Alternative credit information provider FactorTrust recently added National Auto Lenders as a new customer to enhance the auto finance company’s underwriting process.
Both FactorTrust and NAL insisted non-prime auto financing has seen a steady increase in recent years due to growth in the number of non-prime customers, a willingness to take on more risk and a general lowering of contract interest rates. As the market segment has grown, so has the competition.
FactorTrust chief executive officer Greg Rable also emphasized that today’s finance companies have a need for faster decisions, new data sources and automation in order to best manage credit quality. Rable believes FactorTrust’s non-prime credit risk and consumer data, and risk models can helps those institutions stay competitive.
“It’s imperative for lenders to be able to utilize information that provides them with a better understanding of who their consumers are,” Rable said. “There is a massively underserved population of underbanked consumers that, when taking alternative credit data into account, deserve credit options.
“With our tools, NAL can access unique, proprietary data and auto finance risk scores on non-prime consumers not available to them elsewhere and not reported to the Big 3 bureaus,” he continued. “This more accurately evaluates a borrower’s credit risk, helping lenders better understand a consumer’s ability to repay while maintaining a pricing advantage.”
FactorTrust’s data shows that the 113 million U.S. consumers with FICO credit scores below 700 today indeed are striving for a better financial standing. The provider thinks these consumers should be recognized as CreditClimbers — individuals determined to improve credit scores in order to advance their situation and access more credit options.
Every time a CreditClimber does something positive, they deserve to improve their credit score, according to Rable.
“We’ve seen people improve their credit scores — at every scoring level — by having alternative credit data factored in during the underwriting process. More data is better for both the consumer and the lender.”
FactorTrust’s real-time database of more than 200 million loan transactions can provide finance companies with a holistic view of underbanked consumers’ creditworthiness and ability to repay credit offerings. Though all institutions, including banks, can benefit from FactorTrust’s data, the provider says it is especially valuable in the auto industry.
“Our mission at NAL is to provide fast and flexible financing for hard-working people who may have less than perfect credit. Through the additional data provided by FactorTrust, our underwriters can better judge a consumer’s ability to repay so that they can approve more deals and the consumer can realize their dreams of owning an automobile,” said Ozzie Ramos, president and CEO of NAL who recently was named this year’s Subprime Auto Finance Executive of the Year.
For more information on FactorTrust, visit www.FactorTrust.com or call (866) 910-8497.
With subprime paper representing only about 16 percent of the total outstanding auto finance balance figure TransUnion reported for the third quarter, the bureau’s top industry analyst indicated that’s not too much lower-end paper currently in portfolios.
“Overall, it’s probably a good thing,” Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion, said about the latest subprime balance figure that grew by 11.4 percent year-over-year.
“The reason I say that is we’re in the sixth, almost seventh, year of economic expansion,” Laky continued during a conversation with SubPrime Auto Finance News after TransUnion’s Q3 2016 Industry Insights Report powered by Prama analytics. “As long as we’re in an economic expansion, the longer that goes, the more confident I think lenders feel in lending to subprime and non-prime consumers, so I think you would expect that growth.
“Again, the further you get into an economic cycle, the more people are going to have net gains in employment,” he went on to say. “We saw 161,000 net new jobs last month, with many of those people coming back into the workforce and may have been unemployed for a period of time or are relatively new to credit. As people are getting employed, it’s naturally creating this demand in subprime and non-prime and lenders are there to meet that demand.”
Balances are higher as now almost 80 million consumers hold some kind of auto financing — a Q3 metric Laky noted as being about 6 percent higher than a year earlier. However as the leaders of both Consumer Portfolio Services and Credit Acceptance noted when they reported their third-quarter results, there is a bit of turbulence that finance companies are facing.
“If there is a tightening — and the reason I say if — from a consumer market prospective, we’re still seeing good growth of consumers getting autos,” Laky said. “From a tightening perspective you’re seeing individual lenders maybe tightening their policies or reducing or being more careful in how they’re participating in the market. There’s a tremendous amount of competition out there. What we’ve seen is the competition for most risk tiers is driving down interest rates or APRs, how they’re being compensated for the risk they’re taking. It’s harder to get at.
“But at the same time, we’re starting to see the beginnings of a higher cost of funds for lenders,” he continued. “The Fed talks about raising rates a little bit. Some of the investor concerns around the fintechs in the second quarter of the year may have just flowed through to auto lenders, particularly independent auto lenders that might have had a higher cost of funds.
“Those two things together can probably just squeeze margins enough that are causing some lenders to really think about where they want to play a little more carefully,” Laky went on to say.
And if finance companies choose to be a little less aggressive, Laky explained the two most likely strategic moves they can make.
“From a lender’s perspective, the two levers that are probably the easiest or most straightforward to pull are credit scores — changing FICO cutoffs is a quick way to manage the credit side of the risk — and the other lever is on the asset side usually with the loan-to-value ratio. That’s another good lever you can pull pretty quickly as a lender,” Laky said. “You can reduce your caps on LTVs or your score cuts relatively easily.
“Nowadays, a lender with any sophistication, things are so engrained — policies and scores and LTVs — that simply changing one isn’t always an option. There’s a lot of thought that usually goes into either expanding the buy or contracting them,” he added.
SubPrime Auto Finance News closed its conversation with Laky by asking about what TransUnion will be watching in 2017 in order to spot significant change or continued patterns of origination growth that’s been noticed for several consecutive quarters.
“From an auto lender’s perspective, we’re going to look a three areas,” Laky said. “First is we’re always going to keep a look on credit quality. We look to see not just how credit is growing across traditional tiers, but the characteristics of the consumers within those tiers and how they’re changing. I feel that’s our responsibility as TransUnion to help our lenders keep an eye on that overall.
“Second is used-car values,” he continued. “We’re a long time into a strong used-car market. There’s a lot of talk about off-lease vehicles increasing over the next couple of years. We certainly see it in the credit file so we’ll keep an eye on that.
“Third, I would keep an eye on funding costs,” Laky went on to say. “The Fed talks about raising rates. While it might only be a little bit, it does flow through to the cost of funds and can certainly challenge margins for lenders. As long as the economy is strong and the Fed is raising rates because of a strong economy, I think that’s the least of the things to worry about.”
TransUnion’s complete Q3 report can be viewed here.
PointPredictive, a provider of machine learning fraud solutions, recently announced the results of a new study that detected high levels of fraud in early payment auto finance contract defaults.
The firm explained its study encompassed data from millions of auto finance applications submitted by dealers all over the U.S. across all vehicle types. PointPredictive auto fraud models analyzed each application and gave it a fraud score.
While built to detect fraud, PointPredictive said its scientists were surprised to find that it did extraordinarily well in the detection of early payment default, a term finance companies use to indicate when contracts default within the first six months.
The study found that by scoring auto finance applications with models built to detect fraud, finance companies could detect 50 percent or more of their early payment default (EPD) prior to funding than if they relied on traditional credit scores alone.
“Our analysis and experience suggest that many auto loans that default within the first six months have fraudulent misrepresentation on the loan application,” PointPredictive chief executive officer Tim Grace said.
“When we ran fraud pattern recognition models on the application information provided on EPD loans, we found strong evidence of fraud,” Grace continued. “This is the same type of behavior mortgage lenders discovered prior to the mortgage crisis when it was determined that up to 70 percent of mortgage EPD was fraud related.
“The study confirms that using credit scores alone cannot detect fraud or risk of default,” he went on to say.
The PointPredictive analysis proved that fraud scoring could:
• Detect 14 times more fraud for finance than current solutions while flagging less than 5 percent of the total applications.
• Prevent 50 percent or more of a finance company’s early payment default losses by identifying those applications that had misrepresentations that would lead to loss.
• Identify risky dealers that submit multiple fraud applications up to three months sooner and reduce losses due by 70 percent due to early detection of bad players.
In 2007, a study by BasePoint Analytics found that between 30 and 70 percent of mortgage loans that defaulted within the first six months contained serious misrepresentations on the original application. These misrepresentations on borrowers’ income, employment, collateral or even intent to occupy had a material impact on the performance of the loan but were often considered “hidden fraud” since they were never detected in the application process.
PointPredictive insisted that auto financing fraud, like mortgage fraud, occurs when information on an auto finance application is intentionally misrepresented either by the borrower, a sophisticated fraud ring, or an unscrupulous dealer.
When information is manipulated and the finance company does not know about it, PointPredictive noted that institutions may underwrite the application assuming the information is valid. Intentional fraud presents a problem for auto finance companies since loans that have misrepresentation are more likely to result in EPD.
To counter auto finance fraud and better detect EPD, PointPredictive Auto Fraud Manager uses pattern recognition, a technique that scientists have perfected to detect fraud based on historical data mining. The solution works by analyzing historical patterns of fraud, EPD and risky dealer activity and then scores each application as it comes in from a dealer.
Finance companies are automatically alerted when an individual application has a significant number of anomalies or fraud patterns related to the income, employment, collateral, borrower or dealer. The lender can review the application and take action before it is approved. Over time, if a particular dealer submits many applications with similar fraud patterns, the solution will alert the lender to that as well so they can take the appropriate action.
The full results of the study have been published in the PointPredictive whitepaper titled “You Can’t Fight Fraud with Credit Risk Tools,” which is available at no charge by emailing [email protected].
This week, FactorTrust announced the hiring of Paul Bunting as chief information officer as the company accelerates its efforts around analytics and product development.
The company indicated Bunting will oversee all IT and infrastructure, security, analytics and product development efforts at FactorTrust.
Bunting brings more than 20 years of experience in the financial services industry, including banking, risk, fraud and public records. He worked for Equifax for nearly 10 years, fulfilling various roles within the credit reporting agency, including vice president of international data and analytics during which he focused on developing credit products for the underbanked.
In his most recent role, Bunting served as business development leader for Cignifi, a big data platform that develops credit risk and marketing analytics through the use of mobile phone data. While working for the company, Bunting created an abundant sales pipeline through assembling and repackaging the company’s proprietary analytical tools, models and data management technology with a focus on expanding products that promote financial inclusion for underbanked and near-prime consumers.
Additionally, Bunting founded Pretrieve, a public record search engine company, in 2003. The company was so successful, it was sold in two parts to Acxiom and Intelius just two years later.
“Paul is an accomplished executive who is well-versed not only in IT, but also data, analytics, product development and operations,” FactorTrust chief executive officer Greg Rable said. “Additionally, Paul’s expertise on underbanked consumers makes him the ideal candidate for leading our offerings for Credit Climbers, consumers with credit scores below 700 making a concerted effort to improve their financial standing.”
This week, FactorTrust finalized the integration of its database with risk analytics and decision solutions provider Provenir in an effort to offer Provenir’s clients exposure to a greater pool of creditworthy borrowers.
“Combining FactorTrust’s ability to accurately mine and score underbanked consumers with Provenir’s automated end-to-end risk analytics and decisioning platform provides lenders with an even quicker and more accurate and robust lending solution,” FactorTrust chief executive officer Greg Rable said.
FactorTrust’s real-time database of more than 200 million loan transactions is geared to provide finance companies with a holistic view of underbanked consumers’ creditworthiness and ability to repay loans. Though all institutions, including banks, benefit from FactorTrust’s data, it is especially valuable in the consumer lending, auto and rent-to-own industries.
“Our clients are frequently looking for reliable and accurate data sources as an alternative to traditional bureau, which integrate into the lending process simply,” said Paul Thomas, Provenir’s global head of sales and marketing. “By developing a relationship with FactorTrust, we’re providing a value-add for our clients which not only cuts down on the time associated with underwriting, but is also cost-efficient to implement.”
Both S&P Global Ratings and the American Bankers Association spotted rises in auto finance delinquencies in their recent reports, but Cox Automotive chief economist Tom Webb insisted this week that the “overall financing environment remains extremely favorable.”
According to results from the ABA’s second-quarter Consumer Credit Delinquency Bulletin, both of its categories of auto financing registered slight year-over-year upticks. ABA reported direct auto loan delinquencies — contracts arranged directly through a bank — edged 1 basis point higher in Q2 from 0.81 percent to 0.82 percent.
Meanwhile, ABA noted Q2 indirect auto loan delinquencies — financing arranged through a third party such as a dealer — moved up from 1.45 percent to 1.56 percent.
And S&P Global Ratings carved out its look strictly at subprime paper and noticed the 60-plus-day delinquency rate ticked up to 4.85 percent in August 2016 from 4.74 percent in July and 4.14 percent in August of last year. Analysts acknowledged subprime delinquencies remain below the highest level, which was recorded in August 2009 at 5.19 percent.
Webb also considered where wholesale prices currently stand when evaluating how delinquencies might be impacting auto financing activity.
“There have been some lenders who have pulled back as a necessity because they became overly aggressive and they started to see it in their portfolio performance. However, there have been other players who have come in,” Webb said during his quarterly conference call. “From the dealer standpoint, the availability of financing is not an issue at all.
“From the lender standpoint, although delinquencies are ticking up a little bit, they’re not overly alarming,” he continued. “There have been some significant increases for some lenders in terms of their severity of loss. But I would suggest that would not be because of used-vehicle values but because of their loan-to-value ratio going in.”
Looking back at the ABA bulletin, the composite ratio — which tracks delinquencies in eight closed-end installment loan categories — fell 3 basis points to 1.35 percent of all accounts — a record low. This reading also marked the third year that delinquency rates were below the 15-year average of 2.21 percent.
The ABA report defines a delinquency as a late payment that is 30 days or more overdue.
“Consumers have become more confident over the past two years and for good reason — their financial picture is improving and their paychecks have finally started to rise as we near full-employment levels,” ABA chief economist James Chessen said. “Quarter after quarter, consumers continue to build a stronger balance sheet as they earn more, save more and keep debt levels low relative to income.”
So if Chessen is correct, auto finance companies might be leveraging a strategy Webb described. After all, Equifax recently reported that newly opened auto loans and installment contracts year-to-date through June and reported to Equifax as of August represented a rise of 3.5 percent versus the same period a year ago.
“Going forward, you assume that wholesale values are going to deteriorate a least a little bit. To use the same loan-to-value ratio, you’re putting more risk on your books because your loan-to-value ratio is based on current values whereas your repo might occur 16 to 18 months later,” Webb said.
“I think they have to incorporate that and I wouldn’t be surprised if everyone tries to get a little more up-front money in the deal. I think it would be better for everyone,” he went on to say.
Along with adjustments of its top management, White Clarke Group announced on Tuesday that Five Arrows Principal Investments — the corporate private equity business of Rothschild & Co. — made what is being described as a “significant equity investment” in the global provider of specialist technology and software solutions to the automotive, asset and consumer finance markets.
Having invested substantially in its CALMS product range during the last few years, White Clarke Group highlighted that it has achieved “considerable” growth globally and has now reached a point where the business will benefit from greater scale to meet growing customer demand.
Officials highlighted Five Arrows Principal Investments will leverage its capabilities to support White Clarke Group in its transition into the next stage of growth. Five Arrows Principal Investments has a focus on supporting software and technology platforms with recurring revenue streams underpinned by high customer satisfaction and retention rates.
As part of the transaction, White Clarke Group has announced that Brendan Gleeson, currently executive vice president of the group, will take on the role of chief executive officer. Ed White, currently president and chief executive officer of the group, will transition into the role of chairman.
“Five Arrows Principal Investments’ confidence in White Clarke Group and its CALMS product is a significant endorsement of our strategy and the way we have transformed the business over the last five years. The Rothschild & Co. partnership will give us the platform we need to achieve the next phase of our growth strategy and help scale the business,” Gleeson said.
“I very much look forward to working with the leadership team to ensure White Clarke Group achieves its considerable potential,” he continued. “We will continue to invest in our people, our product and our customers to ensure this happens.”
Meanwhile, White touched on what it means that the company is elevating Gleeson to his new post as this “significant” equity investment arrives.
“With a strong executive leadership team and Brendan’s passion for this business, White Clarke Group is well-positioned to move to the next stage of its growth trajectory,” White said. “I believe Five Arrows Principal Investments will be an ideal shareholder. Under their stewardship, the legacy of my late business partner, Dara Clarke, and myself — which bears both our names — will be protected and our business can move from strength to strength.
“I am very proud of what the people in our organization have achieved and grateful for our customers’ continued faith in us,” White went on to say.
When Equifax looked at its most recent auto finance data, analysts considered the trend that finance companies might be tightening their underwriting a bit.
Still based on the August Equifax National Consumer Credit Trends Report, analysts noticed what they called “healthy growth” in originations. Equifax indicated that newly opened auto loans and installment contracts year-to-date through June and reported to Equifax as of August represented a rise of 3.5 percent versus the same period a year ago.
Analysts noted that balances on new originations grew 5.5 percent. Perhaps what triggered the tightening thought, they added that the share of financing originated to borrowers with an Equifax Risk Score of less than 620 — generally considered to be subprime accounts — fell 0.6 percent versus the first six months of 2015.
“Lenders in general have been very risk averse since the Great Recession, with more and more using all the tools available to accurately rate and price the risks they are taking and to sensibly decide which ones they don’t want to take,” said Amy Crews Cutts, chief economist at Equifax.
“Lending in the subprime segment can be done well and to the mutual benefit of consumers and lenders, provided the whole credit-collateral-capacity picture of the loan is healthy. In recent months there has been a shift in the share of new loans going to higher-credit quality borrowers, possibly indicating tightening of lending standards,” Crews Cutts continued.
Equifax indicated performance of the auto finance market is holding steady at very low levels.
As of August, the severe delinquency rate (defined as share of balances that are 60 days or more past due) stood at 1.05 percent, which is a slight increase of 7 basis points over August of last year.
The write-off rate is at 21.2 basis points, which is an increase of 1.8 basis points year-over-year.
Delinquencies, including seasonal variations, have stayed tightly within the range of 0.8 percent to 1.25 percent since March of 2013 while write-off rates have varied between 18.2 and 23.0 basis points.
“The market is starting to see slowing demand, which means lenders will have to contend with increased competition for consumer loans which will drive a need for increased market intelligence to properly identify and mitigate risk in this environment,” said Lou Loquasto, vice president at Equifax, who will be one of the experts on hand for the SubPrime Forum during Used Car Week at the Red Rock Resort and Casino in Las Vegas on Nov. 14-18.
Equifax insisted that consumer credit data is the most accurate way to assess a consumer’s financial health and a useful tool in assessing current performance of the auto lending industry. In line with this assessment and in response to the need for enhanced market intelligence in the auto lending environment, Equifax plans to announce details around its new auto finance market intelligence platform later this week.
Other highlights from the report include:
—As of August, auto finance portfolio balances are growing at a higher rate year-over-year for banks than finance companies (10.6 percent and 6.8 percent respectively). Year-over-year growth rates in the number of auto accounts are slightly lower for finance companies (4.9 percent) than banks (7.0 percent).
—In August auto leasing showed signs of growth for both banks and finance companies, with a 14.1 percent and 16.1 percent year-over-year increase, respectively.
—Year-over-year consumers are spending more on the vehicles they are purchasing. The average origination amount for all auto contracts issued in June was $21,392. This figure marked a 3.5 percent increase over June of last year.
XpressCredit — a provider of a web-based, indirect lending platform for independent dealerships —recently entered into an agreement with NADA Used Car Guide to accelerate the used vehicle sale and loan approval process.
Executives explained the integration of NADA Used Car Guide's values into XpressCredit's BookOut product to its dealer and finance company subscribers is designed to enhance the sale process, ultimately benefiting the customer. With the NADA Used Car Guide values enhancement, BookOut can allow dealers to save and obtain used valuations and transmit vehicle valuations to finance company subscribers as part of a credit application.
The company insisted it is a one-stop process that streamlines the use of several different tools into one software experience for dealers.
“We know the use of our accurate and trusted values will help dealerships close deals faster and with accuracy,” NADA Used Car Guide vice president and general manager Mike Stanton said. “With the integration of our values, dealers will no longer have to go outside of the XpressCredit platform to include critical used vehicle price information for lender approval."
According to XpressCredit's managing partner Patricia Reinhold, “With the inclusion of NADA Used Car Guide Values into our BookOut product, everybody wins.
“Customers will spend less time running through the loan approval process and dealers will not waste any time booking out vehicles. This is a true winner,” Reinhold went on to say.
Research recently released by TransUnion found that two in three lenders feel that data and analytics are evolving faster than their own internal capabilities. TransUnion surveyed 309 banks, credit unions and consumer finance companies to learn more about their use of data and analytics.
The survey found that 61 percent of lenders feel that the vast amounts of data now available to them are overwhelming, and more than half — 54 percent to be exact — say it is difficult to discover useful insights when there is so much data.
Yet TransUnion discovered that 70 percent of lenders want direct, immediate, self-service visibility into their analytics.
The need for real-time data is real, according to TransUnion’s research. Nearly three in four respondents (73 percent) report that their analytics capabilities — or lack thereof — affects their ability to compete in the marketplace. Virtually all (92 percent) respondents agree there are new or hidden opportunities in today’s market, but struggle with uncovering opportunities in a timely fashion due to massive data volume and limited resources.
Versta Research surveyed 309 lenders about how they are using analytics to compete, how they prioritize data and analytics, and their strengths and weaknesses in data and analytics. Respondents included risk, compliance, lending, finance, marketing, and analytics executives and managers responsible for optimizing growth.
Versta Research conducted the survey from Feb. 12 to March 15.
“Our research found half of lenders say their organizations are driven mostly by intuition and the experience of managers rather than by analytics. Yet, 80 percent of lenders believe that improving their analytics capabilities would make their organizations more competitive,” said Steve Chaouki, executive vice president of TransUnion’s financial services business.
“We believe our Prama suite of solutions addresses these needs, and the industry is beginning to recognize the importance of having access to analytic services that facilitate faster decisions and strategy adjustments,” Chaouki added.
To meet the changing demands of the lending market, TransUnion launched Prama, what the company thinks is a groundbreaking suite of solutions changing how companies explore data and act on insights.
“Prama puts the power of broad, deep data and the reliability of superior analytics at the customer’s fingertips — giving them the information they need to make better decisions at the speed their business requires,” TransUnion said.
The Prama suite of solutions currently consists of Prama Insights, which includes two modules — Market Insights and Vintage Analysis. The Market Insights module can provide quarterly views on key lending metrics at a state, regional and national level.
The Vintage Analysis module can allow users to view seven years of their own performance data spanning the life of each loan such as delinquency, charge-offs and bankruptcy. Leveraging a full depersonalized national credit file, users can compare or benchmark vintage performance against their peer groups and the industry as a whole.
The next step in the Prama journey — Prama Studio — is planned to be generally available later this year. Its first module, Attribute Manager, will include capabilities for custom attribute development through a convenient web-based portal.
To learn more about the TransUnion data analytics study visit solutions.transunion.com/analytics.
