Auto Finance News is proud to announce NETSOL Technologies Inc. is the official Diamond sponsor of its two industry events this year: the Auto Finance Summit and Auto Finance Accelerate, a week-long event series on auto finance operations, including sales & marketing, innovation, and risk.
NETSOL specializes in internet technology and enterprise software solutions primarily serving the global leasing and financing industry. The Calabasas, Calif.-based firm has worked with 200 finance companies in more than 30 countries, and its suite of applications is backed by 40 years of domain expertise.
The 19th annual Auto Finance Summit, the industry’s premier event, will be held Oct. 28-30, at the Bellagio Las Vegas.
Both events offer a unique blend of panels and presentations, featuring the best, brightest, and most innovative experts in auto lending and leasing.
“NETSOL’s participation allows us to bring the best possible events to the auto finance market,” said JJ Hornblass, CEO of Royal Media, the events’ producer and publisher of Auto Finance News. “We are thrilled to be enhancing our relationship with this dynamic technology company.”
Santander Consumer USA is paying a $1.5 million fine to settle claims by the Securities and Exchange Commission over the lender’s accounting for troubled subprime loans. The SEC charged that for at least eight reporting periods, from 2014 to 2016, Santander Consumer USA failed to calculate and report its credit loss allowance for certain impaired loans in accordance with Generally Accepted Accounting Principles.
Instead, the SEC said, the lender improperly grouped the impaired loans with other assets, and SCUSA’s “flawed internal accounting controls” contributed to the errors that led the lender to restate financial statements. “The errors impacted every periodic report and earnings release filed by SCUSA from the time of its IPO in January 2014 until it filed its second restatement in late 2016. SCUSA’s financial statements contained errors that were material for both quantitative and qualitative factors,” the SEC noted in a Dec. 17 document.
Also, “SCUSA used an incorrect discount rate and made errors in calculating the accretion of that discount, which also impacted its reporting of the impairment of these assets,” the SEC said. Santander agreed to the settlement without admitting or denying the SEC’s claims. SCUSA had a $42.8 billion auto loan portfolio as of Sept. 30. As part of the settlement, the company has agreed to a cease-and-desist order against future violations. “Our voluntary agreement with the [SEC] resolves this inquiry, and we are pleased to put this matter behind us,” a bank spokeswoman wrote in an email to Auto Finance News.
“Strengthening our internal controls over our financial statement disclosures and reporting has been a key focus of ours for the last two years, and we continue to make significant progress.” Richard Gottlieb, a partner in the financial services group at Chicago-based law firm Manatt, Phelps & Phillips LLP’s, told AFN that in the scheme of things, the SEC settlement is a “rather insignificant accounting error.”
It comes one month after Santander reached an agreement with the Consumer Financial Protection Bureau to pay a $2.5 million fine and more than $9 million in restitution to resolve allegations that it had misled consumers in regard to loan extensions. Santander agreed to the CFPB settlement without admitting or denying the claims.
A number of auto finance companies rolled out products and services in 2018 that the editors of Auto Finance News found noteworthy, among them:
Honcker Adds Insurance to List of App Services
Mobile car buying app Honcker added insurance to its platform this year, bringing the company closer to making the entire car buying experience fully mobile. Customers are paired with one of 10 national providers based on where they live. Carriers include State Farm, Liberty Mutual, and Progress. Honcker’s insurance service is available in 13 of the 15 states in which the company operates.
“Everything the customer would normally need for an insurance quote is prepopulated in the system at our third-party call center,” Honcker CEO Nathan Hecht told Auto Finance News. “The customer is given quotes from three national carriers. If the consumer chooses one of the three, it will bind on the spot, and the insurance card is sent to the Honcker app.”
TrueCar Offers Guarantee Trade-In Values
The automotive market has no shortage of valuation tools. TrueCar added something new to its services with a guaranteed trade-in valuation for partnering dealerships. The feature, called TrueCar Trade, lets consumers plug information about their vehicles into the tool, which then generates a guaranteed trade-in value powered by Galves Accu-Trade.
“If we put a valuation of $10,000 on a car and once the consumer has sold the car to the dealer, if for whatever reason the dealer didn’t want that car, they could sell it to us for the same $10,000 paid to the consumer,” Brian Skutta, TrueCar Executive Vice President told AFN.
The trade-in valuation tool is meant to drive consumers to its dealer partners and, subsequently, boost origination volume for lenders.
NextGear Finances $1B In Deals With Floorplan Tool
In less than a year, NextGear Capital financed more than a $1 billion in non-auction dealer purchases through its Rapid Pay floorplan tool.
“We are giving our dealers funding before we have that title in hand,” Sarah Lutey, director of corporate strategy at NextGear Capital, told AFN.
With the tool, the floorplanning process that historically could take days has been reduced to about 90 seconds. Already, 39% of NextGear’s 22,000 dealers use Rapid Pay to floorplan all their non-auction purchases, typically one to five units at a time.
Drive Motors Offers Fast, Online Checkout
Digital sales platform provider Drive Motors teamed up with electric OEM startup Karma Automotive to provide a fully online checkout experience.
Drive Motors, which counts Ally Financial as a preferred lender on its platform, enables consumers to get fully approved for loans in less than a minute, Chief Executive Aaron Krane told AFN.
“Newer brands can move faster,” Krane said. “Certain established OEMs likely [are] not going to be able to choose a single consistent online buying solution for their dealerships—whereas a new OEM like Karma can create a consistent experience by focusing on one solution.”
Experian Creates Voice-Enabled Auto Loan Application
Experian said in December that it is testing a voice-enabled application that would allow car buyers to secure auto loans through a smart speaker, such as Amazon’s Echo.
The software is based on a form of artificial intelligence called natural language processing that lets machines analyze and process speech, Eric Haller, executive vice president and head of global data labs at Experian, told AFN. The application would prompt customers to verbally allow access to their credit bureau data. The software would then build a credit application and send it to various financial institutions.
Once a prequalification offer is secured on a vehicle, Alexa can ship it — along with the customer’s information — to the closest participating dealership. The service will be available in the next 12 months. Experian hopes to make applying for an auto loan as easily as telling Alexa to play a song.
With auto loan delinquency rates rising, it would seem to be a good time to be a repossessor. But that’s not the case. Tow truck and vehicle insurance prices are climbing; license, bond, and other compliance-related costs are increasing; technology spending— to boost internal efficiencies and maintain a competitive edge — is growing.
Meanwhile, lenders seeking to reduce loss-mitigation costs are trimming repossession fees. Combined, these factors have put the squeeze on repossession companies and led hundreds of agencies to shut down. That’s bad news for the auto finance industry.
The effects of repo agencies’ intensifying struggle to build profits will reverberate through the auto finance industry, said Michael Levison, chief executive of repossession management firm ALS Resolvion.
“The most important key to your loss-mitigation effort is a healthy repo agent community,” Levison told lenders at the Innovations in Recovery Summit sponsored by ALSR in September. “Without that, our success rates are going to fall. Prices are probably going to go up.” Lenders and repossession companies, however, are starting to reevaluate the way they work and experimenting with new business models.
A Rocky Landscape
Every year for the past decade, expenses have climbed for repossession firm Absolute Recovery. Trucks have become more expensive, diesel fuel prices have risen, and insurance has become harder to get. “The cost to run a repo business has gone up exponentially,” Brent Hulderman, owner of Charlotte, N.C.-based Absolute Recovery, said at the recent repossession and skiptracing event. “Our costs have gone [up] double, triple over the past few years.”
Compliance requirements, too, have become stiffer and technology investments more vital to these firms. “To run more efficiently and actually make money at our business, we put a ton of money in technology,” said Michael Pletz, owner of Pittsburgh-based A.L. Recovery. “We spend thousands and thousands of dollars on compliance, because [a compliance violation] could put us out of business.”
Despite these rising costs, fees paid to repo agents are shrinking as lenders seek efficiencies in their loss-mitigation departments. “As our costs keep going up, repossession fees have not,” Hulderman said. “We really do need more money to compensate.”
Revenue growth at repo services companies has been slowing, too, in recent years. Whereas revenue increased 6.5% in 2013 and another 12.8% in 2014, it slowed to 1.2% in 2015, according to market research company Statista. Projected revenue growth in 2020 is expected to drop to 0.6%. In the past five years, the number of repossession services companies in the U.S. has declined 3.1% to 11,007, and the number of people employed at those businesses has dropped 1.3%, according to research company IBISWorld.
Levison pointed out that the hundreds of agencies that have gone out of business in the past couple years are a “real risk to our business and to this industry long-term.”
Though recovery agents seek more one-on-one interaction, lenders are increasingly embracing an indirect structure to assign repossessions. In the forwarder model, as it’s called, lenders parcel out repo and skiptrace assignments to management companies with hundreds of agents in their networks.
Hyundai Capital America, for one, has migrated to a forwarder model from a direct-agent model. “Unfortunately, what drove us to [the forwarder model] was the lack of technology,” said Marco Villarreal, the captive’s recoveries operations manager. “We’re still working on the infrastructure to be more nimble as far as our recoveries and who we partner with.”
Ideally, Villarreal would prefer a hybrid model that would allow the captive to set up champion-challenger testing to evaluate forwarder-versus direct agent performance. But Hyundai is still 18 months out on its system conversion, “so that prohibits us from what we want to do,” he said.
Last year, Wells Fargo Auto replaced its hybrid model with a forwarder model, on the heels of an effort to centralize 57 regional locations. “It helped us have some consistency and make it easier to be able to manage the relationship,” said Javier Solis, the bank’s vice president of third-party performance and strategy. “It doesn’t take away as far as the compliance requirements, but it allowed us to have better conversations, being able to monitor departments at a different level. Imagine trying to have that performance conversation for 400 direct agents.”
Wells Fargo is evaluating the results of the shift. “We’re just a year into it,” Solis said. “We’re still learning. We’re still developing. Ultimately, we want to make sure that what we do is protect our customer.”
While captives and national banks tend to rely on forwarder models, smaller lenders are more likely to employ a direct-agent structure. United Auto Credit, for one, splits its recovery assignments between forwarders and repo agents. “We’re not that big, so we’re a mile wide and an inch deep across the country,” said Vice President of Servicing Mike Duke. “For a lot of the country we can’t build a relationship, because we have one repo in [a small city like] Farmington, New Mexico. We would need a forwarder.”
Duke prefers a direct-agent model, though, because it allows for more stringent compliance oversight. “I would like to have a little more control over the compliance that we have on these vendors,” he said. “We’re going to get dulled down by whatever the forwarder’s compliance program is.” Also, the direct relationship allows for some give-and-take with agents.
“In those relationships, I can pay my agent more and, sometimes, I can demand a little bit from the agent,” he added.
While lenders keep a tight rein on recovery metrics, repo agents have also cracked down on the accounts they are willing to work. “We used to accept every assignment that came down the pike,” said Jeremy Cross, president of Kennett Square, Pa.-based repo agency International Recovery Systems.
“We don’t anymore. There is a crisis right now of agencies. Agents are dying left and right. We can’t take every assignment. The higher the average revenue per assignment, the happier we are.”
North Richland Hills, Texas-based Hide and Seek Recovery has also become more particular about which assignments it will accept. “We pay attention to whatever efforts are going to be required post-recovery,” said General Manager Sara Patterson. “Are we going to have to transport it? Are we going to have to take additional pictures? Is there more compliance stuff that’s required? Is it something that we have to put extra people on to make sure that we can get the condition report uploaded within [the required amount of time]?”
Beyond the nitty-gritty, though, Cross at International Recovery Systems has the bigger picture in mind for the company’s forwarder and lender clients.
“We want a partner, we don’t want a boss,” he said. “Having that personal relationship is key — not just for me, but for my staff.” Additionally, funding speed is of utmost importance to Cross. “The next [consideration] is, How fast do we get paid, and how much do we get paid?” Cross said. “How valuable is that client? You want to be a priority to your agents? Make yourselves a priority.”
Cross and Hulderman encouraged lenders and forwarders to call their agents periodically and to be clear about expectations. For instance, Chase Auto Finance provides Cross with a scorecard every month. “The vendor manager calls us once a quarter and does a review,” he said. “‘This is how you did: You did a good job here; you didn’t do such a good job there. How can I help you improve?’ Have that communication. Manage your metrics, from your scorecards.”
That competition drives repo agencies to improve. “If I see on a scorecard that another [agency] is right there on my heels, you better believe that I’m pushing to make sure that we’re better next month,” Hulderman said. “Competition makes everyone better.”
Ultimately, the health of the recovery market will hinge on lenders and agencies working together, ALSR’s Levison said. “If we just take the attitude that that’s their problem, we’re going to end up regretting it,” he said.
Editor’s note: This story was orignally featured in the December issue of Auto Finance News magazine.
J.D. Power and LMC Automotive forecast that new-vehicle retail sales for December will be down 1% from December 2017, the sixth consecutive monthly decline, and that retail sales for all of 2018 will be off 1.3% from full-year 2017.
The research companies expect December retail sales to come in 1.3 million units. For the year, the firms expect sales of 13.9 million vehicles. However, retail prices are up, with the average price tag in December projected to be $34,292, a record high.
“Despite retail sales falling for the sixth consecutive month, the continued growth in transaction prices is allowing manufacturers to offset lower sales with higher revenue,” Thomas King, senior vice president of the data and analytics division at J.D. Power, said in a statement. “Consumers are on pace to spend nearly $45 billion on autos in December, up 1% from last year and the highest level ever recorded.”
Conversely, the companies see incentive spending for the month of December decreasing year-over-year. Average incentive per unit, they say, is down to $4,098 from $4,261 last December.
Truck and SUVs accounted for 72.3% of new-vehicle retail sales through Dec. 16–the highest level ever for December. Fleet sales, which increased by 2.7% from December 2017 to December 2018, are also on the rise.
What about 2019? Jeff Schuster, president of Americas operations and global vehicle forecasts at LMC, said that’s a little harder to predict. “Next year, the auto industry will continue to face heightened uncertainty and intense competitive challenges due to conflicting macro factors, the continuing SUV/car shift and the growing number of new electric vehicles joining the market,” he said in the statement.
Wells Fargo & Co. will pay $575 million to settle state-level claims over sales practices, marking the latest cost in the fallout from a series of scandals that erupted at the bank more than two years ago.
The settlement with 50 states and the District of Columbia announced Friday resolves state investigations into Wells Fargo’s practices from 2002 to 2017. The practices, which have previously been disclosed, include opening bogus accounts, charging improper mortgage rate-lock extension fees and forcing insurance policies on auto-lending customers.
Wells Fargo’s expenses surged over the past two years, driven by fines and legal costs as investigations multiplied across business lines. Following the 2016 revelation that bank employees opened as many as 3.5 million accounts without customer approval in order to meet sales goals, issues have emerged in the bank’s consumer-lending, wholesale and wealth-management arms.
“Wells Fargo customers entrusted their bank with their livelihood, their dreams and their savings for the future,” California Attorney General Xavier Becerra said in a statement. “Instead of safeguarding its customers, Wells Fargo exploited them, signing them up for products – from bank accounts to insurance – that they never wanted.”
The bank said in a statement that it had already set aside $400 million for the settlement and would take a $175 million provision in its fourth-quarter results. California, the bank’s home state, will get the biggest payment in the settlement at about $150 million, according to a spokeswoman for Becerra.
“This agreement underscores our serious commitment to making things right in regard to past issues as we work to build a better bank,” Chief Executive Officer Tim Sloan said in the statement.
It’s been a costly year for the bank. Among its penalties in 2018 were $1 billion to federal regulators for consumer mistreatment and $480 million for an investor class-action lawsuit. The bank also settled with the U.S. over crisis-era mortgages for $2.09 billion in August.
Earlier this year, the Federal Reserve imposed an unprecedented growth ban on Wells Fargo, in place until the bank can demonstrate that it has fixed its missteps. Democratic Senator Elizabeth Warren repeatedly called for Sloan’s ouster, and at one point, Wells Fargo Chair Betsy Duke denied rumors that the bank’s board had reached out to Gary Cohn to replace the CEO.
Next year isn’t panning out to be any easier. A soon-to-be Democratic House of Representatives will gain subpoena power, and the Financial Services Committee’s presumptive chair, Maxine Waters, has already labeled the bank a top priority. Ongoing probes and the bank’s recent removal of two top executives from the operating committee and firing of about three dozen district managers in the retail bank hint of more fallout on the horizon.
While slowing car sales, an unpredictable tariff war, and a growing affordability issue could all make for a tough 2019, there are a number of auto initiatives that are looking to take off next year. Among them:
Fair
The used-car leasing app company has its sight set on global expansion in 2019 – and it’s one step closer after it ended the fourth quarter with a $385 million funding investment led by SoftBank. In January, Fair acquired Uber’s Xchange Leasing portfolio. Since then, it has been financing vehicles for Uber drivers and it plans to utilize the ridesharing platform to bolster its international presence, with plans to supply cars for Uber drivers around the world, according to a company spokeswoman.
MOBI
The Mobility Open Blockchain Initiative is a consortium of captives, lenders, dealers, and manufacturers dedicated to exploring the use of blockchain digital-ledger technology for mobility services. MOBI Chief Executive Chris Ballinger said that blockchain can help finance companies fund more contracts and take advantage of easier title transfers. BMW, Ford, General Motors and Groupe Renault are part of the consortium.
BMW-Daimler
The two German luxury automakers are merging their Car2Go and DriveNow ride-sharing offerings. The joint venture has the potential to disrupt current ride-sharing landscape in 2019.
AutoNation-Vroom
New- and used-car dealership chain AutoNation this month was the lead investor in Vroom’s $146 million series G funding and Vroom CEO Paul Hennessy told Auto Finance News that increased collaboration between the AutoNation and the online car retailer is “the next logical phase to [AutoNation’s] business evolution.” Vroom said it going to use the funding for its technology and marketing efforts.
2018 will be remembered as a profitable year for the auto industry. Healthy December sales, as forecast by Cox Automotive, will drive U.S. auto sales above 17 million for the year. But car companies weren’t resting on their laurels. Many players in the auto space were positioning themselves for the future. What follows are five moves by auto industry companies that the editors of AFN found particularly interesting.
AutoGravity
The car-shopping-and-finance-app company, which helps consumers apply for loans, continued to make a mark on the auto lending world. This year, AutoGravity doubled the number of its lender partners, which now include BMO Harris Bank, Infiniti Financial Services and TD Auto now. It also expanded into the U.K. and Canadian markets.
Ford
In April, the OEM announced that by 2020 it would stop selling most sedans and compact cars, including household names like the Focus, Fusion, and Fiesta.
GM/GM Financial
This summer, the car maker named Dhivya Suryadevara its CFO, making GM the only automaker with a female CEO-CFO team. Suryadevara reports to CEO Mary Barra, who has led the company since 2014. GM is also only one of two Fortune 500 companies with women in both posts.
Mobiliti
Vehicle subscription startup Mobiliti gained momentum this year as it began offering its service in Michigan, New Jersey, Pennsylvania, and Texas as it looked to complete a coast to coast expansion. Mobiliti allows dealers to offer consumers vehicles on a monthly payment basis.
Waymo
Google’s self-driving-car technology subsidiary earlier this year enlisted Fiat Chrysler Auto to supply and finance a fleet of autonomous vehicles for a taxi service. Waymo is looking for FCA to provide it with 62,000 Chrysler Pacifica hybrid minivans.
It was an interesting year. Early in 2018, Fiat Chrysler Automobiles said it would form a captive unit. The end of the year saw the arrest of Renault-Nissan-Mitsubishi alliance head Carlos Ghosn. And there was plenty of news in between. What follows are AFN editors’ picks for top five stories of 2018:
Fiat Chrysler Automobiles to Form Captive
Fiat Chrysler Automobiles Group in May said it would form a captive unit. The move came almost eight years after Cerberus Capital Management sold Chrysler Financial to TD Bank. However, FCA has yet to release any details on how it plans to create a lending arm.
S&P Downgrades Honor Finance’s ABS
S&P Global Credit Ratings in July downgraded subprime auto lender Honor Finance’s 2016 ABS issuance because, S&P said at the time, the bonds issued are “at risk of not being repaid.” Honor’s Class C notes, originally rated BB-, were downgraded to CCC+. It was the first post-crisis downgradeof a subprime auto ABS. From 2009 to July 2018, subprime loan rating actions included 1,090 upgrades and zero downgrades. In late November, S&P Global Ratings noted that Honor Finance’s 2016 ABS issuance is on track for a second downgrade.
GM’s Barra to Directly Oversee GM Financial
Earlier this month, GM Chief Executive Mary Barra took direct responsibility for GM Financial after GM’s President Dan Ammann, the company’s president who had been overseeing GM Financial and other operations, was named chief executive of the OEM’s Cruise Automation autonomous vehicle subsidiary. One analyst, Jeremy Acevedo, Edmund’s manager of industry analysis, saw the move leading to tighter integration between the OEM and its captive finance arm. GM did not respond to a request for comment.
Auto Finance Feels the Pressure of Fed’s Rate Hikes
Although rate hikes signal the Federal Reserve‘s confidence in the economy, lenders are worried higher rates will lead to slower new car sales. The Fed boosted interest rates four times in 2018, the latest coming in mid-December. Rising interest rates can contribute to a market decline as higher rates make used vehicles more attractive than new vehicles, Doug Evans, senior director of remarketing at Hyundai Capital America, told Auto Finance News.
Renault-Nissan-Mitsubishi’s Ghosn Arrested
Carlos Ghosn, who headed the Renault-Nissan-Mitsubishi alliance, was arrested in November by Japanese authorities who say he underreported his compensation in financial reports. Ghosn, who has not been released, has maintained his innocence, according to reports. Since his arrest, Ghosn has been replaced as chairman of Nissan and Mitsubishi Motors. Renault holds a 43.5% stake in Nissan, while Nissan owns 15% of Renault. Mitsubishi joined the alliance in 2016 after Nissan purchased 34% of its stock.
USAA Bank’s Auto Experience Lab is working to enter the subscription service market, but even after seven years of development, rollout for that service is still “under the queue of projects to complete,” James Spears, assistant vice president at USAA Auto Experience, told Auto Finance News.
Much of the work in the lab is dedicated to the way mobility as a service is taking over car ownership. The lender received a U.S. patent in 2014, three years after submitting the plans for a fleet subscription-management service.
While USAA declined to provide a timeline for when this service might be available, a bank spokeswoman says the patent is part of USAA’s intellectual property portfolio and is currently being considered for testing or working with a partner.
Meanwhile, USAA continues to build out the auto finance components of its mobile banking app, which includes discounts for vehicles, tires, and repair. “We know what capabilities we’re going to deliver to our members, because we have focus groups and they tell us what they want next,” Spears said. “We’re doing member research, we’re taking those ideas and delivering them in a very disciplined way within software iterations.”
Members can access exclusive discounts from BMW, Fiat Chrysler Auto, Ford Motor Co., Nissan Motor Co., and Mercedes-Benz. “Part of the way we present [offers] to the member is through services like ‘Your Garage,’” Spears said, referring to a personalized service within the app.
“If you were to click on the ‘My Vehicles’ tab, [feature] we’ve built in offerings,” he added. For instance, Goodyear provides tire discounts, and RepairPal offers maintenance promos especially for USAA members. “We’re able to capture exclusive agreements with OEMs to provide incentives on leasing and purchasing and offer it to members in their car search,” Spears said.
2018 will be remembered as a profitable year for the auto industry. Healthy December sales, as forecast by Cox Automotive, will drive U.S. auto sales above 17 million for the year. But car companies weren’t resting on their laurels. Many players in the auto space were positioning themselves for the future. What follows are five moves by auto industry companies that the editors of AFN found particularly interesting.
