Sagging used-car values are a common threat to all auto finance sources this year, but especially to those with a heavy presence in leasing, according to a CEO panel held on March 22 at the American Financial Services Association (AFSA)’s Vehicle Finance Conference & Expo in Las Vegas.
Panelists addressed other topics as well, such as how to handle loan applicants who plan to use their vehicles for ride-hailing services like Uber, and how to improve the customer experience to encourage loyalty as other industries outside automotive raise consumer expectations, especially online.
However, used-car values were front and center, driven lower by lease returns.
“Lease returns go up all the way through 2019,” said Dan Berce, president and CEO of GM Financial. “Used-car values are probably the biggest risk we face as a company this year and next year.”
For the entire U.S. industry, lease maturities were almost 3.4 million in 2017, up from fewer than 3.1 million in 2016, according to Jonathan Banks, vice president of vehicle valuations, analytics, and valuation services for J.D. Power.
The post-recession low of only 1.3 million lease maturities arrived in 2012, reflecting the bottom in new-vehicle sales in 2009.
Lease maturities will continue to increase through 2019, to 4.2 million, Banks reported in an analysis released at the National Automobile Dealers Association (NADA) convention, which followed the AFSA conference.
Lease returns can generate a loss for finance companies if the actual value when they are resold is less than the lender expected when the leases were originated. Even for finance sources that don’t offer leasing, lower used-car values can also generate smaller returns or a loss when repossessions are resold.
Tapping the Brakes
Lease terminations totaled 349,000 for GM Financial in 2017, more than double the number for 2016. At the same time, the captive’s return rate for off-lease units increased to 68% in 2017, up from 50% in 2016 and 40% in 2015, according to the annual report GM Financial filed with the Securities and Exchange Commission.
Meanwhile, used-car prices declined approximately 5% in 2017 vs. 2016, GM Financial said. “We expect similar performance in 2018, with car prices expected to decline an additional 5% to 6% in 2019,” Berce said in February, when GM Financial reported its fourth-quarter and year-end results.
In response, parent company General Motors is tapping the brakes on leasing by steering incentives into subvented loans. In 2017, GM Financial originated 678,000 leases, up just 0.9% from 2016. In 2016, its lease originations were up 22.2% from the year prior.
Stepping on the Gas
For different reasons, Santander Consumer USA has been on the gas in leasing. The company rededicated itself last year to capturing more business with Fiat Chrysler Automobiles (FCA) dealers, and the automaker has pushed leasing in response to dealer demand and to protect market share.
With interest rates increasing this year, Santander Consumer, like other finance sources, expects incentives to shift toward subvented loans, the company said during its fourth-quarter investor call in January.
Rich Morrin, president of Chrysler Capital and auto relationships for Santander, joined the AFSA panel several months after being promoted from COO. Santander and FCA launched Chrysler Capital in 2013, and Santander continues to provide retail loans, leases, dealer floorplan, and commercial loans for Fiat Chrysler dealers in that name.
In 2017, Santander’s total auto originations were $20.2 billion, down 8% from 2016. Total Chrysler Capital retail loans were down 16% to $6.7 billion. However, lease originations were up 16% to $6 billion. In the fourth quarter, lease originations increased 34% from the year prior to $1.3 billion.
In the second quarter of last year, Santander also completed the national rollout of its Chrysler Capital VIP program of dealer incentives, with more than 2,500 dealerships participating.
In answer to a question during the AFSA panel, Morrin said Santander is working hard on its FCA dealer relationships. “We try and foster a relationship with every single Chrysler dealer,” he said. “We don’t just take it for granted.”
Another hot topic on the AFSA CEO panel was how to handle loan applicants who are likely to use their vehicles for ride-hailing services, such as Uber and Lyft.
Even though retail installment sales contracts for individual buyers typically mandate the customer not use the vehicle “for commercial use,” and even though an Uber driver probably puts extra wear and tear on a vehicle, a couple of panelists said that, in effect, they would probably OK such applications.
“Quite frankly, we’re not going to stop it,” said Rich Hyde, COO for Prestige Financial Services Inc., a subprime specialist based in Salt Lake City. He added, “Subprime customers tend to put on a lot of miles anyway.”
GM Financial’s Berce said GM Financial probably doesn’t care one way or the other, “as long as they’re paying for the vehicle, and wear and tear are in the right spot.”
He pointed out that parent GM owns Maven, an on-demand mobility platform launched in 2016. In March 2017, GM Financial entered an agreement to purchase program vehicles and lease them to Maven for use in their U.S. ridesharing arrangements, according to GM Financial’s annual report.
Finally, panelists agreed that, as new-vehicle sales decline, customer loyalty is more important than ever, and the focus in loyalty is on improving the customer experience, especially online.
Ravi Raghu, president of Capital One Auto Finance Inc., acknowledged that auto finance lags many other industries in terms of customer experience. He said, “How many here, as a car shopper and going through the financing experience, can say they looked back and said, ‘Wow, that was amazing!’?”
Morrin of Santander Consumer said catering to millennials probably has a positive effect on all customers. “The way a millennial wants to transact … you want the process to be transparent and easy,” he said. “We need to build processes that are just that.”
Hyde of Prestige Financial said ease of use and “wanting to make the customer experience better” are company goals for 2018. “Businesses that do well today are either easy or fun,” he said. “We’re not much fun right now, but we can be easy.”
It sounds contrary, but Hyde pointed out that as a subprime lender, Prestige Financial considers it a success if customers “graduate” to prime credit and don’t come back. He said, “We’re not really looking for repeat customers, necessarily.”
Jim Henry is a freelance writer based in the greater New York City area. Contact him at [email protected].