Top Execs from Non-Prime Lenders Discuss State of Industry
FORT WORTH — While several interesting topics and panels were the focus of this year's National Auto Finance Association's Non-Prime Auto Financing Conference, the highlight of the conference was a panel consisting of the top executives from AmeriCredit, Triad Financial and First Investors Financial Services.
Mark Floyd, chief operating officer at AmeriCredit; Dan Leonard, president and chief executive officer of Triad Financial; and Tommy Moore Jr., president, CEO and co-founder of First Investors Financial Services, were asked to address the state of the non-prime industry.
Jim Bass, of driversselect, served as moderator for the panel. As many may be aware, Triad Financial halted all originations via its indirect dealer channel the end of May.
Discussing this development, Leonard said, "Our experience has been rather sudden. We didn't intend to be a case study for this panel."
Basically he explained that two of the company's warehouse lenders "had sufficient linkage that when the first warehouse had a problem it impacted the second warehouse."
To support its dealer partners, Leonard said the shareholders "stepped up to provide interim funding so as not to leave dealers, many of whom have been our partners for a long time, in the lurch."
Again he indicated, "I think we're kind of a case study of the current funding environment."
As for Floyd, he reiterated what many other executives in the industry have been saying, that the auto industry is primarily cyclical.
"The good news is that we are in a cycle," he explained. "We always go through these cycles. The bad news, however, is we don't know how long it will last. The difference this time is that we can't see the light at the end of the tunnel."
Floyd basically said that many in the industry may not have been around for the last downturn, so they may be more thrown off or worried about the current challenges.
"We're focused on fundamentals. This forces us to step back and look at our scorecards and forecasting. We go through these cycles every 15 to 20 years. Consumers are the backbone of the American economy. Obviously consumers are struggling a bit.
He summed up one of the issues as "underemployment." By this, he means that many of the consumers AmeriCredit has been talking with have had their overtime pay cut. Also, some customers who relied on second and third jobs are finding these positions disappearing.
"We went back to see how we were counting employment and took a different approach to how we're counting that (in decisioning)," Floyd pointed out. "We are making sure we're being diligent on collections. It's a balancing act. We don't want to call the customer too much. As long as we stay on top of accounts and treat the customer right, they'll be more likely to pay us than collectors who aren't so nice.
"If we get through the next couple quarters, I think we'll be OK," he added.
Moore agreed with Floyd that some concerns may be heightened because many executives currently in the industry may not have gone through a similar cycle.
"Two year ago, it became obvious and predictable what was going on in the mortgage industry," Moore highlighted.
Across the board, he said First Investors Financial Services' portfolio is performing well, but he's somewhat concerned about the leverage of consumers.
"There's a big debate about whether we're in a recession. Credit markets are in a depression. Forget recession. Spreads have widened. The de-leveraging of the industry is very concerning."
Despite the challenges, Moore told the audience, "From an operating standpoint, I prefer to lend in these types of markets. The pricing power is back in the market."
Bass chimed in saying, "The market has changed. Who is in charge?"
According to Leonard, "There is a balance returning in the relationship of the finance company and the dealer. It tilted to the dealer, but it is tilting back and balance is returning.
He added, "I don't think it is right to go back to the finance companies having all the power."
Meanwhile, Moore noted, "Equilibrium means better pricing. We're managing dealers more closely."
Basically, dealers who send poor quality applications will likely not be partners for long. However, he indicated that the finance company will work with dealers to rehabilitate the relationship prior to cutting it off.
"We're doing business with a lot fewer dealers this time around," Moore said, with both Floyd and Leonard nodding in agreement. Continuing on, he explained, "Less efficient dealers don't make money. We put them on notice. They don't improve, we stop doing business with them."
Floyd added that about six to nine months ago AmeriCredit deactivated about 3,000 dealers. He went on to note that his company turned off its auto decisioning.
"We want eyes looking at every deal," Floyd highlighted.
With a grin, Moore said, "We never auto approve; we just auto decline." He also said, "My hope and speculation is that (bigger) down payments will come back."
Also tackling the topic of the longer terms that are more prevalent in today's market, Leonard said, "I don't see extended terms going backwards. (The decision to offer longer terms) was more affordability of payment."
Floyd pointed out, "72-month loans are the norm these days."
According to the association, registrations exceeded last year's. In April, the NAF Association reduced the registration fee in recognition of the economy's impact on travel budgets.
"The reduction accomplished what we hoped," said Jack Tracey, the association's executive director. "Most conferences are down in attendance this year, and we wanted to avoid that by making it more affordable to those on tight budgets.
"The conference is always planned by our members who work in the industry, and this year the sagging economy is on everyone's mind so the program responded to that concern," he added.
Keynote speaker Bernard Weinstein, of the Institute of Applied Economics, University of North Texas, started off the program talking about the current economic pressures and whether the economy is in recession.
He pointed to falling employment, declining industrial production and price inflation, among other signs but, he said, "We will survive this."
Panels and individual presenters updated attendees on market conditions and on changes and innovations.
Amy Martin, Standard & Poor's, for example, was cautiously optimistic about auto backed securitizations. The conference topics this year focused more on operations and less on marketing.
The NAF Association's Annual Non-Prime Automotive Financing Survey, conducted by outside consultant BenchMark Consulting International, is underway and will be published this summer.
Although Tracey said he had hoped some final numbers could be released at the conference, he decided to postpone closing the survey to give more lenders an opportunity to participate.
Given the spotlight currently shown on the industry, Tracey said the study is one of the few avenues analysts, media and more can turn to for accurate data on the marketplace. In order to present a good, overall picture, he said the more lenders who participate, the better the results.
However, some preliminary results were offered during the association's annual meeting. Rich Apicella, executive for automotive finance at Benchmark, reported increases in new contract volume and portfolio sizes and a slight increase in credit quality.
Moreover, he said negative trends seemed to continue for repossession rates and losses.
To participate in this study, both member lenders and non-member lenders are encouraged to contact Apicella at R-Apicella@benchmarkinternational.com.