Credit Acceptance Corp. recently reported more than just its second-quarter performance. The company also received a civil investigative demand from the Federal Trade Commission.
As a part of its Q2 financial reporting to the Securities and Exchange Commission, Credit Acceptance said in its filing that the CID came from the FTC on June 6 relating to its various practices regarding consumers.
Credit Acceptance senior vice president and treasurer Doug Busk told investment analysts during a conference call that the company is cooperating with the inquiry.
“Relative to the contents of the civil investigative demand, it requested information on a number of topics: credit reporting, consumer privacy and information security, customer payments, marketing, training, customer communications, and consumer complaints,” Busk said.
“In terms of timing, really we don't have any insight there. We provide information, and the next step and the timing of the next step isn't known,” he continued.
The FTC’s request arrived as Credit Acceptance was in the closing weeks of a quarter when both its consolidated net income and adjusted net income increased year-over-year.
The company’s Q2 consolidated net income rose to $69.4 million, or $3.06 per diluted share compared to $61.5 million, or $2.56 per diluted share, in the year-ago quarter.
For the six-month span that ended June 30, Credit Acceptance generated $119.2 million, or $5.15 per diluted share, in consolidated net income, a total slightly lower than the same time frame in 2013 when the amount was $122.1 million, or $5.04 per diluted share.
Credit Acceptance’s second-quarter adjusted net income came in at $67.6 million, or $2.98 per diluted share, compared to $60.7 million, or $2.53 per diluted share, for the same period last year.
Through half of 2014, the company posted $131.0 million in adjusted net income, or $5.66 per diluted share. That’s higher than a year ago when Credit Acceptance had adjusted net income of $119.5 million, or $4.93 per diluted share.
Q2 Originations and Competition
Credit Acceptance’s string of double-digit growth year-over-year in loan unit volume and dollar volume stopped in the second quarter after reaching three quarters in a row. The company still posted unit- and dollar-volume jumps of 4.5 percent and 5.7 percent, respectively, during Q2 as its number of active dealers grew 10.6 percent.
The company originated 50,913 contracts in Q2 from a dealer base that consisted of 4,960 stores.
Credit Acceptance chief executive officer Brett Roberts acknowledged average volume per active dealer declined 5.5 percent year-over-year in Q2. Roberts attributed the decline in volume per dealer as the result of increased competition.
”It continues to be a difficult competitive environment,” Roberts said. “The growth rate in the second quarter did break the trend that we saw over the last three quarters. I don't know if the comparison is a little bit tougher this quarter. Last year's first quarter was pretty soft, so the first quarter of this year's growth number likely reflected that. The comparison was a little bit tougher. But it continues to be a very tough market, and the 4.5 percent growth that we had this time was certainly a break in the trend line.”
Analysts asked Roberts if Credit Acceptance is poised to return to year-over-year loan unit increases ranging from 11.0 percent to 14.3 percent as well as dollar volume rises climbing between 11.3 percent and 16.2 percent — the upward levels the company posted in the previous three quarters.
“It will get better at some point but it goes in cycles,” Roberts said. “It's probably likely to get worse before it gets better. That has been the history. It is difficult to know the exact timing, but we're in a period now where there's lots of capital and there’s lots of competition, and there’s certainly loans that are being written that we wouldn't want to write based on the economics of those loans, and so we just have to be patient until the tides turn, which they eventually will.”
The lengthening of vehicle financing contracts as well as the loan amount attached to those deals has the attention of another federal regulator — the Office of the Comptroller of the Currency.
The auto finance market appeared several times in the OCC’s Semiannual Risk Perspective from its national risk committee, which monitors the condition of the federal banking system and emerging threats to the system’s safety and soundness. NRC members include senior agency officials who supervise banks of all sizes, as well as officials from the law, policy, accounting, and economics departments. The committee meets quarterly and issues guidance to examiners that provides perspective on industry trends and highlights issues requiring attention.
“The OCC sees signs that credit risk is now building after a period of improving credit quality and problem loan clean-up,” the agency said in the report. “Examiners have observed erosion in the underwriting standards for syndicated leveraged loans, as well as loosening of standards and increased layering of risk in the indirect auto market.
“Further, bankers are speaking out increasingly regarding their concern with competitive pressures. Given these trends, the OCC will increase its attention on underwriting standards and encourage banks to diligently assess their credit risk appetite in this stage of the credit cycle,” officials said.
To reinforce its assessment, OCC officials cited several metrics previously reported by SubPrime Auto Finance News, including Experian Automotive’s quarterly analysis of term length and loan-to-value ratios.
According to Experian’s latest State of the Automotive Finance Market report, loan terms in the first quarter of this year reached the highest level since the company began publicly reporting the data in 2006.
The analysis also showed that loans with terms extending out 73 to 84 months made up 24.9 percent of all new-vehicle loans originated during the quarter, growing 27.6 percent since the first quarter of last year.
The average amount financed for a new vehicle loan also reached an all-time high of $27,612 in Q1 2014, up $964 from the previous year. In addition, the average monthly payment for a new-vehicle loan reached its highest point on record at $474 in Q1 2014, up from $459 in Q1 2013.
“Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly monthly-payment driven, with loan terms and LTV advance rates easing to make financing more broadly available,” the OCC said in its report.
“The results have yet to show large-scale deterioration at the portfolio level, but signs of increasing risk are evident,” officials continued. “Average LTV rates for both new and used vehicles are above 100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on products such as extended warranties, credit life insurance and aftermarket accessories into the financing
“The average loss per vehicle has risen substantially in the past two years, an indication of how longer terms and higher LTVs can increase exposure,” the agency went on to say. “Average charge-off amounts are higher across all lender types over the last year.
“These early signs of easing terms and increasing risk are noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently,” the OCC concluded.
Beyond the metrics about originations, collections and other figures associated with vehicle financing, the 2014 member survey orchestrated by the National Automotive Finance Association highlighted just how important Millennials are to the present and future of the industry.
During his presentation at the 18th annual Non-Prime Auto Financing Conference, George Halloran discussed at length this new crop of consumers, individuals who are comfortable handling just about any part of their financial lives through the Internet at just about any time of the day. Halloran is the auto finance program director at Benchmark Consulting International, which assembled the survey for the NAF Association again this year.
“I think it’s very much on the minds of all finance sources because what we see is the younger generation, if they’re not shopping, they show up with mom or dad or grandma and grandpa,” Halloran said. “The dealerships are becoming much more connected to this kind of shopping. And the finance source similarly is becoming much more connected because these people want to shop when they want to shop. They want products and services available on their schedule with complete information and transparency.
“It’s kind of like if they wake up at 2 in the morning, eat a Snickers, drink a Red Bull and decide they want to buy a car, they want to do it right then,” he continued. “They want to find their financing then so you have to be online with your offers and processes so they can go to them and almost get to the point of pre-approval.
“In the non-prime market, it’s a little tougher, but that’s what they’re looking for. And the younger shoppers are shopping sometimes not for themselves,” Halloran went on to say.
The dialogue about Millennials that started again at the conference and now continues isn’t something new per se, according to Halloran. During other presentations at NAF Association events, he said the topic of Millennials came up, but now it’s even more pressing since this demographic appears to represent a much larger piece of the potential buying pool.
“I don’t think it’s too much of a culture shock, but it has been something they’ve been monitoring for years,” Halloran said. “It’s an evolution. Right now finance companies are serving two types of marketplaces. Those who are not Millennials, and those who are.
“They might not be actual customers yet, but they have a huge impact on the actual customer in terms of how they operate and the tools they use and information channels they use,” he continued.
Halloran made two other points about how finance companies must approach Millennials.
“These people are very social in the way they define social, which means they want what they want when they want it, and it has to be available in a fully transparent way,” he said.
“They’re not particularly price sensitive. They’re not necessarily shopping for the best price,” Halloran continued. “Their shopping revolves around more of what they want and what they can afford. If they think they can afford something, they’re not just going to look for the lowest price around. If they find something that’s acceptable — that’s what it means to be social to them — that’s the implication in terms of pricing and availability.”
Revamped Study Produces Enhanced Results
The NAF Association included metrics from the past two years in its latest study because officials took a one-year hiatus to revamp the survey process with their partner, BenchMark Consulting International. The association meshed together some of its long-standing analysis with new material provided by Experian Automotive and FactorTrust.
The new product resulted in the NAF Association and its members being able to identify nearly a half dozen challenges that are either new or have been presented but intensified in the past couple of years.
To reinforce the validity of its process, orchestrators pointed out that 77 percent of companies that participated are repeat contributors. The total accounts for the 22 finance companies that completed the survey surpassed 1.2 million, up 5 percent from two years ago when the last survey was compiled. The outstanding balances within the portfolios of the participants exceeded $10 billion, up 10 percent from the previous installment.
The 22 finance companies that participated included:
— AFS Acceptance
— Anderson Brothers Bank
— Automobile Acceptance Corp.
— Chase Auto Finance
— Crescent Bank & Trust
— FIFSG/First Investors Financial Services
— Foursight
— Gateway Financial Solutions
— MarkOne Holdings
— MPH2 Funding
— Nationwide Acceptance Corp.
— PFS Corp.
— Prestige Financial Services
— Regional Acceptance Corp.
— Security National Automotive Acceptance
— Southern Auto Finance
— Summit Financial Corp.
— Tidewater Finance Co.
— Top Finance Co.
— Turner Acceptance
— United Finance
— Westlake Financial Services
“A year and half ago, we decided that the survey questions that were being asked and the report we produced, the information was available from other sources,” NAF Association executive director Jack Tracey said. “We made a conscientious effort to try to find out what the marketplace wanted to know. We then built the survey form we’re using today to gather information so we could produce more relevant information that would be useful and not necessarily available anywhere else.
On top of that we brought in Experian and FactorTrust with their information stratified into just the non-prime markets. We feel now that we’re getting a broader overview of the industry, and the details we are providing hopefully will be some metrics to help manage their organizations,” he continued.
Highlights of Conference
One of the largest crowds ever attended this year’s NAF Association Non-Prime Auto Financing Conference, pushed in part by the presence of the Consumer Financial Protection Bureau.
“I think it went very well. The feedback has been almost universally favorable,” Tracey said. “People think we really raised the bar this year on what we provided to the people in attendance.
“It was just a good event. It challenges me to keep the conference as interesting as we need it to be,” he continued. “With the CFPB out there doing things, it’s not hard to come up with items that people are concerned about.”
The event started with a Q-and-A session only for NAF Association members with Jeffrey Langer and Eric Reusch, who both are in the Office of Installment and Liquidity Credit Markets with the CFPB. Later a select group had the opportunity to have a lunchtime discussion with both of the CFPB officials who shared their perspective on the regulatory requirements the bureau is asking of finance companies.
“The CPFB people were very pleased with the opportunity to answer the questions the NAF members asked,” Tracey said. “Our people were extremely pleased with the exchange of information, getting a real appreciation for what the CFPB is trying to do.”
The conference included presentations from Sandy Schwartz and Tom Webb from Manheim, Amy Martin from Standard & Poor’s and Steve Chaouki from TransUnion.
Tracey shared one other element he noticed that made this year’s conference unique.
“We had a lot more funders than we’ve had in the past, which is an indication that the market is hot. There’s a lot of money out there,” Tracey said. “You could conclude that there is a lot of money in the marketplace chasing deals so there is a lot of pressure on the finance companies to lower rates or take riskier transactions in order to get the money on the street.
“Generally, those dynamics when there is a lot of money flowing into the market and the competition increases and there is a need for volume, we’ve reached the peak of the cycle and some of the negatives in the marketplace — delinquencies, losses, repos — those trends start to take over,” he continued. “Then, the market slows down a bit because people become spooked.
“The funders are there, and that’s good. But it also creates an environment that people need to be cautious of,” Tracey added.
Implemented in less than seven months, White Clarke Group’s CALMS2 Platform has automated application submissions and decisioning for Exeter Finance’s recently launched Strategic Originations Channel.
Officials indicated that now 100 percent of Exeter’s channel applications are pushed through this platform.
White Clarke believes the new system gives Exeter a competitive advantage in recruiting strategic alliances.
Exeter is a growing subprime finance company in the U.S., serving more than 9,000 dealers through its traditional branch channel. Exeter’s growth and the introduction of a centralized strategic originations channel necessitated a completely new platform.
Matt Colby, senior vice president of strategic originations at Exeter, helped build out the process and explained what the company was seeking from the system.
“For us, there were two key requirements,” Colby said. “One, we needed to fully automate the initial underwriting and decisioning process to deliver an offer to the end-customer while they are seated in the dealership. That means a total elapsed time of less than five minutes. In fact, the application decision should be returned in seconds.
“Two, we needed a highly configurable platform that would accommodate future strategic alliances and continued growth, without systems development. That is a major competitive advantage that CALMS provides,” he continued.
Exeter’s project was kicked off in December 2012 and went live in June of last year on time and on budget, something that Exeter chief information officer Nick Ockwell describes as a big win and unusual for an initial system launch.
“Internally, we put our best people on the project. That was fundamental to a successful implementation,” Ockwell said.
“White Clarke Group was the second big factor. We wanted a partner with experience and credibility, someone who had a certain scale and could challenge our thinking,” he added. “Ultimately, White Clarke Group delivered a quality product that has delighted both our business users and our first alliance partner. It has exceeded all of our expectations.”
Along with giving executives another opportunity to complete the first module of its compliance certification program, the National Automotive Finance Association is rolling out one of its best lineups ever for its annual conference later this month.
The NAF Association acquired 25 percent more conference space to accommodate more programs, sessions and expansion of the exhibit hall for the 18th annual Non-Prime Auto Financing Conference, which begins on May 28 at the Omni Fort Worth Hotel in Fort Worth Texas.
“In keeping the primary focus on member needs, the 2014 annual conference will provide an excellent forum for education and networking for those within the non-prime auto finance sector. This highly regarded conference will cover the hot topics pertinent to the industry along with results from the newly formatted NAF Association Survey,” NAF Association executive director Jack Tracey said.
Among some of the conference agenda highlights:
—Consumer Financial Protection Bureau Q&A: This session is built on questions submitted in advance by NAF Association members. Members’ questions will be compiled, and Rick Hackett, partner with Hudson Cook and former CFPB assistant director will pose the questions to CFPB executives Jeffrey Langer, assistant director, office of installment and liquidity lending markets, and Eric Reusch, office of installment and liquidity lending markets.
—Auto Industry Lending Through the Eyes of a Leading Industry Expert: Attendees of this session will hear observations on auto industry financing from leading industry professional, Sandy Schwartz, president of Manheim and the Auto Trader Group. His views will provide a perspective on how the cyclical swings in financing affect the auto industry at large.
—Subprime Forecast: Revving Up Your Approach to Auto Loan Portfolio Evaluation: Presented by Steve Chaouki, executive vice president of strategy and planning at TransUnion, this session cover how the sector has experienced significant growth since 2010, with strong demand pushing manufacturers to production capacity limits. One of the consequences of this dynamic has been the appreciation of used vehicle values, which in turn has led to a positive equity position on many auto loans. TransUnion’s study quantifies the impact of positive equity on the risk propensities of auto loans, controlling for a series of risk factors related to both the borrower and the loan collateral. Through analysis, Chaouki will show how the presence of positive equity leads to a meaningful reduction of credit risk under certain conditions, and how lenders can leverage this insight to optimize their portfolio management, collections and capital reserve policies.
— Asset Backed Securitization: An Update on Recent Developments and Trends: Presented by Amy Martin, senior director at Standard and Poors this session will focus on the current market trends in non-prime financing. This session will provide information on issuance volume and pricing spread; collateral and ratings performance and Standard and Poor’s outlook for the auto loan ABS market.
Before the conference begins, the NAF Association is repeating the opening segment of its compliance certification program due to strong demand. The association had an overflow crowd when it conducted the training back in January so Tracey decided to hold another session in Fort Worth this month.
The NAF Association offers an exceptional certification program including:
—35 hours in-classroom and online self-paced courses
—In-depth coverage of federal laws and regulations
—Thorough analysis of state laws and regulations
—Complete module devoted to CFPB
“A critical part of a compliance management system is staffing it with qualified compliance personnel. A company having their compliance officers certified through a comprehensive educational program is a clear demonstration of the importance the organization places on compliance,” Tracey said.
Certification participants will be eligible to attend the remaining sessions of the Non-Prime Auto Finance Conference for $195.
For complete details of the conference and the compliance certification program, visit www.nafassociation.com.
Based on the thinking that the right approach to financing a vehicle can help subprime buyers get their credit back on the right track, Edmunds.com offered four recommendations that dealers can share with consumers to help with the process.
Those four suggestions included:
1. Run your credit report. AnnualCreditReport.com offers one free report per year from each of the major credit reporting companies. The report will help you identify “risk factors” in your history — such as old debts and unpaid fines — so that consumers can fix them. Edmunds.com recommended taking this step at least three months before people plan to buy so that they can take action on any outstanding items before engaging with the dealership and other lenders.
2. Get pre-approved for a loan. If the buyer’s credit is bad, they can expect to pay a high interest rate on the loan. But the site said that doesn’t mean consumers shouldn’t shop around for the best possible rates. The site mentioned people should check with their bank or credit union since they may be more willing to approve if the consumer already has an existing financial relationship.
3. Show that you’re a good credit risk. When consumers apply for financing — especially at a dealership — they should bring proof of improved financial stability. These items may include a recent pay stub, a utility bill and a list of personal references
4. Stay well within your price range. Just because a consumer qualified to buy a $22,000 midsize sedan, that doesn’t mean they should buy it. For example, if the buyer scales back and purchases a $17,000 compact sedan, he or she will free up $100 per month. This is money they could use for gas, insurance or other bills.
“Contrary to popular belief, there are a number of reasons why a lender would help somebody with a troubled credit history to buy a new car,” said Edmunds.com consumer advice editor Ronald Montoya.
“If you do your credit homework, shop within your price range and make all of your payments, you'll not only improve your credit score but you’ll also practice positive finance habits that will serve you well for years to come,” Montoya continued.
General Motors Financial is not booking as much subprime paper for its parent automaker as it was a year ago, but company leadership isn’t alarmed by the modest decline experienced during the first quarter.
The lender’s share of subprime contracts associated with GM vehicles in Q1 came in at 31.8 percent. That figure is down from 36.3 percent a year earlier. GM Financial president and chief executive officer Dan Berce pointed out the company’s entire portfolio of subprime deals still ticked up slightly year-over-year to a market penetration level of 7.9 percent, slightly above what the industry average was in the first quarter (7.2. percent).
“In today’s low-rate interest environment we do see bank rates at the upper end of subprime being competitive with our subprime rates so that did account for some of our erosion in market share. Nevertheless, because GM’s subprime share is still at industry-leading levels we feel we’ve accomplished our mandate by creating a competitive product in subprime,” Berce said.
By accomplishing that mandate, GM Financial generated earnings of $145 million for the quarter, compared to $106 million for the same quarter a year ago.
The company grew consumer loan originations to $3.4 billion in Q1, up from $3.3 billion during the fourth quarter of 2013 and $1.4 billion in the year-ago period.
GM Financial’s outstanding balance of consumer finance receivables totaled $24.1 billion as of March 31.
“All of the sectors were strong. Our used-car origination volumes for both GM and non-GM dealers were higher than a year ago. The new GM vehicle originations slightly less, again for those reasons I talked about before with bank rates being quite competitive in subprime today,” Berce said.
“Competitive dynamics, a quick comment on that, they remain intense, but I would say that we did see the competitive conditions stabilize a bit in the quarter after intensifying really for the bulk of 2012 and 2013,” he continued. “We at GM Financial, though, have maintained credit and pricing discipline. We haven’t made any changes to our credit policy of any meaningful way in the subprime area.”
And since underwriting hasn’t changed much, GM Financial reported that consumer finance receivables 31-to-60 days delinquent stood at 3.1 percent of the portfolio as of the close of the first quarter, improving from 4.3 percent on March 31 of last year.
Accounts more than 60 days delinquent constituted 1.4 percent of the company’s portfolio on March 31, down slightly from 1.5 percent on the same date a year ago. Consumer finance receivables 31-to-60 and more than 60 days delinquent for North America were 5.0 percent and 1.8 percent, respectively, as of the first quarter.
Elsewhere in the performance area, GM Financial noted annualized net credit losses were 1.8 percent of average consumer finance receivables for the quarter, compared to 2.6 percent a year earlier. Annualized net credit losses for North America as a percent of average North America consumer finance receivables were 3.1 percent for the quarter.
“Just like originations, we did see seasonality as usual here,” Berce said.
Leasing Activity
GM Financial indicated operating lease originations of GM vehicles totaled $773 million, up from $650 million sequentially and from $620 million year-over-year.
The net amount of leased vehicles in GM Financial’s portfolio totaled $3.7 billion as of March 31.
“Lease originations, this is a bright spot for us,” Berce said. “We particularly had a good quarter in Canada this quarter originating a little more that $250 million of new leases. That was primarily because of outstandingly lease support from GM in Canada and our introduction of a biweekly pay option, which has been received by the market quite well.
“U.S. volumes were about flat year-over-year at $519 million compared to $535 million a year ago. Credit performance in this portfolio remains exceptional primarily due to the prime nature of this portfolio,” he went on to say.
Commercial Lending and Liquidity Update
The company’s outstanding balance of commercial finance receivables came in at $7.1 billion in the first quarter, up from $6.7 billion at the end of the fourth quarter and $883 million a year ago.
The outstanding balance of the North America commercial finance receivables on March 31 was $2.2 billion.
Commercial lending in North America, we continue to see steady progress albeit slow. We are up to 336 dealers now in the U.S. and Canada with outstandings of just short of $2.2 billion,” Berce said.
“We do believe that with the roll out of our prime product this summer that will help our progress here,” he continued. “Dealers continually tell us that they would like to have a single source for all of their needs whether it's commercial or consumer, loan or lease. And with prime we will for the first time have a complete product suite and therefore we think we will get more adoption of all of our product toward the end of 2014 and into 2015.”
The company had total available liquidity of $3.8 billion as of March 31, consisting of $1.2 billion of unrestricted cash, $1.4 billion of borrowing capacity on unpledged eligible assets, $583 million of borrowing capacity on unsecured lines of credit and $600 million of borrowing capacity on a line of credit from GM.
The National Credit Union Foundation, in partnership with Filene Research Institute, highlighted that 14 credit unions across the country are participating in a product incubator for non-prime auto loans.
The following credit unions will be testing the non-prime auto loan product:
—CALCOE FCU in Yakima, Wash.
—Cy-Fair FCU in Houston
—Denver Community CU in Denver
—EECU in Fort Worth, Texas
—Freedom First CU in Roanoke, Va.
—Laramie Plains Community FCU in Laramie, Wyo.
—Missoula FCU in Missoula, Mont.
—SchoolsFirst FCU in Santa Ana, Calif.
—Seasons CU in Middletown, Conn.
—Shreveport FCU in Shreveport, La.
—Soo Coop CU in Sault Ste Marie, Mich.
—Summit CU in Madison, Wis.
—University CU in Austin, Texas
—US FCU in Burnsville, Minn.
These non-prime auto loans are one of five products in the Filene Research Institute’s accessible financial services incubator funded by the Ford Foundation.
“Credit unions have a long history as being the proving ground for consumer centric, innovative financial products,” said Cynthia Campbell, director of innovation labs at Filene. “And partnering with the NCUF to test the viability of Non-Prime Auto Loans with mainstream financial institutions was a natural fit since their experience in working with low-to-moderate income consumers is extensive.”
NCUF noted that 88 percent of Americans drive to work. Without a vehicle, NCUF executive director Gigi Hyland acknowledged that options for work, food, childcare and healthcare become limited.
Hyland insisted economic mobility is strengthened through the mobility that comes with affordable, reliable wheels, and this product increases access to affordable vehicle loans to those who have credit challenges.
“Estimates say that families can increase their income by as much as 25 percent with access to reliable transportation,” Hyland said.
“We’re excited to work with not only Filene on this project but also such a wide array of credit unions across the country to give affordable, safe and reliable used cars to those that need them most,” she went on to say.
Moody’s sees finance companies easing off the subprime vehicle loan accelerator, but analysts stopped short of saying that lenders are ready to hit the brakes on originations to consumers with damaged credit histories.
According to a new report from Moody’s, U.S. subprime auto lenders are exercising more caution in granting loans to increasingly risky borrowers, although some data lead Moody's to conclude that a major slowdown in subprime lending is not in the offing.
The report titled, “U.S. Subprime Auto Lenders Somewhat More Cautious,” is based on an analysis of the latest data from Experian.
Moody’s vice president and senior analyst Peter McNally explained that one factor pointing to increasing caution among lenders was improved borrower credit scores for used auto loans in the fourth quarter 2013, the first year-over-year improvement since 2010.
Another factor McNally mentioned is slower growth in the shares of lending in the subprime space held by banks, credit unions, and captive finance companies.
“Declining competition from non-traditional subprime lenders puts less pressure on independent finance companies to lend to weaker borrowers to maintain their lending volumes” McNally said.
“If lenders maintain this caution, loan losses among newer loans could stabilize,” he continued.
McNally also pointed out that rising interest rates on subprime loans also indicate that lenders are becoming more cautious. Previously, APRs were falling despite the decline in credit, suggesting that competition was strong enough for lenders to leave themselves uncompensated for rising risk levels.
“However, rising loan-to-values and loan terms suggest that lenders are still willing to take on increasing risk,” McNally said. “So we don’t anticipate a major slowdown in subprime lending.”
The report also indicated some lenders could also be more hesitant given the deteriorating performance of recent subprime originations. Analysts cited Experian data that showed delinquency rates in recent originations by finance companies, which grant a high share of their loans to less-than-prime borrowers, are increasing.
Loans originated in 2013 had the highest delinquencies since those originated in 2008, according to Experian.
Moody's expects that new loan volumes will remain high, at least through 2015, because market conditions remain favorable for increased lending.
“The improving labor market, along with pent-up demand in the auto industry, will generate new customers. At the same time, persistently low interest rates, which give lenders low cost of funds, will entice lenders to keep making loans,” McNally said.
Earlier today, Equifax formally announced the strengthening of its recent strategic alliance with IHS Automotive, which integrated R. L. Polk & Co. into its business last year.
Officials highlighted this alliance creates a unique value proposition for the automotive market and allows both organizations the opportunity to bring deeper insights that empower critical business decisions for automotive lenders, dealers and manufacturers.
With the announcement of a formal alliance, Equifax is also releasing its first jointly developed product with IHS Automotive — Equifax Lost Sales Analysis.
Officials explained this solution can capture auto loan application data and can use it to produce analysis of where lenders lost out on deals to their competitors. Lenders also can assess how missed opportunities are performing and whether the original offers could have been more competitive.
Additionally, Equifax Lost Sales Analysis can allow lenders to better understand the competitive landscape by showing where dealers in their network are sending their business and which auto financers are winning their lost loans.
Additionally, the credit bureau believes lenders will better understand what terms the winning lender offered, and determine if the lost sales would have been a good fit for their portfolio. Equifax Lost Sales Analysis also provides detailed information about customer APR, financed amount, type of loan, vehicle, lender and dealer information when available, and performance metrics such as delinquencies and repossessions.
“As the economy continues to strengthen and auto lending competition heats up, lenders need the right tools to help remain competitive,” said Joy Wilder Lybeer, senior vice president of the financial services group at Equifax.
“Equifax Lost Sales Analysis enables lenders to fuel improved sales performance by providing competitive lending insights and market analytics,” Lybeer continued. “We are excited about our strategic alliance with IHS Automotive and look forward to continuing to work together to ensure that our automotive services team at Equifax best meets the evolving needs of our auto customers.”
IHS Automotive senior vice president Edouard Tavernier also commented on what this new tool can do.
“We are excited about the new insights the combined solution will provide the automotive finance industry,” Tavernier said. “It is a great example of how connecting the robust automotive registration data from Polk, with additional content and powerful analytical tools, can extend the value we provide to automotive customers.
“We look forward to expanding our collaboration with Equifax to provide a full suite of analytical offerings for automotive lenders,” he went on to say.
