Contributing Author: Brien Joyce Vice President EFG Companies
One of the hot topics at the 2016 NADA Convention was the much debated subprime bubble in relation to rising delinquency rates. Again, industry experts worked to calm everyone’s nerves about Fitch Ratings’ latest report, which brought to everyone’s attention that as of February, 60-day delinquencies had risen to 5.16 percent, the highest rate since 1996. Even so, experts have once again stated that there is no bubble and delinquency rates are rising at a healthy level in conjunction with vehicle sales.
However, with the Federal Reserve raising interest rates by 25 basis points this past December, and the expectation that rates will rise again later this year, it can be posited that lenders will tighten restrictions within the subprime space. The last thing anyone wants is for higher interest rates to coincide with rising delinquency rates, creating a perfect storm that could potentially cause that debatable bubble to pop.
As you evaluate your portfolio risk and determine the best go-forward plan to maintain your market share, consider looking at avenues outside of those traditional lending benefits commonly used by the industry, like APR. While the industry has typically competed for ground on APR, lenders, especially in the subprime space, often have their hands tied on how low they can go due to Federal Reserve rate increases and portfolio risk.
In a widely anticipated decision, the Federal Reserve voted to raise interest rates this past December by 25 basis points.
And, of course, one of the first industries that will be affected by this rate hike is auto finance. As you re-assess your lending portfolio to take into account the new rates, it’s also the perfect time to evaluate how to differentiate your institution beyond rate alone.
With the interest rate hike, we can expect retail auto sales to begin to plateau in 2016. It wouldn’t be surprising to see little to no growth in overall unit sales next year. This trend will shape dealer business, as they will begin focusing more on customer retention and brand enhancement. This refocusing offers lenders the chance to differentiate their institution and grow loan volume through their engagement with dealers. The more business a given dealer has, the more opportunity you have to increase loan volume. Therefore, every lender should ask themselves, “How am I helping my dealer partners achieve their business goals?”
Contributing Author: Steve Roennau Vice President Compliance EFG Companies
Last year was a great year for the auto industry mostly because consumers from all credit tiers were able to secure financing for both new and used vehicles. According to the Federal Reserve, auto loan rates for new cars hit their lowest level in the last 40 years. Meanwhile, subprime lenders increased their share of the used vehicle market to nearly 56.7 percent by Q3 of 2013.
However, those low interest rates were paired with longer terms and higher loan-to-value ratios through the first quarter of 2014. Because of this trend, NADA analysts expect subprime lenders to react to the heightened risk of potential default associated with longer terms and begin to raise their rates in the second half of 2014. In other words, the subprime low APR bubble may be bursting.
With a rate increase expected in the latter part of this year, how are you preparing to keep your share of the market?
Lenders always have that drive to compete on rate. But, when you are unsure about the potential for significant rate volatility, how do you manage the impact on your loan volume?
In reality, the F&I manager will often look beyond rate and assess the overall benefit of conducting business and maintaining relationships with particular lending institutions. Here’s a quick self-diagnosis to determine how well insulated your business is to market rate fluctuation:
How available are our field reps to our dealers’ F&I Managers and how engaged are they in the dealers’ business?
How quickly and efficiently do we provide call-backs on decisions and fund loans for the dealers?
Do our loans help or harm the dealers’ ability to sell more vehicles and sell F&I products to increase dealership profit?
Are we committed to the automotive market long term?
Do we have a solid reputation in the area of customer service?
Your availability and active engagement with the dealer is critical. Ensuring that your field reps are adding value to the dealer’s operation at every point of contact will keep your organization in a market position where dealers want to conduct business with you, regardless of rate-competitiveness. Likewise, your paper buyers must provide timely call-backs and show a willingness to put deals together for the dealer.
Strong relationships between your buyers and the dealer’s F&I Manager combined with the efficiency of your loan approval process can keep you at the top of the dealer’s lender list through the peaks and valleys of rate movement. The same thing goes for underwriting. Streamlining the underwriting process and ensuring loans are funded efficiently builds equity in your company’s brand with the dealer. The more equity you build in your brand with the dealers, the more insulated you become in a market with rate volatility.
In addition, the loan itself, in structure and added-value content, can build value in your lending institution, by encouraging the dealer to consider you as a primary lending source—regardless of market rates. Whenever possible, leaving room for the dealer to sell consumer protection products in F&I helps drive dealer profitability and may help mitigate loss for all parties on the loan. Or, offering a loan that provides complimentary F&I products could be the differentiator that continues to drive loan volume your way.
In a market where your rates will increase and lending criteria may tighten, good lenders will find a way to add value to the dealer’s business, or find themselves becoming secondary sources in the marketplace. Dealers want to know that a lender is committed to the market. They want partners that will demonstrate staying power through the ups and downs of the sub-prime market conditions. A lender committed to the dealer’s business will earn his business.
Lastly, it’s important to maintain your reputation with the end customer. Consumers are savvier today than in the past. They actively research the majority of companies with which they choose to do business, including lending institutions. If your institution is known as having poor customer service, it’s likely that customers will jump ship and refinance with someone else the first chance they get. On the other hand, strong customer service tends to keep customers in the loan and willing to utilize your institution for future financing needs
