CRL auto finance presentation

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  • Higher profit margins are on the “back end” (financing and aftermarket sales) then the “front end” (sale of the vehicle itself).
  • Loan terms have been rising consistently. Avg borrower trades in car at 36 months, then finances for 63 months Stretching loan terms necessary to lower monthly payments 92% of new car buyers qualified for shorter terms, but chose longer terms to lower monthly payments (CNW statistic)
  • Captives dominate loans arranged through dealerships.
  • R Square=.670, Adjusted R Square=.580
  • R Square=.948, Adjusted R Square=.938
  • CRL auto finance presentation

    1. 1. “ Under the Hood” Predatory Lending in Dealer-Arranged Auto Loan Financing Delvin Davis
    2. 2. Research Questions/Objectives <ul><li>Illustrate different dynamics working within dealer-arranged auto financing. </li></ul><ul><li>Examine how these factors influence both loan affordability and sustainability. </li></ul><ul><li>Publish consistent data points on the auto loan industry that can be usable elsewhere. </li></ul><ul><ul><li>Including data on Buy-Here Pay-Here Dealers </li></ul></ul>
    3. 3. Dealer-arranged (Indirect) Auto Financing Background Data on Indirect Auto Lending and the Dealer F&I Department
    4. 4. Total Auto Loan Volume (Billions of dollars) Source: CNW Market Research Note: New sales data from franchise dealers only. Used sale data include franchise, independent and casual sales.
    5. 5. F&I Department Have Highest Margins of the Dealership Source: CNW Marketing Research
    6. 6. Dealerships Lean Heavily on F&I for Profit <ul><li>F&I profits are enhanced by high-margin practices </li></ul><ul><ul><li>APR Dealer Kickbacks </li></ul></ul><ul><ul><ul><li>$18.1 Billion in 2009 </li></ul></ul></ul><ul><ul><li>Loan Packing </li></ul></ul><ul><ul><ul><li>Aftermarket product sales with high markups </li></ul></ul></ul><ul><ul><li>Yo-Yo Scams </li></ul></ul><ul><ul><ul><li>More prevalent with low-income borrowers </li></ul></ul></ul><ul><ul><li>Rolling Negative Equity </li></ul></ul><ul><ul><ul><li>“ Drive one, pay for two” </li></ul></ul></ul><ul><ul><ul><li>Stretching loan terms </li></ul></ul></ul>Source: CNW Marketing Research; For franchised dealers only (selling vehicles to private parties)
    7. 7. Direct and Indirect Market Shares by Loan Source Source: JD Power and Associates presentation (2008)
    8. 8. Cars are More Affordable, but Less Sustainable Source: Comerica Auto Affordability Index; CNW Marketing Research (repossession rates)
    9. 9. Repossession Rates by Lender Type <ul><li>Major captive auto finance lenders settled class action lawsuits from 2003-2007. </li></ul><ul><ul><li>Resulted in self-imposed caps on interest rate markups (usu. 2.0%-2.5%) </li></ul></ul><ul><ul><li>Caps dealt with race discrimination in the extreme cases, but allowed markups across the board </li></ul></ul><ul><ul><li>Even with caps, captives still slightly outpace banks and credit unions in current repo rates </li></ul></ul>Source: Experian data
    10. 10. Auto Loan Sustainability and Affordability Using Auto ABS Pool Data to Examine Loan Delinquency and Rate Markup
    11. 11. Using Auto ABS Securities <ul><li>Mined data from 76 auto ABS prospectuses </li></ul><ul><ul><li>Credit Info: Avg Amount Financed, Avg FICO, % Used Sales, Avg Term, Weighted Avg APR </li></ul></ul><ul><ul><li>Lender Type: Captive Lender (with and without a markup cap), Bank, or Finance Company </li></ul></ul><ul><li>Bloomberg: Pool yields and 60-Day DQ rates </li></ul><ul><li>Added macroeconomic variables based on date of pool issuance </li></ul><ul><ul><li>Unemployment rate, foreclosure rate, bankruptcy filings, Federal Reserve market rates </li></ul></ul>
    12. 12. Estimating Interest Rate Markup <ul><li>For each pool, an estimate for an objective investor rate was calculated. </li></ul><ul><ul><li>Used the reported yield and payment schedule for each pool’s class to determine the combined yield for the pool overall. </li></ul></ul><ul><ul><li>Determined what rate an investor would be willing to pay over and above the comparable Treasury rate. </li></ul></ul><ul><ul><li>Investor rates then adjusted to account for presence of overcollateralization and withheld pool classes. (“Fitted Investor Rate” </li></ul></ul><ul><li>Rate Markup = Pool Wtd Avg APR – Fitted Investor Rate </li></ul>
    13. 13. Model 1: Dependent Variable – 60 Day DQ Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta B Std. Error (Constant) 2.280 1.098 2.076 .043 Avg Amount Financed (in '000s) .007 .014 .048 .479 .634 Weighted Avg FICO .001 .002 .086 .337 .737 % Used Sales in Pool -.002 .002 -.162 -1.158 .252 Weighted Avg Term -.030 .015 -.254 -1.938 *.058 Captive with Markup Cap -.257 .116 -.252 -2.222 **.030 Bank -.252 .153 -.226 -1.648 .105 Finance Co. -.012 .157 -.011 -.074 .942 Change in Unemployment Rate -.001 .003 -.084 -.335 .739 Change in Foreclosure Rate .006 .004 .508 1.322 .192 Change in Bankruptcy Filings -.008 .007 -.468 -1.217 .229 Change in Fed Reserve Prime Rate -.010 .010 -.122 -1.014 .315 2008 Issuance .088 .281 .094 .314 .755 2009 Issuance -.214 .410 -.216 -.522 .604 2010 Issuance -.417 .421 -.367 -.991 .326 Estimated Rate Markup .112 .036 .983 3.110 ***.003
    14. 14. Model 1: Key Points <ul><li>Rate markup is a significant driver of 60-day DQ </li></ul><ul><li>No macroeconomic factors are significant </li></ul><ul><ul><li>Implies dealers cannot entirely blame rising DQ on the current economy </li></ul></ul><ul><li>Existence of a markup cap helps to lower DQ </li></ul><ul><li>Loan term (in months) associated with lower DQ </li></ul><ul><li>FICO, a traditional measure of risk, is also not significant driver of DQ </li></ul><ul><ul><li>Possibly explained through the markup variable </li></ul></ul>
    15. 15. Model 2: Dep Variable – Estimated Rate Markup Unstandardized Coefficients Standardized Coefficients t Sig. B Std. Error Beta B Std. Error (Constant) -3.414 3.548 -.962 .340 Avg Amount Financed (in '000s) -.138 .039 -.116 -3.563 ***.001 Weighted Avg FICO -.058 .004 -.740 -16.237 ***.000 % Used Sales in Pool .018 .006 .140 2.853 ***.006 Weighted Avg Term .155 .045 .150 3.486 ***.001 Captive with Markup Cap -1.241 .389 -.144 -3.193 ***.002 Bank .537 .467 .058 1.150 .255 Finance Co. -.432 .503 -.049 -.859 .394 Fed Reserve Prime Rate .948 .689 .087 1.375 .174 Fed Reserve 3-Year Rate -.602 .263 -.114 -2.289 **.025 Fed Reserve BBB Rate .215 .378 .042 .568 .572 FICO x Captive w/Cap Interaction .030 .010 .114 3.175 ***.002 Fitted Investor Rate -1.546 .842 -.183 -1.835 *.071
    16. 16. Model 2: Key Points <ul><li>Credit factors, including FICO are significant with Estimated Markup </li></ul><ul><ul><li>On surface, conflicts with notion that markups are arbitrary and subjective </li></ul></ul><ul><ul><li>Extended terms and used sales drive higher markups </li></ul></ul><ul><ul><li>Credit factors still significant even after controlling for investor rate </li></ul></ul><ul><li>Markup caps significant with lower markups </li></ul><ul><ul><li>For captive lenders with caps, low-FICO borrowers are marked up to a lesser degree </li></ul></ul>
    17. 17. Buy Here Pay Here Dealerships Churning vehicles with high markups, promoting extremely high default rates
    18. 18. Buy Here Pay Here Facts <ul><li>In 2009, there were 33,000 BHPH dealerships that sold 1.8 million units , with an estimated 2.37 million (worth $14 billion ) sold in 2010. </li></ul><ul><li>BHPH accounted for 7.56% of all sales from dealerships in 2009. </li></ul><ul><li>Military groups are targeted, having above-average default rates </li></ul><ul><ul><li>Military default rate (32.8%) </li></ul></ul><ul><ul><li>Retired military default rate (41.5%) </li></ul></ul>
    19. 19. BHPH Industry Data 2009 2008 2007 2006 Number of Weekly Payments 132 129 134 131 Average Weekly Payment $84 $84 $85 $82 Amount Financed $9,294 $9,195 $9,085 $8,844 Downpayment $1,040 $1,089 $1,018 $900 APR 24.4% 24.5% 28.3% 25.1% Actual Cost Per Vehicle (including rehab) $5,064 $5,284 $5,111 $4,949 % Vehicle Sale Markup 83.5% 74.0% 77.8% 78.7% Weeks Until Dealer Breaks Even at ACV 48 50 48 49 Average Default Rate 30.1% 28.4% 27.7% 26.2% Bad Debts (% Written Off) 20.0% 21.0% 19.0% 20.0% Troubled Loans (Defaults + Bad Debts) 50.1% 49.4% 46.7% 46.2%
    20. 20. BHPH Collections and Business Model <ul><li>Model promotes “churning” of same car to several customers, maximizing profit at origination. </li></ul><ul><ul><li>Quick trigger is needed on repos to reclaim car value </li></ul></ul><ul><ul><ul><li>GPS and starter interrupt units are increasingly popular </li></ul></ul></ul><ul><ul><ul><li>Quote: “It’s all about collections, not vehicle sales.” </li></ul></ul></ul><ul><ul><li>Typical consumer starts to default 4 th month from origination and has most severe delinquencies in 21 st month. </li></ul></ul><ul><ul><ul><li>Follow-up calls on trading-in for a new car happen by month 18. </li></ul></ul></ul><ul><ul><li>Problems with underwriting standards: </li></ul></ul><ul><ul><ul><li>Quote: Using the SWAG method: a “Scientific, Wild-Ass Guess” </li></ul></ul></ul>
    21. 21. Discussion on Findings <ul><li>Questions about current data and findings? </li></ul><ul><li>Points for Discussion: </li></ul><ul><ul><li>Can we still claim that markups are subjective and arbitrary? </li></ul></ul><ul><ul><li>Advocating for markup caps as a viable solution? (as opposed to flat fees) </li></ul></ul><ul><ul><li>Discussion of BHPH: Include in this report or expound in a separate study? </li></ul></ul><ul><ul><li>Advocating for any particular policy recommendations? </li></ul></ul>

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