Loan origination systems provider Financial Network and credit risk management solutions firm Clarity Services recently enhanced their relationship to incorporate Clarity’s new Clear Income Attributes report.
Officials highlighted FNI’s loan origination solutions will be strengthened as a result of Clarity’s new report. It’s the intention of both companies to streamline financial services providers’ abilities to gather important information used in determining credit and loan options.
Clear Income Attributes is intended to assist financial service providers in determining the stability of a consumer’s income, employment and housing. Clarity noted that its Attributes report can examine net monthly income over 90 days, 180 days and one year and can give important details regarding a consumer’s geographical location and employment.
FNI vice president of business development Heather Slyman pointed out that the company’s customized loan origination solutions can enable financial service providers to choose the key components that work best for them — and when combined with Clarity’s Attributes report — can gather data and make decisions faster and more efficiently.
“FNI proactively looks for ways to enhance our product offerings with value added services we believe to be good solutions for our customers,” Slyman said. “When lenders want to make more loans, incorporating data services like Clarity into their solution gives them the ability to lend more without adding additional risk to their portfolio.”
While claiming that a “majority” of the nation’s top auto finance companies already leverage its employment verification service, Equifax unveiled its newest technology platform during the recent National Automobile Dealers Association Convention.
Equifax highlighted AutoConnect can enable partners to deliver credit, marketing, risk and verification solutions seamlessly to their clients.
“AutoConnect will help partners pursue opportunities across all segments of the automotive ecosystem," said Kathi Mehall, vice president of technology for automotive services at Equifax.
“It uses auto-specific APIs (application programing interfaces) based on the Standards for Technology in Automotive Retail (STAR) to help streamline partners' implementation and deployment of Equifax data and services,” Mehall continued.
With the automotive industry experiencing significant growth and evolution in the consumer online shopping experience the last several years, Equifax explained that it’s making this crucial investment to deliver a platform as well as capabilities that allow partners to quickly deliver the next generation of solutions to their customers.
Recent partner, CreditMiner, a consumer qualification solution provider, announced it will be leveraging Equifax real-time technology platforms and data to empower delivery of their products.
“CreditMiner is committed to providing automotive retailers with transparent, and financial-driven solutions that allow dealers to increase profitability and decrease exposure to compliance burdens and potential violations,” said Don O’Neill, vice president of sales and marketing at CreditMiner.
“Equifax is a trusted brand and is renowned for innovation,” O’Neill continued. “We are excited to partner with their automotive team and look forward to delivering on our commitment to our customers.”
Equifax also mentioned AutoConnect can provide third parties access to unique data from the company, such as verification of income and employment, which is accessible through an API designed for the auto industry. Equifax vice president of marketing for automotive services Scott McMahon stressed this availability can open up new opportunities for partners who deliver solutions to dealers, lenders and OEMs and help to propel their business forward.
“Innovative and secure, the AutoConnect platform will be a cornerstone of all our auto marketing solutions — including the ones we have launched and those that we are developing for future deployment,” McMahon said.
“Our ongoing investment in AutoConnect will enable growth for our partners' business, with particular focus in the upfront marketing, online and consumer qualification space,” he went on to say.
Unique Income and Employment Information through Equifax
While not a new platform like AutoConnect, Equifax highlighted that within the last 24 months, a “majority” of the nation's top auto finance lenders have leveraged The Work Number to enhance a critical component of the loan origination process.
The Work Number is owned by Equifax, and is one of the largest database of employer-direct payroll records. The tool can provide income and employment information in seconds to banks, mortgage companies, dealerships and other entities when authorized by the consumer, and utilized in compliance with Fair Credit Reporting Act regulations.
Within a hypercompetitive auto finance market, Equifax acknowledged that finance companies are working to improve their capture rates, efficiency and ensure accurate risk assessment without having to continually reduce interest rates and/or increase terms and loan-to-value (LTV).
In many cases today, Equifax’s Lou Loquasto pointed out the deciding factor for finance companies winning deals is not tied exclusively to rate, but rather, the institution with the fewest stipulations and the fastest decision times.
Loquasto, who is the auto finance leader at Equifax, explained the company’s income and employment verification via The Work Number can empower finance companies to quickly clear stipulations through instant direct access to unique data that is updated with each pay period. He said this process can result in more efficient loan applications through the elimination of cumbersome, manual processes while also reducing overall risk by mitigating fraud associated with income overstatement.
“The leading auto lenders are recognizing that Equifax provides a tangible, competitive advantage in securing and closing loans,” Loquasto said. "Additionally, more and more lenders are venturing into the subprime market, and they will need new data sources to improve risk mitigation.
“We see the accelerated rate of adoption for our income and employment verifications as indicative of the market need to increase loan volumes without sacrificing rate, structure or quality,” he went on to say.
Equifax Expands Automotive Team
In other company news, Equifax shared during the NADA Convention that the company expaned its automotive services team.
Industry professionals Angelica Jeffreys and John Giamalvo joined Equifax to add decades of real-world automotive expertise to an already seasoned team of industry veterans. Jeffreys came on board as vice president and automotive dealer leader and Giamalvo is now as vice president of dealer services.
Jeffreys brings more than 25 years of automotive experience to the Equifax auto leadership team, with an impressive track record of driving growth and improving business performance. As vice president and automotive dealer leader, her responsibilities include developing a tactical plan to inform and support the auto strategy for dealers, as well as identifying and implementing key growth drivers.
Prior to Equifax, Jeffreys was vice president of strategic partnerships for DealerRater where she negotiated, closed and executed substantive alliances. Before DealerRater, she held several sales leadership roles at Cox Automotive’s AutoTrader.com.
Giamalvo joins Equifax as vice president of dealer services with an extensive background in the automotive market. He will oversee the collaboration among top national dealer groups and enterprise alliances to provide auto insights and solutions to help dealers acquire, engage and facilitate efficient transactions with consumers, both on and offline.
Prior to joining Equifax, Giamalvo served as director of dealer initiatives for Edmunds.com and appeared as a regular industry commentator on multiple national media outlets. He also held leadership positions at BarNone (a division of CoreLogic), AutoNation and Star Auto Group.
“Expanding our team is a direct reflection of both our successes in 2014 and our continued commitment to support the automotive industry, and we plan to stay in lock-step with the market's upward trajectory,” said Gary Hughes, general manager of automotive services at Equifax.
“Automotive Services at Equifax is dedicated to finding innovative ways to solve for real-world pain points — because our auto solutions are built by auto people who have spent their careers working directly in the business,” Hughes continued. “We expect 2015 to be an even stronger year for auto and we’re confident that with Angelica and John’s extensive backgrounds, our auto business will have the best tools and consumer insights needed to succeed in a highly competitive market.”
CreditMiner recently reached an agreement with Equifax to give the credit inquiry tool access to the Prescreen of One service, an Equifax solution for individual, real-time prescreens that can help consumers by letting them know they are qualified for financing and enhance business prospects for dealers and finance companies.
In addition to the deployment of Prescreen of One, CreditMiner and Equifax indicated they will continue to develop innovative solutions in data and technology,
“CreditMiner created this real time space, allowing dealers a real-time solution to access consumer credit data that changes the face and profitability of any retail automotive dealership utilizing the tool. The fact that we were able to establish this relationship speaks volumes as to compliance and functionality of the tools we currently offer,” said Don O’Neill, vice president of sales and marketing at CreditMiner.
“Our goal has always been to provide a solution to dealers that not only increases sales efficiency and profitability, but that lowers their burden of compliance risk,” O’Neill continued. “With a suite of products that adds Equifax data and allowed usage scenarios, we feel it positions us to dominate the space, not just lead it.”
CreditMiner, DeskMiner and ServiceMiner can allow dealers to pre-screen candidates and provide consumers who pass the credit filters, firm offers of credit through its proprietary, patent-pending technology in both vehicle sales and service function areas.
“Our dealers realize that knowledge is power, not just to hold gross, but to be able to provide the consumer with a faster, more efficient, pleasurable buying experience. With DeskMiner, we put the tools into the manager’s hands to provide consumers valuable, effective offers.” O’Neill said.
“For example, knowing when to initiate a sale in the service lane with an offer for a loan based on the consumer’s current real-time credit profile is important,” he added. “If a consumer is made aware they can obtain financing that either lowers monthly payments or reduces overall finance charges, they are more likely to engage.”
With Prescreen of One, Equifax does not require a dealer to collect a Social Security Number or a date of birth. This process can provide dealers with access to prescreened offers, without having to collect, handle or store their consumer key identifiers, reducing data security risk.
“Having access to CreditMiner has given our sales a measurable boost by speeding up the process of qualifying consumers and penciling deals to fund,” said Rodney Back, general manager from Dave Edwards Toyota in Spartanburg, S.C. “Most importantly, with the addition of Prescreen of One, we’ll have Equifax data to make the offers that suit our customers best, moving the vehicle delivery process along more efficiently.”
Gary Hughes, general manager of automotive services at Equifax, added, “We’re proud that CreditMiner has chosen to deploy our Prescreen of One solution within ServiceMiner and DeskMiner. Dealers everywhere want fast and convenient access to prescreened financing offers to best meet the needs of their customers, and DeskMiner provides just that.
“With ServiceMiner powered by Prescreen of One from Equifax, the dealership service team can now reflect a more complete view of the consumer’s purchase consideration, as opposed to a partial view that may impact that sale or consumer later in the purchase funnel. In today’s retail environment the understood value by the consumer is the fuel that drives satisfied and successful decisions,” Hughes went on to say.
For more information on CreditMiner, visit www.ecreditminer.com or call (877) 213-7042.
Black Book vice president of data licensing Jared Kalfus described the industry “crossroads” finance company executives are assessing based on his first-hand conversations at last month’s Used Car Week in Las Vegas.
What has finance company leadership pondering which way to turn at this “crossroads?” Analysts from firms such as Black Book and TransUnion are finding that loan-to-value ratios are strong indicators for severity of loss. They say the lower a vehicle’s equity position, the lower the loan recovery rate and the higher the severity of loss.
“If we look back historically, lenders have used more traditional risk measurements, including credit score, time to maturity and the size of the loan. And when you observe these loans on paper just by looking at them, many look the same until the vehicle equity position is truly factored in and considered,” Kalfus told SubPrime Auto Finance News during a recent phone interview.
“When you start to consider the equity position that vehicle might have, that’s when you really start to underscore the fact that vehicle values are a critical component when evaluating these individual loans and portfolios,” he continued.
In analyzing more than 800,000 loans, a recent study with TransUnion showed that there is a strong correlation between LTV ratios and frequency of loss.
As an example, in looking at two loans that each had a balance of $7,500, a customer credit score of 720, and 24 months to maturity, one vehicle was valued at $12,500, and a second was valued at $4,500. The study showed that the latter loan will, in fact, default more frequently.
Black Book vice president of analytics Anil Goyal indicated the study results showed that finance companies that tracked LTVs closely enjoyed a “significant lift in predicative power by using equity in the whole process.
“That can give an edge to lenders. More accurate prediction of delinquency and default can help in better loss forecasting, better prioritization of collection activities and better forecasting of repayment rates,” Goyal continued.
Goyal added that watching LTVs is especially important as Black Book anticipates the decline of its vehicle value index after 36 months of record high levels.
“This is really important from a lending perspective because the vehicle value trends are all evolving,” Goyal said. “Early in the year in the spring, we saw the compact car segment for example was very strong, and now that segment is under pressure.
“On the other hand, now we’re seeing full-size SUVs and pickups are retaining their values here late in the year when usually we see a steeper depreciation,” he continued.
“The takeaway for the lenders is really to have a balanced portfolio and monitor the collateral values with accurate data and use that in their predicative models on a regular basis so they can have an edge,” Goyal went on to say.
That edge is part of why Kalfus mentioned that he saw the “crossroads” appear again during Used Car Week. Kalfus shared that he was having a conversation with a finance company executive who was quite familiar with the recent analysis by Black Book and TransUnion and recently implemented the LTV metric into its ongoing portfolio analysis. An executive from a different finance company overhead the discussion and joined in because he wanted to know more about to integrate LTV data into risk mitigation.
Kalfus acknowledged the finance company executive familiar with the data basically took over the pitch the Black Book VP typically makes, creating a “pleasant surprise.”
Kalfus continued, “The more data that finance companies use, the more predicative they will be, the more on top of their portfolios they will be. They can work to mitigate their risk.
“Our takeaway to reinforce the message in the conversation we’ve been having with lenders in the automotive finance community is that collateral values have a critical role in the overall underwriting, risk mitigation, and ultimately, long-term portfolio management,” he went on to say. “If they start to incorporate these traits and characteristics into their every-day portfolio management, then they’ll not only have more profitable portfolio, they’ll reduce their risk.”
And Goyal pointed out that finance companies can integrate LTV analysis into their portfolio management strategy in the same way they might watch credit scores.
“They’re all using similar techniques in terms of regression analysis to factor in whatever data they can get, whether it’s from the credit bureau or alternative data providers. Using equity in the whole mix can give you an edge,” Goyal said.
“When I talked to lenders, they are anticipating an uptick in delinquency, and that doesn’t scare them because the delinquency levels are pretty low,” he continued. “What they are concerned about is the vehicle valuations, where they’re going to be next year. What we’re seeing is there’s a lot more volatility across the different segments. They’re not all moving the same way. Some segments are dropping faster; some are not.
“That factor is what going to be important in assessing where your portfolio is moving,” Goyal went on to say. “Is your portfolio continuing to be balanced? Are you tracking your portfolio to determine where your risks are and using that data to prioritize where you want to work?”
Perhaps that’s why Kalfus indicated the industry is at a “crossroads.”
Kalfus closed his comments to SubPrime Auto Finance News by emphasizing, “Lenders are really more engaged.”
The newest white paper from Equifax highlighted five reasons why credit scores might not be most accurate or comprehensive way to access a borrower’s qualifications — especially in subprime.
Those reasons included:
— Credit scores reflect only a portion of the full picture that affects applicants’ credit worthiness.
— Insufficient detail can result in the wrong terms or risk level being placed on deals, denying qualified applicants or inadvertently approving excessively high-risk borrowers.
— Applications frequently contain inflated or misrepresented information, proving a misleading view of the associated risk.
— Verifiable insights into historical job tenure and disruptions which can be highly predictive of ability to pay, are typically not included or inaccurate.
— Because underwriters and funders try to close deals quickly, manually verifying income and employment is inefficient and often fails to identify inaccurate data.
With those elements in mind, Equifax senior director of product marketing Jennifer Reid pointed out that some of the top reasons for contracts being returned to dealers are still:
— A lack of verification of stated income.
— Missing or inaccurate documentation to meet stipulations.
— A failure to meet approval terms and out-of-policy contracts.
In its latest white paper from Equifax titled, “Trust, But Verify: What Research Reveals about Subprime Vehicle Loan Performance When The Work Number Data is Used,” Reid discusses how database-supported verifications can provide finance companies and dealers greater accuracy, accountability, transparency and detailed insight into borrowers' qualifications while also providing operational improvements.
In addition, the white paper includes research illustrating the significance of verifications by analyzing the impact of income, employment tenure, pay frequency and employment disruptions on borrowers' credit-worthiness.
That white paper can be downloaded here.
Reid and other members of the Equifax team will be on hand during Used Car Week, which begins on Nov. 10 at the Red Rock Casino, Resort and Spa in Las Vegas.
Where discussions about underwriting, trends and more will be a focal point will be during the SubPrime Forum, an event orchestrated in partnership with the National Automotive Finance Association.
This three-day conference will provide data, knowledge, insight and powerful business networking opportunities to spur innovation and drive growth in the growing subprime auto finance marketplace. Presented by SubPrime Auto Finance News and SubPrimeNews.com, and in affiliation with the NAF Association, the event will offer a best-in-class forum for executives and thought-leaders in the auto finance vertical.
The SubPrime Forum is set for Nov. 10 through Nov. 12 at the Red Rock Casino, Resort and Spa in Las Vegas. It’s a part of Used Car Week, which includes the CPO Forum, the Re3 Conference and the National Remarketing Conference.
All member-company staff of the NAF Association are $100 eligible for a discount of off the standard registration fee for the SubPrime Forum. Use discount code NAF2014 when registering.
Click here for additional information regarding the SubPrime Forum, including the agenda, scheduled speakers and exhibitors.
Equifax reported the total balance of newly originated subprime auto loans stood at $70.7 billion in August, a level representing an eight-year high and 27.8 percent of the total balance of new auto loans. That’s a slight increase in share from the previous year.
But Equifax auto finance leader Lou Loquasto pointed to a different metric from the latest Equifax National Consumer Credit Trends Report that he thinks is even more profound.
The credit agency determined serious delinquencies represented 1.05 percent of total balances outstanding in August, a decrease of 8 percent from same time a year ago.
“Anytime you have losses and delinquencies this low, it is going to encourage a little more availability of credit at the margin,” Loquasto told SubPrime Auto Finance News this week. “We’ve definitely seen that with non-prime.
“The cool thing is we’ve seen more players participating in non-prime,” he continued. “It’s not just the independent auto finance companies. But the banks are participating in non-prime, the credit unions, the captives. The whole industry is picking and choosing in the lower credit segments, the segments where they’re more comfortable buying a little bit deeper. We think that’s a very healthy thing for the dealers and for customers.
“It’s super competitive out there for lenders. But as a long as the performance continues to be this strong, it’s a good thing for lenders, too,” Loquasto went on to say.
Equifax tallied up the total balance of auto loans outstanding through August and found it to be $924.2 billion — an all-time high and an increase of 10.8 percent from same time a year ago.
At the same time, analysts determined the total number of auto loans outstanding now sits at more than 65 million — a record high and an increase of more than 6 percent from the same time last year.
“Auto sales continue to soar, crossing the 17.4 million mark on an annualized basis for new cars and light trucks in August,” said Amy Crews Cutts, senior vice president and chief economist at Equifax.
“The abundance of high-quality vehicles for sale, the attractive financing options available and the ever-increasing age of cars on the road today have created an environment that makes it easy for consumers to say ‘yes’ when it comes to purchasing a new or used car,” Crews Cutts continued.
“Importantly, auto loan originations to borrowers with subprime credit scores remain stable, providing additional evidence that a bubble is not occurring in that space,” she added.
Sharing more evidence of subprime health, Equifax indicated the total number of new loans originated year-to-date through June for subprime borrowers — defined as consumers with Equifax Risk Scores of 640 or lower — came in at 3.9 million, representing 31.2 percent of all auto loans originated this year. This level is a just slight decrease in share from this same time in 2013.
Furthermore, Equifax’s year-to-date data through June showed the average loan amount for borrowers with risk scores of 680 or lower are increasing the most, posting a 3-percent increase from the previous year.
“We’re still not to where it was at the all-time high. I think some of the reflection of the growth is just due to how low it went during the downturn,” said Loquasto, one of the many experts who will be on hand for the SubPrime Forum, a conference held in partnership with the National Automotive Finance Association during Used Car Week.
Elsewhere in Equifax’s latest report, analysts mentioned the total number of new loans originated through June rose to 12.5 million, an increase of 4.9 percent from same time a year ago. The total balance of those new loans came in at $254.2 billion, an increase of 6.9 percent from same time a year ago and representing nearly half of total new non-mortgage credit originated.
A couple of trends to mention included:
— Loan sizes among borrowers with risk scores of 760 or higher show little change from the same time a year ago.
— By source, balances on outstanding loans funded by banks, savings and loans and credit unions are at $453 billion, while the total number of loans is more than 31.4 million.
— Similarly, total outstanding balances for loans funded by auto finance companies is $471.2 billion, while the total number of existing loans is 34.1 million.
“The cost of funds is so low right now that they’re able to get a lot more car for the money and get into a higher, upscale vehicle than normally would have been in years prior,” said Gary Hughes, general manager of automotive services for Equifax.
“That pent up demand from the past eight to 10 years is coming back around. We anticipate growth to continue. It might moderate a little bit, but we still anticipate it staying near these levels for the foreseeable future,” Hughes added.
Analysis like what Hughes and Loquasto shared is what’s on tap for the SubPrime Forum, the event dedicated to auto financing at Used Car Week.
This three-day conference will provide data, knowledge, insight and powerful business networking opportunities to spur innovation and drive growth in the growing subprime auto finance marketplace. Presented by SubPrime Auto Finance News and SubPrimeNews.com, and in affiliation with the NAF Association, the event will offer a best-in-class forum for executives and thought-leaders in the auto finance vertical.
The SubPrime Forum is set for Nov. 10 through Nov. 12 at the Red Rock Casino, Resort and Spa in Las Vegas. It’s a part of Used Car Week, which includes the CPO Forum, the Re3 Conference and the National Remarketing Conference.
All member-company staff of the NAF Association are $100 eligible for a discount of off the standard registration fee for the SubPrime Forum. Use discount code NAF2014 when registering.
Also, be sure to make your hotel reservations at the Red Rock Casino, Resort and Spa before Oct. 17 to secure your room at the exclusive conference rate of $195/night.
Click here for additional information regarding the SubPrime Forum, including the agenda, scheduled speakers and exhibitors.
“We’re bullish on the industry. We’re proud of what the industry has achieved,” Loquasto said.
“Nobody thinks it can be perfect forever. But what our lenders are doing is making the investments for the future,” he continued. “They’re looking at business intelligence tools and data so they know what to plan for and what to do over the next one to three years. They’re taking some of the profits from the last few years and they’re investing with companies like Equifax and others to do everything they can to make sure this good run continues as long as it can.”
One of Used Car Week’s presenters and the sponsor of the SubPrime Auto Finance Executive of the Year award — Black Book Lender Solutions — finalized the integration of its vehicle valuation data into three more providers of loan origination systems used by finance companies.
Recent integrations announced on Monday include Credex, Compass Technologies and FNI (Financial Network Inc.).
Executives highlighted this continued expansion of Black Book data throughout industry loan origination systems is designed to allow lending decisions to be made in less time and with lower costs, thus accelerating the approval process.
The company insisted these operational efficiencies, combined with the risk management benefits of Black Book Lender Solutions insight, is meant to help finance companies remain competitive and focused on profitable growth opportunities.
Many of today’s leading finance companies are leveraging vehicle values from Black Book Lender Solutions, with data that is fully integrated into loan origination systems powered by some of the most notable providers, including defi SOLUTIONS, Fidelity, Crif Lending Solutions, Argo Data Resources Corp, Meridian Link, Allied Business Solutions and Megasys.
“Black Book’s footprint continues to expand in this segment of the industry as loan origination system providers respond to customer demand to have access to our values,” said Jared Kalfus, vice president of data licensing for Black Book.
“Today’s most profitable companies leverage tools and resources that provide smarter and faster decision-making, along with operational efficiencies,” Kalfus continued.
Credex Systems president Lloyd Wright pointed out that efficiency and speed of approval can greatly impact his customers’ ability to compete and realize larger profit potential.
“With Black Book vehicle value data fully integrated into the loan origination system, lenders can reduce application errors and streamline the entire approval process for clients entering their portfolio,” Wright said.
Stephanie Alsbrooks, chief executive officer of defi SOLUTIONS, indicated her clients “love the speed and accuracy advantage they get with ease of access to Black Book industry leading data.
“Coupled with our defi Solutions configurable rules, Black Book data allow customers to automatically call the value data at any point in their process from application to funding,” Alsbrooks continued.
Jeremy Engbrecht, president of the CRIF Select division, CRIF Lending Solutions, declared that Black Book is one of the most accurate vehicle evaluation tools on the market.
“Streamlining the lending process is paramount for lenders to capture more business in today’s evolving market,” Engbrecht said. “Time is money, especially in the auto industry, which is why we are proud to integrate our CRIF ACTion loan origination technology platforms for direct and indirect auto lending with Black Book.”
Besides presenting the winner of the SubPrime Auto Finance Executive of the Year winner, Black Book will have a major presence at the SubPrime Forum, which is set for Nov. 10 through 12 at the Red Rock Casino, Resort and Spa in Las Vegas.
Kalfus will be joined by colleague Susan Hughes for a session titled, “2014: A Year of Records.” This general session presentation will be devoted to examining the many record-breaking events that took place during 2014 and discussing how those events and trends will continue to impact the industry in 2015 and beyond.
This session will take place Nov. 11 at 11 a.m. during the SubPrime Forum, which is presented in partnership with the National Auto Finance Association. The forum begins Nov. 10 with registration and a welcome reception before launching into a full day of events on Nov. 11, followed by a half-day of sessions on Nov. 12.
For a full schedule of events, visit http://subprime.autoremarketing.com/agenda, and be sure to register for the event by Oct. 10 to save $200 off of your registration fee. And once you’re registered, don’t forget to make your hotel reservations at the Red Rock Casino, Resort and Spa in Las Vegas. The exclusive conference rate of $195/night is available only through Oct. 17.
Black Book isn’t just pitching its products and services to finance companies nowadays. Its analysts and staff are trying to emphasize to executives and managers who watch loan-to-value ratios and overall portfolio status about how much risk is building and how important it is to watch how long it will take for a borrower to return to an equity position.
In light of Experian Automotive highlighting second-quarter data that showed 24.1 percent of all new-vehicle loans and 14.1 percent of all used-car contracts contained terms ranging from 73 to 84 months, Black Book took a closer look at comparative collateral data in order to drill deeper into this trend. The company recently leveraged its Collateral Insight Engine technology to compare two different vehicles based on the exact loan terms of 72 months, 5-percent interest and a 120 percent loan-to-value ratio.
Based on the data from the example, Black Book indicated one vehicle achieved a positive equity position in just 37 months, a whole 15 months earlier than the other vehicle (at 52 months).
What’s more, the first vehicle had approximately $3,000 more equity by the 24th month versus that of the second.
Black Book vice president of analytics Anil Goyal explained to SubPrime Auto Finance News during a recent phone interview that knowing the potential loss-given default provides the ability for finance companies to become more competitive with their portfolios while mitigating risk.
Additionally, Goyal pointed out that positive equity will pinpoint those loans that are less likely to default, giving finance companies yet one more data point to differentiate two loans that look otherwise identical.
“As trends have emerged in the lender community, this risk is even more heightened with longer terms,” he said. “You’ve got to have an analysis on when that vehicle is going to come into an equity position. The longer it takes, the longer you’re exposed to market conditions where the trends could change and the vehicle depreciates much faster.”
Goyal emphasized the two aspects when finance companies assess risk. The first is the frequency of default, “which is really indicated by the credit score and you can factor that into your price and get paid for that risk,” according to Goyal.
The other element he mentioned is severity of default.
“When someone doesn’t pay,” Goyal said, “what’s the equity on that loan? How much balance is remaining? What can you recover out of that when you repossess that vehicle?”
Goyal stressed that these two risk-assessment factors are heightening nowadays because of finance companies stretching terms.
“Basically the lenders are trying to provide that monthly payment that the customer can afford,” said Goyal, who joined Black Book in a full-time role back in July after serving in a variety of consulting functions for the firm along with positions at Bank of America and Citigroup.
“But the key risk that’s evolved in this is that you’re going to be underwater for a longer period of time because the equity takes much longer to build up,” he continued. “Meanwhile, you’re having this addition trend of vehicle values softening and getting more toward the pre-recession time frame. You’ve got this double whammy. You’ve got the equity under water and not building as quickly and at the time vehicle values depreciating more.”
During the recent interview, Goyal offered another hypothetical example with some figures involved. He explained that with a typical 36-month loan, a borrower will have paid about 30 percent of that principle balance in a year. If the term is 84 months, the borrower only paid down about 10 percent of that principle balance following a year of payments.
“If the value depreciated anywhere from 25 to 45 percent from that original retail price to that wholesale value in that 12-month period, you’re significantly underwater with that 84-month loan,” Goyal said. “That’s why we think it’s so important to monitor that and put that into your analysis as a lender to make sure you are appropriately accounting for that risk up front as well as in your portfolio evaluation.”
Yet another piece of the puzzle to consider: The kind of vehicle that’s being attached to the contract. Goyal noted that currently values of compact pickups and SUVs are holding strong. A couple of years ago, it was entry-level cars that held that distinction, but Goyal indicated that values for those kinds of units are softening because the supply of those vehicles is on the rise.
Goyal closed his conversation by mentioning that watching the portfolio isn’t just an important chore for the underwriting and recovery departments at finance companies. He stated it’s also important for marketing divisions to watch these trends, too, so they can approach current loan holders with new opportunities if they currently are in a positive equity position.
“We are able to tell lenders when a loan is going to be in an equity position, how long is it going to take to get there and for lenders to be able to account for that throughout the life cycle as well as what’s my portfolio looking like and how does that impact loss forecasting,” Goyal said.
“We are constantly watching these trends,” he continued. “But as the market evolves these trends will change. That’s what we emphasize monitoring your portfolio is very important from a collateral viewpoint,” he added.
In light of the Consumer Financial Protection Bureau handing out stern enforcement actions connected with credit bureau reporting, the ranking member of the U.S. House Financial Services Committee now is joining the regulatory fray.
As the chairman-elect of the American Bankers Association attempted to assure the subcommittee about how the industry is committed to consistent, accurate credit reporting, Rep. Maxine Waters released a proposal that would make “sweeping” reforms to the nation’s consumer reporting system.
Waters, a California Democrat, explained her draft proposal, entitled the “Fair Credit Reporting Improvement Act of 2014,” will enhance requirements on the consumer reporting agencies (CRAs), and furnishers that provide information to these CRAs, to guarantee consumers have the capacity to ensure that the information on their credit reports is accurate and complete.
Waters noted her proposal comes in the aftermath of a number of recent court cases, news reports and studies that have detailed the significant problems and flaws in the current consumer reporting system, including the CFPB penalizing First Investors Financial Services Group.
“Credit reports are no longer just used exclusively by lenders in making a credit decision. More and more, credit reports are used in a variety of ways, from employment decisions, to determining a consumer’s ability to rent a home, buy a car, or purchase insurance,” Waters said.
“A person’s credit report is too important in determining access to a wide array of opportunities for these reports to contain inaccurate and incomplete information,” she continued. “This proposal addresses many of the flaws with the existing consumer reporting system, by making common-sense changes that enhance consumers’ rights, create more transparency over the consumer reporting and credit scoring process, and increase the accountability of credit reporting agencies, furnishers and companies that develop credit scoring models and formulas.”
According to the Federal Trade Commission, one in five, or roughly 40 million consumers, have had an error on one of their credit reports. The lawmaker said about 10 million consumers have errors that could increase the cost of credit available to them.
The draft proposal would make several reforms to the Fair Credit Reporting Act. Key provisions include:
— Providing relief to millions of borrowers who were victimized by predatory mortgage lenders and servicers, by removing adverse information about these residential loans that are found to be unfair, deceptive, abusive, fraudulent or illegal.
— Ending the unreasonably long time periods that most adverse information can remain on a person’s credit report, shortening such periods by three years.
— Giving consumers the tools to “truly” verify the accuracy and completeness of their credit reports, by mandating that furnishers retain all records for as long as adverse information about these accounts remains on a person’s credit report.
— Eliminating punitive credit scoring practices by removing fully paid or settled debt from credit reports, including medical debt, which has been found not to be a reliable predictor of a person’s creditworthiness.
— Giving distressed private education loan borrowers the same chance to repair their credit as federal student loan borrowers, by removing adverse information when delinquent private education loan borrowers make consecutive on-time monthly payments for a certain period of time on their loans.
Waters also mentioned the draft proposal also restricts the use of credit reports for employment purposes, which employers are increasingly using to screen qualified job applicants despite a lack of adequate data to show that a person’s credit is predictive of their job performance.
She pointed out the proposal also sets a dollar amount that a consumer can be charged to buy their credit score from CRAs, while also requiring CRAs to provide consumers with a free annual credit or educational credit score upon a consumer’s request.
“Over 10 years ago, Congress tried to strengthen consumer protections, but our consumer reporting system still has a number of systemic flaws. I believe we must take action to end the heartache that has plagued millions of consumers who have been unable to obtain a job, go to college, or buy a car because of their credit score,” Waters said.
“Many of these problems have stemmed our country’s economic growth. This draft proposal attempts to meet our obligation to ensure that consumers who have fallen victim — or fallen on hard times — are not deprived of the chance to achieve the American Dream,” she went on to say.
What Industry Is Already Doing
John Ikard is ABA chairman-elect and chief executive officer of FirstBank, headquartered in Lakewood, Colo. Ikard told House subcommittee members about how banks and other finance companies work diligently to provide accurate information to credit bureaus, which provides tremendous value to consumers and institutions alike.
“For consumers, credit reports provide a compilation of their historical performance on obligations which enables them to shop around for credit from any lender knowing that all lenders have a similar base of detailed information,” Ikard said.
Without these reports, consumers would have to provide extensive documentation lender by lender or be limited to a financial institution that they had previously done business with. Thus, credit reports open up the options for consumers and ensure that they can shop around in a very competitive market — nationwide — for the best loan or account that serves their needs. The greater efficiency and competition means better deals and lower prices for consumers,” he continued.
Ikard emphasized how important credit bureau reports are in the underwriting process, especially if the finance company hasn’t worked with this potential borrower previously.
“Banks benefit because an accurate understanding of a credit applicant’s credit history means they are better able to predict who is likely and unlikely to repay a loan, allowing them to make better decisions on whether to grant credit and at what price. Credit reports have proven to be good predictors of how consumers will manage their finances in the future,” Ikard said. “The ability to make more accurate decisions helps lower their costs, which helps to lower prices for consumers.
“Accuracy within credit reports is critical, of course, to ensure that customers are evaluated and extended loans based on the history of their individual performance,” he continued.
And if there are errors in a person’s credit file?
“Inaccurate reports undermine the value of the system,” Ikard told lawmakers. “An inaccurate report could prevent a qualified borrower from getting the credit that they deserve by making them look less creditworthy. An inaccurate report that is missing negative information could also make a borrower eligible for credit that they are ill prepared to handle. Thus, accurate credit reports ensure that credit is extended to deserving borrowers.”
Ikard wrapped up his prepared testimony in front of the committee by stressing how critical of a resource credit reports are and how they’re just as important to banks and finance companies as they are to consumers.
“Having such an efficient system is critical to credit availability for all deserving borrowers and is a key driver of economic growth, competition, lower prices and better deals for consumers,” he said. “Because the benefits to both customers and lenders are so large, it is in the best interests of both parties to ensure that credit reports are as accurate as possible.
Banks have invested heavily in systems and processes to report accurate data and contribute to this important public good. The system would be unworkable without accurate information that all parties can rely upon,” Ikard continued.
“Having an effective dispute mechanism is critical to this process. But any process can also be abused. Repeated unfounded disputes absorb resources that hurt everyone,” he went on to say. “Changes can be made that would help to stop such abuses without hurting legitimate claims to correct errors.”
Make it 13 quarters in a row during which the average amount consumers had remaining on their vehicle installment contract moved higher year-over-year.
TransUnion's Industry Insights Report indicated that auto loan debt per borrower jumped 4.1 percent from $16,410 in the second quarter of last year to $17,090 in Q2 of this year.
On a quarterly basis, TransUnion reported auto loan debt increased 1.35 percent from $16,862 in the first quarter. TransUnion automotive vice president Peter Turek pointed out that auto loan balances rose in every state year-over-year during the second quarter.
Among the biggest U.S. cities, Houston and Phoenix saw the largest yearly auto loan debt rises of approximately 6 percent. Houston's average auto loan debt increased to $21,690, the highest such number of all major markets.
“The numbers reflect a continued healthy marketplace,” Turek told SubPrime Auto Finance News this week. “There’s competition amongst the manufacturers, auto lenders and dealers. It’s great, healthy competition. I think in the end it benefits all of those stakeholders, especially consumers, the folks who drive those vehicles every day and make the payments.
“What we’re observing is the fact that there is more recent originations,” he continued. “As consumers over the past several quarters have demonstrated, auto sales have been booming and related financing has been booming so we have a lot more auto loans on the books that are recent that have higher balances. That’s what’s driving the higher average balance across all age groups and the industry.
“In addition, when you think about what was going on a couple of years ago, consumers were deleveraging so we were talking about how average balances were going down quarter-over-quarter,” Turek went on to say. “Now we’re in the 13th consecutive quarter where there has been an increase in auto loan debt. I would say that’s primarily from increasing auto sales and more, and more consumers buying automobiles and financing them.”
In a new view of the data, TransUnion also noticed that auto loan debt increases for different age groups remained in a tight range, though changes observed for borrowers ages 40 to 49 were noteworthy. These borrowers saw the largest yearly percentage increase — up more than 5 percent — while also having an average auto loan debt level nearly $1,000 higher than the next age group.
“We’re pleased to offer this slice of data. We think it gives some value around what consumers in different age groups are doing. It’s not really surprising. I think some of it is intuitive. When you think about the ages of people when they’re the most credit active is typically between ages 40 and 60,” Turek said.
TransUnion recorded 62.3 million auto loan accounts as of the second quarter, up from 58.2 million a year earlier. Viewed one quarter in arrears (to ensure all accounts are included in the data), new account originations increased to 6.20 million in the first quarter of this year, up from 5.82 million in the same period last year.
Not Alarmed by Q2 Delinquency Uptick
Auto delinquencies rose slightly in the second quarter because there’s more paper on the streets nowadays, but TransUnion analysts don’t think the trends are necessarily bad for the industry.
According to TransUnion, the auto loan delinquency rate — the ratio of borrowers 60 days or more delinquent on their vehicle installment contracts — increased to 0.95 percent in Q2, up from 0.87 percent a year earlier.
However, TransUnion pointed out that auto delinquencies dropped on a quarterly basis from 1 percent in the first quarter of this year.
Turek explained that the latest delinquency rate remains below the Q2 average of 1.05 percent observed between 2007 and 2014.
Since 2007, Turek noted, the auto loan delinquency rate has reached as high as 1.59 percent (in Q4 2008), while its low was observed in Q2 2012 at 0.86 percent.
"Auto lending remains similar to what we have observed during the last several quarters,” Turek said. “Delinquency rates remain relatively low while auto loan balances keep rising — both metrics aided by increasing auto loan originations.
"In fact, there are 4 million more auto loan accounts in the marketplace than we observed just last year. This means with more auto loans in the marketplace and a delinquency rate ticking higher, we now have several thousand more delinquent accounts than at the midpoint of 2013,” Turek went on to say.
TransUnion indicated that all but six states experienced an increase in their auto loan delinquency rates between Q2 of last year and Q2 of this year. The largest delinquency increases occurred in Alaska, Michigan, Montana and Nebraska.
The largest declines occurred in Hawaii, South Dakota and Oregon.
The subprime delinquency rate (those consumers with a VantageScore 2.0 credit score lower than 641 on a scale of 501-990) increased from 4.12 percent in the second quarter of last year to 4.61 percent in Q2 of this year.
Turek also noted the share of non-prime, higher risk loan originations (with a VantageScore 2.0 credit score lower than 700) grew by 56 basis points (from 33.80 percent in Q1 2013 to 34.36 percent in Q1 2014). This percentage is still lower than what was observed seven years ago near the beginning of the recession (38.98 percent in Q1 2007).
Turek said observers should not read too much into the numbers because “4.61 percent of 1,000 is different than 4.61 percent of 1 million. I’m not suggesting it’s not a reason for concern. But I think when you think about the number of loans that are entering into 30-day delinquency, they’re not flowing through. Even though we still have a low delinquency rate overall, the number of new originations has certainly increased the frequency of delinquency. But we’re not seeing them translate into significant losses.
“As you look at that across the industry, you would interpret that as it’s pretty healthy. People are continuing to buy cars. They’re continuing to finance cars. It seems to be working right now, just in a very healthy way,” he continued.
"It will be interesting to see if lending to the subprime segment of the population continues to grow and what, if any, the impact will be on the overall delinquency rate,” Turek went on to say. “Historically, increased subprime lending pushes the overall delinquency rate higher. This is not necessarily a bad thing for the auto ecosystem — consumers find reliable transportation for work, lenders actively minimize the risk, and dealers sell more cars.”
Auto Finance: A Self-Managing Industry
SubPrime Auto Finance News also gathered Turek’s perspective on what’s been the talk of the summer — a perceived bubble inflating in connection with subprime vehicle financing. Like many other observers, Turek shook off thoughts that subprime auto finance is traveling down the same tracks as mortgages that derailed the economy into the Great Recession.
“When you think about what auto lenders do, they manage risk,” Turek said. “Where we are in the current business cycle we are seeing some tremendous growth since 2010 and 2011. Some of the growth is slowing so auto sales are slowing year-over-year. There’s going to be lenders that adjust where they buy to get more volume. There’s going to be more subprime lenders in the marketplace. And then there’s going to be consumers who feel more comfortable taking on a loan.
“When all of those factors combined come together in terms of the ecosystem, there’s going to be increases in delinquency. What we’re seeing is a return to this healthy competition. Delinquency is still, compared to other periods of time, really low, even in the subprime space,” he continued.
Turek also pointed to how finance companies cater their underwriting and analysis quite different between any auto or mortgage business it might conduct.
“Most of the time a vehicle is a shorter term piece of collateral. It’s not an appreciating asset. It’s a depreciating asset,” Turek said. “There’s a lot of that analysis that goes into the financing of that vehicle. It’s an interesting topic, but when you look at the numbers and peel them back, the industry has a way of self-managing itself when it comes to cost and things that impact the industry.
“When you look back at gas prices spiked, there were some lenders that had a lot of SUVs in their portfolio. They were able to account for those potential loan losses if one of those vehicles went bad because of gas prices or their values went sharply down,” he continued.
“Values and depreciation are priced into the loan,” Turek added. “I really don’t see that there is a subprime bubble. When you look at our data and delinquency, I think we’re returning to pretty healthy numbers.”
