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Credit Crisis or Market Rationalization?

Delinquencies are rising and auto finance sources are responding. But the editor wonders if there’s something else at play.

April 11, 2017

You know something’s up when CU Direct dedicates a portion of its auto finance webcast to warn credit unions to be on the lookout for powerbooking and the good ole “repo close.” The weekly social media posts about another finance source pulling out of a market also make me wonder.

I guess it seems like something’s afoot, as if there’s a little battening down of the hatches going on in the auto finance space. And, well, my feelings seem to line up with findings in Experian’s fourth quarter 2016 report.

As you’ll see, auto finance closed out last year’s end-of-year quarter with a bang, recording new highs for average finance amounts and total balances. The latter reach a record $1.072 trillion. And as you’ll read, finance sources reacted to rising delinquencies by reducing the percentage of financing in those high-risk tiers during the period.

In fact, a “continued focus on risk discipline” was Wells Fargo’s explanation for the 15% year-over-year decline in auto originations in the fourth quarter. Capital One, GM Financial, and Santander offered similar reasons for their cutback in auto loan growth last year, too.

Still, I have been hearing whispers for the last few years about how out of control auto finance has gotten. Heck, Tony Wanderon, president and CEO of National Auto Care, said as much in last month’s cover story on rising GAP claims. The one quote that didn’t make the cut was his take on the regulatory environment’s impact, or lack thereof, on auto finance.

“Honestly, I think the regulatory environment in lending is a little bit less on the auto lending side,” he said. “Even through we’ve been dealing with it, it’s less than others, and I think it’s opened up the doors to lending that really doesn’t make any sense to me.”

He does have a point.

Keep in mind we’re seven years and about eight months into the current economic expansion, which officially began in July 2009. And according to the U.S. Bureau of Economic Analysis, only one expansion in the last 50 years lasted longer than eight years and one month.

I’m not trying to get doomy and gloomy here. Truth is, the economy continues to expand, the unemployment rate could fall to 4.5% by year’s end, household income is inching up, and consumer and business economic sentiment is relatively high. That was the reason the Fed raised rates by a quarter point last month and maintained its forecast for two more increases this year and three in 2018.

So what’s going on? And what does it mean to you in the finance office? I posed both questions to Black Book’s Anil Goyal at the National Automobile Dealers Association’s 2017 convention back in January. He said he believes players in the subprime tiers will emerge as banks resist the urge to go full spectrum like they did in the lead up to the credit crisis and the Great Recession that followed.

“Now they’re saying, ‘We’re going to limit how much penetration we have on subprime.’ So they’re tightening their criteria more,” he said. “That means more of the niche subprime players are the ones who are gonna be better positioned to play in that, which is good. Because when there’s too much competition, especially in that risky sector, you’re shrinking the margins. And margins have to stay high because the risk is rising.”

I guess that’s why the folks at AmeriCredit wanted me to meet with Paul Gillespie at NADA. He was named the finance company’s senior vice president of sales and operations last January. “A year ago this month, we made the decision to dedicate management solely to the AmeriCredit channel, so we got a full year now of dedicated senior management running that channel,” he said.

As for what he thinks about the market, he said, “I think there are certain lenders that have made the decision to be a little bit more conservative. But by and large, there’s still a lot of credit availability that can support the subprime and used-car markets.”

I think Black Book’s Goyal put it best when he said, “I just think the market is rationalizing on its own.” That tells me lending relationships matter once again. I guess that’s why CUDL’s message to credit unions during its March webcast was that price alone won’t win over dealers. Process, and faster funding and response times will. You know, relationship stuff.

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