CARY, N.C. -

In the latest installment of the annual Power 300 issue of Auto Remarketing, we go behind the scenes with some of the leading companies in the used-car space and their top executives with a few Q&A features.

Next up in this series is Lou Loquasto, auto finance leader at Equifax.

Auto Remarketing: What’s your assessment of how much momentum leasing has generated in the past 12 to 24 months?

Lou Loquasto: Leasing in particular, I think the story there is have you ever heard stories about people who lived through the Great Depression and how they lived the rest of their lives? About how they handled finances after that? It was almost like the trauma of that 10-year period changed the way they lived their life and looked at finances. I think that dynamic is going on for people who went through the Great Recession. I think both lenders and consumers are hyper-focused on affordability. I don’t think consumers are going to stretch the bounds of ‘Can I afford this monthly payment?’ And I’ve seen the data on what lenders and lessors are doing. They are being super vigilant about affordability. Leasing is a great way to get that next car or to upgrade to some of these new models with new technology and safety features but at the same time keep that payment super affordable.

Auto executives and consumers who lived through the Great Recession are going to stay focused on affordability. Things like leasing, longer-term loans, not making loans people can’t afford, it’s all why the Equifax data continues to show delinquencies and losses remain so low. It’s all about the focus on affordability.

One other thing about leasing, because vehicle values have been so strong on used cars — we’ve nearly hit the Manheim record again — the difference in payment will push a lot of people toward leasing. Vehicle values aren’t going to stay this way forever so I think at some point as vehicle values go lower, I think you’ll start to see the lease penetration go down a little bit.

AR: Which do finance companies consider to be riskier — leasing or traditional purchase financing — and why?

LL: Certainly apples to apples. A 750 (FICO score) lease is more risky than a 750 (FICO score) retail because with leasing you have to worry about the residual value on the vehicle and you don’t have to for retail. We do see similar default rates in similar credit score bands for lease and retail. But for lease, they’re turning in a very high percentage of those vehicles, and if you don’t get the residual value correct you will take losses. But the lessors know this, and there’s more and better vehicle value data and projections than ever before. And with companies like Equifax there’s more and better data to help you understand the likelihood of default. Lenders are using more than just the generic credit score so lenders are accounting for it. You don’t see much non-prime lease. They stay with the prime segment because they are taking on the additional residual value risk.

AR: How much more capacity do consumers have to take on growing monthly payments stemming from more expensive vehicles?

LL: That’s the whole story. Everything is affordability. The reason why our industry has been so healthy and so strong is affordability. Some of that has been lender discipline. Some of it has been consumers aren’t spending unnecessarily. They’re not running up credit card debt or home equity debt like before the recession. There’s been news recently where income is starting to increase. As monthly payments move, if income can continue to inch up and we can continue to keep loan terms where they are then I think the affordability is going to continue to be the story. It’s the story of why fix something that’s not broken. Right now, losses and delinquencies are so low, having that vigilance on affordability I think is going to keep it that way. The issue with auto lenders has been margins. It’s been such a competitive space that margins have been compressed because interest rates being charged to consumers is so low across all credit segments. There’s a feeling out there that in 2016 the competition has eased up a little bit so there have been fewer lenders just giving away interest rate just to buy the deal. I think 2016 and certainly 2017 our margins might tick up a little bit even though delinquency and losses will tick up, too.

AR: Besides compliance burdens, what other costs and factors do you see impacting the potential profit finance companies can generate in the auto space?

LL: I think one of the biggest impacts is just the cycle. No one within our industry expects things to be as good as 2011 and 2012. Another comment (I heard) is this was almost like a once-in-a-lifetime situation where the auto loans being made, not many were making auto loans, and the auto loans made during that period were so profitable. They performed so well because only the customers who were the very best were getting auto loans. The biggest risk to all of this is just expectations. People have to understand that we’re going back more toward a normal cycle that has more normal returns. You’re not going to have returns of 10 or 11 percent. That’s a once-in-a-lifetime scenario for auto finance. But you’re still going to have healthy returns. No investor has even lost a penny in the history of auto asset backed securities. To think that all of that is going to blow up at a time when delinquencies are way below historical norms, for people who look at the data like Equifax, and people who work with auto finance companies, no one is seeing it. Good times are going to continue. It’s not going to be the peak that it was in 2011, but lenders are focusing on affordability and consumers are focusing on affordability. Consumers are getting loans they need to buy cars to get to work. It’s a very happy time for our industry even though sometimes other media sources try to make it out that it’s not.

 

Additional pieces from this series can be found below: 

4 questions with AUL's Jimmy Atkinson
Q&A with Jared Rowe
4 questions with Costo Auto Program's Lori Grone
4 questions with Tony Hughes of Moody’s Analytics
4 questions with NABD's Ken Shilson