Even as TransUnion noted that auto finance origination volume appears to be losing a little steam, the Federal Reserve Bank of New York’s Household Debt and Credit Report released on Wednesday showed how the balances consumers are absorbing for their vehicles helped to push total consumer debt above the highest level ever recorded.
The report indicated that total household debt reached $12.73 trillion in the first quarter, surpassing the peak of $12.68 trillion reached during the recession in 2008.
“Almost nine years later, household debt has finally exceeded its 2008 peak but the debt and its borrowers look quite different today. This record debt level is neither a reason to celebrate nor a cause for alarm. But it does provide an opportune moment to consider debt performance,” said Donghoon Lee, research officer at the New York Fed.
“While most delinquency flows have improved markedly since the Great Recession and remain low overall, there are divergent trends among debt types,” Lee continued. “Auto loan and credit card delinquency flows are now trending upwards, and those for student loans remain stubbornly high.”
TransUnion put the latest delinquency rate at 1.30 percent, up from 1.16 percent in Q1 of last year, driven in part by poorer payment performance in the subprime and near-prime segments.
The New York Fed noted that the outstanding auto finance balance stood at $1.17 trillion, up by $96 billion compared to the first quarter of last year and $10 billion higher on a sequential basis.
However, Brian Landau, senior vice president for financial services and automotive business leader for TransUnion, didn’t make any projections about the auto finance industry approaching $2 trillion any time soon during a phone conversation with SubPrime Auto Finance News. After TransUnion’s Industry Insights Report offered clear evidence that auto finance originations are slowing, especially in the subprime space, Landau mentioned that he’s been answering lots of questions filled with ominous tones.
“I don’t think we feel like the sky is falling. In other conversations I’ve had with other reporters, that’s what they think. But I think and many of us at (TransUnion) think this is just a reset of the market,” Landau said.
The credit bureau’s report, powered by Prama analytics, indicated that auto finance originations, viewed one quarter in arrears, declined to 6.66 million to end 2016, down 0.2 percent relative to fourth quarter of 2015. This movement marks the second consecutive quarter in which total originations were down year-over-year.
Analysts found that subprime originations posted the steepest decline in originations, dropping by 5 percent.
“You have to take things in the proper context. We’ve had seven consecutive years of growth,” Landau said. “We have not witnessed that probably since the dawn of the auto industry. A lot of that was due is there was a great buildup of pent-up demand stemming from the financial crisis.
“You’re seeing right now that the industry is resetting and recalibrating to account for the slight uptick in subprime and near-prime delinquencies,” he continued.
In a separate blog post, Lee described how analysts are reviewing the financial crisis from a different perspective in light of what the recent data is showing.
“The Great Recession led to a household borrowing situation in America that was very different from what we’d seen historically, but in 2007 when the financial crisis began to unfold, there was much less data available to economists on the state of household balance sheets,” Lee wrote.
“With better information now, we will continue to share new developments and analysis in the area of household debt,” he continued.
And the team over at TransUnion is watching the credit world closely, too, especially in the auto finance space, where Landau considered what strategy providers could leverage as part of a pullback in originations.
“One of the levers that can pull immediately is a pullback on extended terms,” Landau said. “We’ve seen terms on average ticking up over the last several years; 84 months was never something you heard about in the normal state of auto lending. Now, it’s becoming more of a common term used.
“Another lever is asking customers to put down a higher down payment on their vehicle purchase. That would improve loan-to-value ratios going forward,” he went on to say.
S&P Global Ratings recently considered what two specific areas contain the most risk since loosening underwriting resulted in U.S. auto loans and leases rising steadily over the past several years to reach all-time highs in 2016.
With more than $1 trillion in outstanding balances, S&P Global Ratings acknowledged the figure has raised questions about whether the growth will ultimately lead to significant asset quality deterioration and increased depreciation on leases, as well as which finance companies will bear the impact. The firm considered those questions and more in recent article titled, “How Worsening Auto Finance Conditions Could Affect Banks, Nonbank Finance Companies, and Captive Finance Companies.”
Adding to analysts’ concerns are subprime auto delinquencies climbing recently while used-vehicle prices have somewhat declined.
“We believe the greatest areas of market and credit risks are leasing and nonprime —including subprime —lending, respectively, and the financial institutions with significant concentrations in those areas, or in auto finance in general, are at risk of declining earnings or even bottom-line losses,” said S&P Global Ratings credit analyst Brendan Browne.
S&P Global Ratings reminded the industry that the financial institutions the firm rates includes captive auto finance companies owned by manufacturers given that they hold the lion's share of leases. Because of their contract exposure, the firm also mentioned that its recent analysis includes two nonbank auto finance companies — DriveTime Automotive Group and Credit Acceptance — as well as a handful of banks, most notably Santander Holdings USA and Ally Financial.
"If used-car prices continue to fall, the captives likely will have to report higher depreciation expenses on their leases, and non-prime lenders will have lower recoveries on defaulted loans,” Browne said. “A further increase in delinquencies and losses on loans would affect lenders. We could lower our ratings on companies in auto finance if these trends were severe enough.”
With regard to the used-vehicle prices, the Manheim Used Vehicle Value Index came in at 124.7 in April, which was up 1.6 percent year-over-year. According to a report accompanying the index, wholesale prices climbed 0.5 percent from March on a mix-, mileage- and seasonally adjusted basis.
In an analysis accompanying the index, Cox Automotive chief economist Tom Webb downplayed the concern many analysts have expressed about used-car price declines.
“Although the Manheim Used Vehicle Value Index increased for the first time this year on a month-over-month basis, used-vehicle values have not collapsed the way many analysts have warned of for more than a year due to expected increases in wholesale supplies,” Webb said. “And in fact, what weakness we have seen is probably more a result of excessive new-vehicle inventory, not used.”
Meanwhile, TransUnion reported the auto finance delinquency rate increased from 1.16 percent in Q1 2016 to 1.30 percent in Q1 2017, driven by poorer payment performance in the subprime and near prime segments.
“Serious auto loan delinquency rates are approaching levels not seen since the recession, but it’s important to understand that delinquencies in the auto market never elevated to levels observed for other key credit products such as credit cards and mortgages,” said Brian Landau, senior vice president for financial services and automotive business leader for TransUnion.
“Regardless, with flatter sales volumes and higher delinquencies, we anticipate lenders will evaluate their credit policies for subprime and near prime borrowers to calibrate for the uptick in delinquencies,” Landau continued.
S&P Global Ratings indicated a few factors that provide some protection against ratings downgrades include support from parents (as in the case of the captives and Santander), diversification outside of auto (for most banks), and ratings that already factor in an expectation of high losses on auto loans (as in the case of the nonbank finance companies).
“Still, we view worsening conditions in auto finance as a negative rating factor for all of these companies,” S&P Global Ratings said.
The S&P Global Ratings report is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.com.
Staff writer Joe Overby contributed to this report.
The National Automotive Finance Association is organizing the 21st annual Non-Prime Auto Financing Conference with the same mandate organization leadership has held for more than two decades.
“This is the industry event where all the non-prime auto financing company executives gather for information on the most relevant issues affecting non-prime financing, where vendors servicing the industry gather and where 21 years of networking continues,” NAF Association executive director Jack Tracey said in a message to SubPrime Auto Finance News.
“It’s exciting to see how this conference over the past 21 years has grown in prominence,” Tracey continued. “It’s where everyone comes. Nonprime auto financing leaders attend the conference because they know they’ll see the rest of the industry there.
“We strive each year to pull together a conference program that addresses issues facing nonprime auto industry and to provide education and solutions on the problems confronting the industry,” he went on to say. “Our objective is to have everyone go home with a least one good idea for improving their business.”
This year’s event, which carries the theme, “Optimizing NonPrime Performance,” is scheduled to run from May 31 through June 2. The event again is to unfold in Plano, Texas, but at a new facility — the Hilton Dallas/Plano Granite Park.
Some of the conference sessions includes the release of the 2017 Non-Prime Auto Financing Survey as well as a discussion about how finance companies can raise capital. Another segment has the title, “CFPB in Their Own Words.”
Among some of the notable conference speakers scheduled to appear are:
â– Rep. Jeb Hensarling, a Texas Republican and chairman of U.S. House Financial Services Committee
â– Tom Webb, retiring chief economist at Cox Automotive
â– Amy Martin, senior director of the structured finance ratings group at Standard & Poor’s
Complete registration details for the 21st annual Non-Prime Auto Financing Conference can be found at www.nafassociation.com.
PointPredictive recently announced the general availability of an enhanced version of DealerTrace, a comprehensive consortium-based analytic solution designed to provide auto finance companies with a dealer-level, holistic view of fraud and early payment default risk.
The firm explained this solution can allow most finance companies to detect dealer fraud up to six months earlier than currently possible with existing tools.
“Dealer fraud is an industry-level problem that affects all auto lenders,” said Frank McKenna, chief fraud strategist at PointPredictive.
“The enhanced DealerTrace service uses the power of the Auto Fraud Consortium to provide all participating lenders with unique cross-industry insights that allow them to identify their riskiest dealers and then take proactive and appropriate action to improve their overall loan portfolio quality,” McKenna continued in a news release.
Participating DealerTrace finance companies contribute their loan-level application information to the Auto Fraud Consortium on a monthly basis and provide information about fraudulent or early payment default loans as it becomes available. PointPredictive analyzes and combines information on a dealer-by-dealer basis across the consortium and provides each participating DealerTrace lender with a rank-ordered list of its highest risk dealers every month.
A finance company may also register for enhanced alerting to be notified when information about one of its dealers is provided by another DealerTrace finance company.
PointPredictive highlighted that DealerTrace can leverage the underlying pattern-recognition technology of the fraud and early payment default detection analytics of Auto Fraud Manager to create dealer-centric risk assessments based on finance company-reported application and outcome data.
Fuzzy-matching techniques are used to recognize the same dealer — perhaps operating under different names or with slightly different demographic characteristics — across multiple participating finance companies. This process can allow DealerTrace to form a cross-lender consortium-level view of each dealer’s risk characteristics that is beyond what any individual dealer could do on its own.
The strategy also can enable participating finance companies to benchmark their book of loans with a dealer against the consortium’s view of that dealer. PointPredictive insisted this benchmarking can be useful to detect instances where a dealer may be routing its riskier loans to certain finance companies.
“We are excited to release this updated and improved version of DealerTrace as the second solution offering for our Auto Fraud Consortium members,” said Tim Grace, chief executive officer of PointPredictive.
“By pooling data at an industry level, PointPredictive helps lenders aggregate their fraud knowledge, identify new fraud patterns more quickly, and collaborate to reduce fraud losses throughout the auto lending lifecycle,” Grace went on to say.
To learn more about DealerTrace or the Auto Fraud Consortium, contact PointPredictive at [email protected].
Financial technology and lending decisions are built on data. Lenders can buy data in the form of reports, statistics and bits of information about consumers and their buying habits from hundreds of companies and accumulate mountains of their own new data from every portfolio and process.
Employing certain practical ideas, lenders can get the most bang for their data buck and gain insight that can translate to real advantages.
Better data from exceptions
In almost any type of lending, better data starts within the lending business itself. Every lender has processes that create really valuable data. But for most lenders, valuable data leaks out of their processes throughout a loan’s life. That’s not hard to fix and it’s not expensive — it just requires a commitment to maintaining a rock-solid data foundation.
If you ask your rich uncle for a loan, maybe there aren’t many rules. Even so, your uncle probably wants to know how you’re going to repay the loan. Because your uncle likes you, he might give you the loan if your answer isn’t great. Rich uncles can do that. Lenders should definitely not do that and they mostly believe that they don’t. In reality, they do and they do it often. Manager overrides, manual exceptions, and virtually every other subjective decision when making a loan are almost always bad ideas and they muddy some of the most critical data a lender can acquire.
Override gains offset by defaults
Evaluation of numerous portfolios purchased and sold (by the analyst team at Newport Capital Fund, a hedge fund that specializes in acquiring and disposing portfolios of distressed loans) showed a consistent result – portfolios almost never get a true and sustainable lift in profitability from policy exceptions or manual overrides. In the short term, a statistical wash can happen, but that’s about as good as it gets. A few extra good performers gleaned with an override are almost always offset by extra defaults. Lenders usually lose money on exceptions. Despite all that, there are indeed profitable ways to use exceptions.
Exceptions and overrides are fundamental components of the evolution of credit policies. They clearly indicate policy mutations. When lenders manage exceptions strategically, they quickly make those that cause losses extinct and just as quickly promote truly profitable policy exceptions to real business rules.
A decision to override a policy rule is always supported by a reason, usually based on experience. A typical scenario: “Teachers from Portland who buy Priuses always pay, so let’s approve this one even though we require two years of residence history and this borrower only has 18 months.” That choice to bypass a business rule is informed by experiential data from the manager’s head. If it is the right call, it would be more useful as part of standing policy and implemented in the loan origination system.
Do better
The key is to do better than simply storing that knowledge as “Override — Other” in the loan origination system. Profitable lending policy evolution isn’t a natural process — it requires some basic genetic engineering.
It starts with as robust a set of exception reasons as possible — in an automated loan origination system or even in a spreadsheet if that’s where the underwriting happens. That list is never too long. Not everything can be anticipated, so it’s okay to use “Other” with one critical caveat: “Other” must have immediate review and the conditions that made it “Other” need to become lending policy going forward.
To achieve maximum data effectiveness, lenders must always be paring down their exception reason list. In a perfect data world, there would be none. All exception and override logic simply must be included in standard policy rules. True statistical validity, and thus, optimal portfolio performance, cannot be achieved if the rules allow and the data contains poorly documented or subjective decisions, even if they comprise a small set. When every lending decision uses all the data and logic available, with ongoing monitoring and quick adaptation, optimal lending policy evolves and the potential for profitability grows exponentially.
Mark Gleason is sales director at defi SOLUTIONS. This commentary originally appeared on the company’s website here. The company can be reached at (800) 926-6750 or [email protected].
Alternative credit information provider FactorTrust announced earlier this week the addition of United Auto Credit to its growing number of clients enlisting alternative credit data to help qualify and evaluate risk in their underwriting process.
Executives explained trends in the non-prime automotive segment have financial service providers seeking ways to identify and interact with underbanked and non-prime consumers through new data sources.
With FactorTrust’s database of more than 250 million unique loan transaction records, United Auto Credit, the California-based, non-prime automotive financial service provider who serves dealers and their customers across the U.S., now has a more holistic view of non-prime consumers and their ability to repay loans.
The unique credit data attributes FactorTrust has accumulated throughout the past 10 years is largely unavailable via traditional sources.
“FactorTrust’s proprietary data of non-prime consumers—specifically our loan performance data—is proven to be more predictive than the Big 3 bureaus; because our data isn’t reported to the Big 3, it’s new data to the market,” FactorTrust chief executive officer Greg Rable said .
"This alternative credit data speaks to today’s sophisticated financial service providers who need new, unique data sources to make faster and more accurate decisions about their customers and gives them products and pricing that they deserve," Rable continued in a news release. “Depending solely on Big 3 bureau data and traditional credit scores is just not keeping up with the current competitive landscape in lending."
United Auto Credit chief executive officer Jim Vagim added, “The inclusion of FactorTrust’s alternative credit data into our cutting-edge technology will help us achieve our mission of providing more credit options and excellent customer service to consumers within our common-sense lending strategy.
“The FactorTrust data study helped us understand how we can mitigate losses and approve more creditworthy consumers, allowing us to better serve our network of independent and franchised dealers,” Vagim went on to say.
For automotive financial service providers wanting to know more about the uses of alternative credit data in their credit strategy, FactorTrust said it will conduct a secure data study at no cost. Connect with FactorTrust at www.FactorTrust.com or (866) 910-8497.
RouteOne announced on Thursday that defi SOLUTIONS is now an eContracting certified loan origination system (LOS) with RouteOne. The companies highlighted that finance sources utilizing defi’s LOS now can benefit from a streamlined eContracting implementation process.
The companies noted that defi SOLUTIONS is certified by RouteOne as an LOS that has fulfilled the requirements for the base eContracting functionality on the RouteOne system. They indicated certification of an LOS can help ensure that the technical implementation for finance sources customers who choose eContracting is a fast and easy process.
The firms went on to mention defi SOLUTIONS certification enables its ability to easily begin enabling eContracting functionality with RouteOne for its rapidly growing finance source base.
RouteOne is one of the industry leaders in eContracting, booking more than 7.5 million eContracts to date. Currently, RouteOne has more than 6,000 active eContracting dealers and 35 finance sources that have implemented eContracting.
“The demand for eContracting is growing from both the dealer and finance source ends of the market,” RouteOne chief executive officer Justin Oesterle said. “RouteOne is committed to eliminate any hurdles our customers could be experiencing and streamline the process for on-boarding so they can enjoy the benefits of eContracting.
“This certification accomplishes that by making it easier for finance sources to implement the technology, which as a result drives dealer adoption when more and more of their finance sources are available to eContract with,” Oesterle continued.
Stephanie Alsbrooks, the CEO at defi SOLUTIONS added, “Services that give our lenders the ability to do business as they choose is the foundation on which we’ve built our business. “defi’s integration with RouteOne’s eContracting will simplify our lender’s processes, increasing their efficiency and giving them the opportunity to save time and achieve more.”
Finance sources interested in eContracting should contact a RouteOne finance source account manager at (866) 768-8301 or www.routeone.com/salesteam.
On Thursday, Equifax announced the global launch of a portfolio of analytics tools dubbed Equifax Ignite that’s available now in the U.S., Canada and the U.K., and coming to Australia in the fall.
The company explained that Equifax Ignite challenges what it classified as the traditional “one size fits all approach” with an innovative suite of solutions that provides fast, configurable and actionable data to solve clients’ most critical challenges and help drive their growth strategies. Offering insights through three distinct delivery channels, Equifax said this “tailored for you” approach was designed with various key users in mind — from marketing senior executives to data scientists.
The driving force behind Equifax Ignite is the company’s established insights through powerful data and analytics solutions that can help propel critical business decisions. Officials said Equifax Ignite embodies the company’s deep expertise in big data, specialized risk, fraud and marketing analytics, as well as its vast portfolio of directly sourced, directly measured data from the credit, finance and telecommunications industries.
Equifax Ignite can deliver deep insights through an extensive data portfolio including trended data, risk scoring models and the linking and keying of disparate sets of data.
“Harnessing the power of big data poses a tremendous challenge for businesses,” said Trey Loughran, chief marketing officer at Equifax. “Whether it’s providing the latest in data visualization through an app or access to our differentiated data, advanced analytical tools and technology, Equifax Ignite brings data to life and helps drive businesses forward by helping the end user become a data-driven organization.”
As an example, the company explained that with Equifax Ignite, a bank could leverage key insights to help assess risk at various decision points relevant to their unique goals. From more accurately targeting and screening new customers through market intelligence and alternative data, to creating risk models and monitoring risk scores over time, the user is able to access the vast array of insights available, using leading-edge analytic techniques.
“Equifax Ignite redefines access to data and speed to market,” said Prasanna Dhore, chief data and analytics officer at Equifax. “There is a paradigm shift happening: the market needs more tailored data solutions that don’t take months to deliver.
“Generic models aren’t relevant to many businesses’ needs, and custom models and diagnostics simply take too long,” Dhore continued. “Equifax Ignite meets market demand through a frictionless process that reduces building, testing and deployment from months to days.”
The Equifax data and advanced analytics is funneled into three delivery channels: Equifax Ignite Models and Scores, Equifax Ignite Direct and Equifax Ignite Marketplace.
• Equifax Ignite Models and Scores: Configurable scores that offer the power of a custom solution with the speed and ease of an off-the-shelf product. The Equifax Ignite portfolio of configurable scores can help businesses enhance customer acquisition, risk segmentation and decisioning, and improve customer relationships.
• Equifax Ignite Direct: Created as a self-serve platform, this high-speed solution can allow users to create analytics using direct access to data, attributes and analytical tools. Seamless integration enables teams to build, test and deploy models that suit their unique needs.
• Equifax Ignite Marketplace: A virtual destination for all of the Equifax analytical applications (apps) available for download. The apps will be leveraged for visualizing and digesting data, benchmarks and trends across industries including insurance, banking and telecommunications.
For more information about Equifax Ignite, visit Equifax.com/EquifaxIgnite.
Perhaps it’s not yet a significant risk threat to the overall health of auto finance company portfolios, but Experian Automotive’s Melinda Zabritski explained the possible problems if your customers are using the vehicle attached to the installment contract to drive for transportation services such as Uber.
Why?
Currently, Zabritski said, there is not a clear way to track which units are being used for those purposes and which are not.
To put into perspective the potential quandary, Zabritski pointed out that finance company underwriting scorecards often consider that the customer will roll up 20,000 miles or much less on the vehicle during each year of the contract.
When SubPrime Auto Finance News returned from Used Car Week in Las Vegas last year, the Uber driver who provided transportation from Raleigh-Durham International Airport said he put more than 100,000 miles on his SUV in roughly 12 months.
So how do finance companies determine if the contract holder is driving the vehicle that much, especially for services like Uber?
“It’s been talked about, but right now there’s not a good way to measure it,” said Zabritski, who is the senior director of automotive finance at Experian. “There are only a few states that require the registration as a livery service or taxi, in which case you could measure it from a vehicle standpoint. Like through an Experian AutoCheck report for vehicles, it would show up as a taxi.
“Not all states require that so lenders look at it and say, ‘Well, how can I look at it?’ You could look at employment, but just because I work for Uber doesn’t mean I’m a driver. There’s just no hard and fast way to do that,” Zabritski continued during a conversation following a panel discussion about the subprime market at this year’s Vehicle Finance Conference hosted by the American Financial Services Association.
“It’s one of those things that it could be a potential risk since these cars are on the road significantly more than your average consumer,” she went on to say. “There’s more chance they could be in an accident, more wear and tear. As a lender, if I have to go repo this car, I think it’s got 40,000 miles on it and it’s really got 90,000. There’s that kind of potential impact.”
Uber’s online newsroom doesn’t list any specifics about how many drivers currently are in its network. However, Uber’s website highlighted it has drivers in nearly 250 North American cities, including major metro areas such as Chicago, New York and San Francisco as well as broadly classified regions such as Eastern North Carolina and Eastern Washington.
“Lenders will certainly use mileage when they’re doing pricing on originations. But also when they’re forecasting reserves, there’s a lot more analytics being put into place in those portfolios,” Zabritski said.
“In forecasting delinquency, there’s a lot about quality of the vehicle, the value if they do have to repo it and what the asset might be worth and what is the vehicle history since that can impact asset value. It’s those types of things that all get formulated in all of the planning,” she continued.
“And right now (with Uber), it’s a big unknown,” Zabritski added.
Concern about Uber driver income
Not only might risk come from collateral deterioration, finance companies also might not have clear views of how dependent an Uber driver might be on the income generated through the service to maintain payments. In fact, the income Uber drivers might generate triggered actions by the Federal Trade Commission in January.
Uber agreed to pay $20 million to resolve FTC charges that it misled prospective drivers with exaggerated earning claims and claims about financing through its Vehicle Solutions Program. Officials said the $20 million will be used to provide refunds to affected drivers across the country.
“Many consumers sign up to drive for Uber, but they shouldn’t be taken for a ride about their earnings potential or the cost of financing a car through Uber,” Jessica Rich said following one of her last actions as director of the FTC’s Bureau of Consumer Protection. Rich departed the agency on Feb. 10.
“This settlement will put millions of dollars back in Uber drivers’ pockets,” Rich added.
According to the FTC’s complaint, in its efforts to attract prospective drivers, Uber exaggerated the yearly and hourly income drivers could make in certain cities, and misled prospective drivers about the terms of its vehicle financing options.
The FTC alleges that Uber claimed on its website that uberX drivers’ annual median income was more than $90,000 in New York and more than $74,000 in San Francisco. The FTC alleges, however, that drivers’ annual median income was actually $61,000 in New York and $53,000 in San Francisco.
In all, the FTC determined less than 10 percent of all drivers in those cities earned the yearly income Uber touted. The FTC also alleged that Uber made high hourly earnings claims in job listings, including on Craigslist, but that the typical Uber driver failed to earn those advertised hourly amounts in various cities.
The complaint also alleged that Uber claimed its Vehicle Solutions Program would provide drivers with the “best financing options available,” regardless of the driver’s credit history, and told consumers they could “own a car for as little as $20/day” ($140/week) or lease a car with “payments as low as $17 per day” ($119/week), and “starting at $119/week.”
Despite Uber’s claims, from at least late 2013 through April 2015, the median weekly purchase and lease payments exceeded $160 and $200, respectively, the FTC alleges.
Officials went on to say Uber failed to control or monitor the terms and conditions of the auto financing agreements through its program and in fact, its drivers received worse rates on average than consumers with similar credit scores typically would obtain, according to the FTC’s complaint. In addition, the FTC said Uber claimed its drivers could receive leases with unlimited mileage through its program when in fact, the leases came with mileage limits.
In addition to imposing a $20 million judgment against Uber, the stipulated order prohibits the company from misrepresenting drivers’ earnings and auto finance and lease terms. The order also bars Uber from making false, misleading, or unsubstantiated representations about drivers’ income; programs offering or advertising vehicles or vehicle financing or leasing; and the terms and conditions of any vehicle financing or leasing.
The latest TransUnion Industry Insights Report found that 80 million consumers held a vehicle lease or retail installment contract as of the close of 2016. Analysts determined the figure marked the highest level TransUnion has observed since at least the third quarter of 2009, as approximately 4.3 million additional consumers last year took out what can be clearly classified as vehicle financing.
However, SubPrime Auto Finance News asked TransUnion’s Jason Laky to consider whether the funds consumers are using to acquire a vehicle are coming from other sources such as personal loans, which reached a new milestone at the conclusion of 2016 with total balances topping $100 billion for the first time ever.
Laky is senior vice president and automotive and consumer lending business leader for TransUnion, so his jurisdiction is both the auto finance and personal loan markets. Laky approached this difficult question by first explaining the primary reasons personal loans exist.
“For the prime or better consumers, the biggest use of the personal loan but not the only one is debt consolidation,” Laky said. “A lot of lenders are promoting to use a personal loan to pay off credit cards or other high interest loans you have at a lower interest rate and a predictable monthly payment that an installment gives.
“The second use that’s more prevalent in the non-prime and subprime areas where consumers don’t have as much financial security, those loans tend to be used for more immediate needs, whether it’s large repairs or a bridge loan for some education, something like that. The loan sizes are a little smaller and the use tends to be much more utilitarian,” he continued.
Laky explained that TransUnion’s data cannot shed specific light on what purpose consumers use personal loans; if they are in fact the monies used by a consumer to make the necessary down payment for an auto finance company to complete underwriting of the contract. But Laky also acknowledged there has been rumblings of this practice happening more often.
“One thing we’ve certainly started to pay attention to is we have heard it mentioned out the marketplace this idea of using the personal loan to make the down payment or to cover negative equity,” Laky said. “We don’t see in the TransUnion credit file the actual use of the personal loan. We don’t know where the funds go, but it’s certainly a possibility.
“We’ve heard a couple of lenders mention that it may be going on out there. It’s certainly something we may go ahead and look at studying,” he continued. “From a lender’s perspective, I’m sure that whenever you have a consumer that takes out a personal loan in order to cover some gap in the auto financing, it’s probably a flag that’s a higher risk consumer than maybe you think.”
The amount of risk finance companies, banks and credit unions are already holding in the auto finance market still is growing significantly. TransUnion reported total auto financing balances climbed to $1.11 trillion at the close of 2016. Analysts indicated the total balance grew 8.3 percent during 2016, slower than the average growth rate of 11.0 percent between 2013 and 2015.
The average vehicle financing balance per consumer also rose slightly to $18,391, up from $18,004 in Q4 2015.
“For the second consecutive quarter, total auto balances had a year-over-year growth rate below 10 percent, reflecting the slower growth that we are seeing in new car sales,” Laky said in a news release from TransUnion.
“In the third quarter, auto originations declined year-over-year for the first time in six years,” he continued. “Prime plus and super prime originations continued to grow in Q3 2016, indicating lenders are beginning to shift their focus away from the riskiest segments, where we’ve seen strong competition among lenders that has put pressure on risk adjusted margins.”
TransUnion determined that originations declined 0.8 percent to 7.46 million in Q3 2016, down from 7.52 million in Q3 2015. Subprime originations experienced the largest decline (down by 3.2 percent), and prime plus (up 1.8 percent) and super prime (up 1.7 percent) originations grew in the third quarter of 2016.
Analysts went on to mention the auto delinquency rate reached 1.44 percent to close 2016, a 13.4-percent increase from 1.27 percent rate in Q4 2015. They added auto delinquency is at its highest level since the Q4 2009 reading of 1.59 percent.
More details about personal loans
As mentioned previously, TransUnion’s Industry Insights Report confirmed personal loans reached a new milestone at the end of last year with total balances topping $100 billion for the first time ever. While younger consumers have played a major role in the growth of these lending products, analysts found that, contrary to popular belief, mature borrowers are leading the charge on these loans.
TransUnion added that total personal loan balances grew $14 billion between year-end 2015 and year-end 2016, reaching $102 billion. The number of consumers with a personal loan continued to climb steadily and ended 2016 at the highest level since at least Q3 2009. In Q4 2016, 15.82 million consumers had a personal loan.
TransUnion noted baby boomers comprised 32.8 percent of all consumers with a personal loan when 2016 ended, followed by Gen X (31.6 percent) and millennials (26.6 percent). In Q4 2013, millennials were just 23.5 percent of personal loan users, but their share has grown over the past three years to reach 26.6 percent at the end of 2016.
“There is a perception that personal loan growth has been driven by younger consumers, but our data clearly indicate that these loans are appealing to older borrowers,” Laky said in the same release. “We believe some of this growth is occurring because interest rates may be lower than other type of loans for certain baby boomer segments.”
Analysts went on to mention the personal loan delinquency rate was 3.83 percent in Q4 2016, the highest Q4 reading since Q4 2013 and up from 3.62 percent in Q4 2015. Originations, viewed one quarter in arrears, declined for the second consecutive quarter. Originations dropped 5.7% from 3.75 million in Q3 2015 to 3.54 million in Q3 2016.
“We’ve observed a decline in non-prime lending that we attribute to mid-year FinTech funding challenges and regulatory uncertainty in advance of the election,” Laky said. “We believe that the personal loan market is stabilizing, and have seen balances grow across risk tiers through the end of the year.”
