engage their members is not what our credit union partners need or what they want. Our success is due to the engagement strategy built into the program, along with it being highly customizable,” said Robert O’Hara, vice president of strategic alliances at GrooveCar Direct.
“Credit unions are provided with a suite of services and features that meet a member’s demands while providing continuous support that our partners appreciate in a turn-key program,” O’Hara continued. “These programs include marketing and sales webinars on trending topics, branding assistance, marketing collateral, video and email marketing campaigns and consulting.”
Equifax auto finance leader Lou Loquasto pictures an industry landscape where finance companies rank dealerships based on risk and potential profitability, just like they do consumers as applications arrive in the underwriting department.
By extrapolating the knowledge gleaned through static pool analysis, Loquasto explained how dealerships and finance companies still can capture potential business in the subprime space as the current cycle backs off the growth pattern seen for several years.
The latest data Equifax shared with SubPrime Auto Finance News showed 1.37 million retail installment contracts were originated through March to consumers with a VantageScore 3.0 credit score below 620; deals generally considered to be subprime accounts. The figure represented a 7.3-percent decrease year-over-year.
“Does that mean every dealership subprime is down 5 to 10 percent? Without looking at the data and knowing what we know about the business, probably not,” Loquasto shared during a recent phone conversation. “That would be pretty remarkable if you look at 30,000 dealerships, and they’re all down 5 to 10 percent.
“We see dealers that are up in subprime and some that are down 25 percent,” he continued.
So how are some stores moving on an upward trajectory in subprime? Loquasto explained that finance companies need analytics platforms to determine which dealers are a better fit for their book of business and provide the right amount of risk for their appetite. Equifax recently analyzed TradeSight metrics evaluating a series of dealers with a focus on subprime accounts in the 560 to 580 credit range.
The chart below shows two dealerships with side-by-side comparisons that look at a handful of credit performance criteria, such as delinquency rates, average APR and length of months on the book.
According to the data below, dealer A shows a higher propensity for customers with 30-plus and 60-plus delinquencies, as well as charge offs. However, dealer A also represents clientele with higher APR rates. Based on this data from platforms such as TradeSight, Loquasto pointed out that finance companies can best analyze which contracts and dealers make up the best opportunity for their book of business based on a number of credit performance and risk assessment data.
“The difference in profitability of those two scenarios is dramatic,” he said.
| Item |
Dealer A |
Dealer B |
| Charge-off and Repo at Month 14 |
3.80% |
3.60% |
| Charge-off and Repo at Month 22 |
12.00% |
5.20% |
| 30 Days Delinquent at Month 18 |
36% |
11% |
| 60-Plus Days Delinquent at Month 18 |
18% |
8.20% |
| Average APR |
12.70% |
9.50% |
“Some dealerships where the performance is worse than you would expect and worse compared to their peers, some of those dealerships are down a lot in subprime. You say that makes sense. Lenders spotted something with that dealership, and so they’re pulling back and tightening up,” Loquasto said.
“But we see dealerships that are down in subprime, but the performance in their static pool is much better than other dealerships within the same credit band,” he continued. “We would look for lenders to review data, identify dealers like that and be a little more aggressive with that dealership. They might say, ‘This might be a deal I would normally turn down, but this dealer’s performance is so good that we’re going to give them the benefit of the doubt.’”
Loquasto acknowledged that sometimes dealerships have a negative reputation when it comes to subprime originations so finance companies simply tighten up underwriting across the board when they feel a market shift. He suggested that finance companies take a deeper analysis before just cutting.
“Our industry is so sophisticated right now, especially in subprime, that if a lender was looking at 1,000 loan applicants, they would scrutinize those 1,000 loan applicants with sophisticated scores and data with people who have great experience choosing good borrowers from bad borrowers, and they’ll be able to rank order the least riskiest to the most riskiest, and they do an awesome job,” Loquasto said.
“But they don’t do that with dealers so well,” he continued. “They don’t look at these 1,000 dealers and do a sophisticated analysis using all of the available data and sophisticated scorecards not only for the business they book, but the business their competitors book. And then have a sophistical ranked order list at the dealer level.
“That’s something we’ve been advocating for a long time,” Loquasto went on to say. “As a long as I’ve been in the business, more than 20 years, there are pools of dealers that help you with market share, which is fine. But what we’re advocating is dealer pools to rank order risk at the dealership level.”
Not just in subprime, Equifax data also showed a general slowdown in auto financing.
Again through March, Equifax said 5.82 million auto loans, totaling $130.6 billion, were originated, representing a 2.0-percent decrease in accounts and a 0.1-percent decline in balances year-over-year from this time last year.
Through March, Equifax found that 23.5 percent of auto loans were issued to consumers with a subprime credit score, and they accounted for 18.5 percent of origination balances.
Equifax went on to mention the average origination amount for all contracts came in at $22,693, a 3.5-percent rise. The average subprime contact amount stood at $18,033, according to Equifax, which added that figure marked a 2.7-percent lift year-over-year.
“Where we are in the cycle, there isn’t as much profitability out there for lenders. That’s why we’re talking about strategies like this so they can squeeze out every bit of profitability they can,” Loquasto said.
“Three, four, five years ago when profitability was high, maybe lenders weren’t as diligent about squeezing out every dollar of profit. But now they are,” he continued. “If we’re in the seventh inning of this cycle and lenders can get into the good habit of doing a better job rank ordering dealer risk then as soon as the cycle turns like we know it will and we get back into growth, they’ll have built in these good habits.
“Just like every customer has to be looked at differently and the industry does a great job of that, every dealer can’t be looked at the same,” Loquasto went on to say.
