Below Prime Auto Financing Conference: As the Market Comes Back, Auto Lenders Look to Grow
FORT WORTH, Texas — Even though the industry is facing ever-increasing regulation thanks to the developing Consumer Financial Protection Bureau and all the rules this will likely entail, the atmosphere at this year's Below Prime Auto Financing Conference in Fort Worth, Texas, appeared to be one of exuberance.
The industry has been through the worst, and the surviving players appear to be that much stronger for it and ready to do business.
Topics garnering the most attention this year included first-time securitization issuers and ramping up origination growth, along with discussions of the development of the protection bureau and how this will impact lenders and the market.
For instance, during the first CEO Panel, Scot Seagrave, senior vice president of loan originations for Prestige Financial, explained that his team has been working more closely with dealers to explain how the approval process works. The company basically used the market downturn as a learning tool for dealers.
"The more they understand the basic fundamentals of our business, the less they hate us," he said of dealer partners.
Moreover, he noted the cost of funds has come down.
"Pricing came in lower, to our favor. Our rates have stayed the same, so our profitability is up," he pointed out.
As for Westlake Financial, this company also saw an improvement in funding costs.
"There is a lot of liquidity in capital markets, which are keeping costs low," said Ian Anderson, president of Westlake.
However, he also cautioned, "As interest rates increase, that will impact our ability to lend. But it continues to be good."
When looking at how a dealer is faring regarding non-prime auto loans booked, Anderson explained the company will drill down to the dealer level and see how a store's loan are performing in relation to the county, region and area of state.
As for Prestige, Seagrave noted that his company tends to look at how loans perform more on a regional level than a dealer-specific level.
"States are very different. It's tough to figure out why your product performs better in some states than others," he noted.
Meanwhile, Michael Ritter, president and chief executive officer of Flagship Credit Acceptance, said his company "can't have enough data." It breaks out loan performance to every level possible, he noted.
And all these lenders are looking to grow by ramping up originations and seeking new dealer relationships.
A key question an audience member asked the CEO panel was, "How do you respond to companies that start buying very deep? "In other words, how will these companies react as competition for the non-prime business heats up?
In response, Ritter said, "Each company has to do what it does best. If we all do that, the market is a gigantic place."
Prestige's Seagrave told the audience member, "We will be staying in our little box and expanding by getting in front of dealers. We are OK with the bronze medal (or not ramping up too quickly, or buying too deep)."
"When everyone starts buying up everything, we pull back and are cautious," Seagrave added.
Later in the conference, when Amy Martin, a team leader and senior director in the Structured Finance Ratings Group at Standard & Poor's, took to the stage, one of the biggest topics of interest from audience executives was how can they do securitizations.
She pointed out that there were some new issuers, such as Tidewater and Westlake Financial, which plans to become a regular securitization issuer.
Martin also said banks have pulled back on securitizations because they are not as attractive anymore.
She also briefly mentioned a new factor under financial reform — the government will be looking for securitization issuers to have "more skin in the game." The idea is that the company issuing a securitization must now have a more direct stake in that pool of loans so that as the vintage weathers, the company sees a more direct impact on its bottom line.
Martin noted that this new thinking is more geared for subprime mortgage issuers; however, it's also something of note for the auto finance industry as well.
Continuing on, she said securitizations are not up to the peak level seen in 2006 but that more issuers are coming to market.
"LTV is increasing and 2010 saw a broader array of securitizations," Martin said.
She went on to note that lenders are loosening requirements on prime approvals, from 741 FICO in 2009 to 742 in 2010, and in the first three months of this year, the average prime FICO was 734.
Finally, another popular topic of discussion this year at the conference was the expectations for the Consumer Financial Protection Bureau.
Michael Benoit, a Washington, D.C., partner with Hudson Cook, did not hesitate to delve into what he's been hearing.
According to Benoit, the government division can amend regulations but cannot write new rules until a director is confirmed.
Debate is still ongoing as to whether Elizabeth Warren, who came up with the idea for the bureau, will be installed as director or whether a board will be put in place.
Despite the fact that so much about the bureau is still unknown, Benoit did have some good things to say.
"I have been very impressed by the caliber of people hired for the consumer bureau," he pointed out.
He went through the list of names, pointing out that many are extremely knowledgeable in their areas of responsibility. He also stressed that auto finance does not appear to be a high priority for the new bureau.
"They've been doing a lot of recruiting but very little hiring," Benoit said of the bureau.
He noted that he walks by their offices in Washington, D.C., regularly, and that many of the bureau's tech personnel are crammed almost on top each other in one room. They don't appear to have room for a lot of hiring yet, he mentioned.
Benoit went on to say that the bureau executives seem to understand, "There are not the kinds of problems in auto finance as there are under credit cards or mortgages."
Ultimately, the bureau will take time to ramp up and get to business, he said.
To view PowerPoints and presentations from the conference, visit http://nafassociation.com/events/1106presentations.html.