Though Wells Fargo Auto’s portfolio declined in the third quarter, the bank posted higher origination volume and improved credit performance in its third-quarter earnings released today.
Originations increased 10% year over year to $4.8 billion, yet Wells Fargo’s auto portfolio declined 17% to $46.1 billion. The bank noted the downsized portfolio is “reflecting our focus on growing high-quality auto loans following transformational changes made to the business,” according to the earnings report.
Meanwhile, third-quarter delinquencies fell 2.7% year over year to 4.2%, while net chargeoffs plunged 35.6% to $130 million.
Wells Fargo’s auto portfolio is expected to continue its runoff following the bank’s latest scandal with the Office of the Comptroller of the Currency and the Consumer Financial Protection Bureau. In April, the bank was fined $1 billion for allegations that it force-charged consumers for auto insurance they didn’t need and were already acquiring from a third party.
However, last week the OCC said it was dissatisfied with Wells Fargo’s efforts to reimburse affected customers. “We are not comfortable where we are with them,” Joseph Otting, chief of the OCC, told senators at a hearing last week, according to Bloomberg. It is uncertain what the OCC will do in regards to Otting’s comments.
In addition to the fines imposed on Wells Fargo by the OCC and CFPB, the Federal Reserve banned the bank from growing until it fixes its internal issues.
Costco is expanding its holiday sales event, which typically only included GM products, to include other OEMs as part of an expanded program.
“We hope to expand sales programs, having multiple OEMs to pinpoint added incentives just for Costco members,” Rick Borg, executive vice president of program operations at Affinity and Costco Auto, told Auto Finance News.
The increase in sales that coincides with the holiday event is significant enough that Costco plans to expand its members-only incentive program.
“There is an increase in sales, specifically for General Motors products and all four brands under the GM flag,” said Borg. “Last year, from the third quarter to the fourth quarter, our overall sales went up over 85% through the promotion.”
This increase is substantial, but for GM, which offers cash incentives during the program, this figure balloons. Last year, GM sales shot up “north of 900%” from third quarter to fourth quarter, Borg said.
During the holiday sales event last year approximately 101,000 units were sold. The event seems to bring out a certain customer type.
“You’ve got a quality demographic that’s ready and able to purchase or lease,” Borg said.
Because the OEM partnerships are so successful, Borg says Costco Auto is looking to expand the model to several other brands in 2019.
“A member can go to a participating dealer for a specific manufacturer and receive an additional cash incentive towards that transaction price for a specific model,” Borg said.
In a two-month pilot program with Subaru last year, members were referred to dealers, and the OEM would sponsor an additional discount of $500 to $750, depending on the model, off the purchase price. Borg would not disclose the number of units sold during the pilot nor which OEMs might be added to the program next year.
“Not all manufacturers are able to do something as widespread and as large [number of discounts] as we’re doing with GM, but it still gives the manufacturer an ability to tap the potential of the Costco membership exclusively and spur sales,” he said.
For more content like this, check out the upcoming Auto Finance Summit 2018, October 24-26 at Wynn Las Vegas. Visit www.AutoFinanceSummit.com to register.
Following its acquisition of fleet-management company Clutch Technologies, Cox Automotive is broadening its program with Porsche to include hourly and weekly rental rates.
The expansion provides insights into the philosophy of Cox’s Mobility Solutions unit as OEMs and dealerships embrace subscription programs, President Vince Zappa told Auto Finance News.
“When you start to think of the automotive world becoming more fleet-oriented, we tend to take a view that cars are born into this automotive caste system — they’re a new car, they’re a used car, they’re a rental car — and they can only have one use-case at a time from a consumer perspective,” he said. “Our view is that a fleet of cars should be able to be used in any number of ways, whether it’s subscription, on-demand rental, test drives for dealerships, loaner cars. We look at a fleet in a more holistic manner.”
This approach can be seen in the OEM’s newly launched Porsche Drive and Porsche Host programs, extensions of the Porsche Passport luxury subscription program managed through Clutch. Drive and Host allow the luxury OEM to bolster utilization from a single fleet of cars, Zappa explained.
With Porsche Drive, a four-hour rental starts at $269; a weekly rental is $2,909. Porsche Host is a collaboration with Turo, a San Francisco-based company that connects renters with existing Porsche owners willing to put their vehicles into a shared fleet.
“We think there is an interesting opportunity that is deeper than being one specific subscription program,” Zappa said. “If we can put all the unmanaged vehicles into our platform and match consumers to it at their price point, that’s what we want to do.”
MIAMI — Auto ABS is experiencing strong performance this year, but President Donald Trump’s trade war and tariff threat on imported auto parts are expected to prompt a downturn in securitization volume, Jamie Feehely, managing director securitization, National Bank, said during ABS East last month.
“There are no securitizations done that are 100% used cars,” Feehely said. “If we are going to continue to have a market, we have to rely on new issuances of ABS, and new cars are going to be harder to sell if tariffs go up from virtually zero.”
If the tariffs go through, the industry is going to suffer a dearth of new car sales as the used market — which is already in high demand — is going to go up, and securitization volumes will decrease.
The question that comes up is why the President is trying to break trade and tariff policies, William Lee, chief economist for the Milken Institute, said at the conference. “Going forward, the trade policy is gearing toward the needs of the 21st century,” Lee said. “What are the rules of the engagement where big countries can engage and open up to each other and have equal access and protection? That’s where I think all this tariff talk is coming from.”
However, captives like Nissan Motor Acceptance Corp. are concerned about the impact of the new tariffs. Nissan’s North America production comprises 72% of the company’s total production, said Treasurer Steve Hetrick. “The concern is down in Mexico where we also have several plants,” he said. “[Tariffs] are front and center, the front of mind, but it’s also something that we have to see if it’s going to develop.”
BMW US Capital is already experiencing the negative results of the Chinese tariffs on U.S. passenger cars that were imposed in retaliation for U.S. duties on Chinese goods, President Stefan Glebke said during the panel. “Once tariffs are implemented for U.S. and Europe we are going to have another hit,” Glebke said. “The automotive industry is a global industry, and all this discussion doesn’t help.”
However, a potential trade agreement could provide the auto industry some relief. Earlier this month, details of a new U.S.-Mexico-Canada trade agreement were announced, which exempts the neighboring countries should the President impose a 25% tariffs on auto imports to the United States.
By yearend, vehicle subscription startup Mobiliti plans to double the number of markets it serves, adding four East and West Coast states to its footprint, Chief Executive Chance Richie told Auto Finance News.
So far, the company services cities in Michigan, New Jersey, Pennsylvania, and Texas.
“The West Coast is a big area of growth we see, and we’re doing everything in our power to get out there as quickly as possible,” Richie said. On the East Coast, New York City is the biggest target on Mobiliti’s radar. “It’s just a matter of getting our insurance product approved through the state of New York, and then we’ll be up and running,” he added.
Already, Mobiliti works with Island Auto Group. The Staten Island-based dealership, along with Mobiliti’s other dealer partners, can access Ally Financial’s wholesale digital auction site SmartAuction when subscription vehicles are returned.
Also, Mobiliti customers can buy out their vehicles with financing from Ally. The Ally partnership eases new dealers into Mobiliti’s program, Richie said. It also helps when Mobiliti is supply limited because of high demand.
This focus on onboarding dealers to expand inventory is what differentiates Mobiliti from its competitors — services like Fair and HyreCar that focus more on consumers in the ridesharing space.
“We look at [subscription services] as a mass-market product,” Richie said. “We want to drive adoption, and we don’t want people to think about subscription as just a specific product. We want consumers to think of this as a true alternative to traditional buying.” When Mobiliti launched in Austin, Texas, in May, it had 10 dealer partners and no users.
Now, the company has 100 dealer partners and more than 1,000 registered users. Mobiliti plans to add more dealers later this month. Richie declined to disclose revenue values until yearend.
The wholesale market saw an unusual uptick in the price of vehicles this past quarter. Manheim documented an abnormal appreciation trend starting in June and running through September.
Wholesale used-vehicle prices (on a mix-, mileage-, and seasonally adjusted basis) increased 0.14% month-over-month in September, according to Manheim. This represents a record high and brought the Used-Vehicle Value Index to 139.9, a 3.7% increase year-over-year.
“Price appreciation normally only occurs in spring at the height of tax refund season,” said Jonathan Smoke, chief economist of Cox Automotive, on last week’s quarterly Manheim conference call. In fact, tax refunds spur the sales of the most used vehicles in a typical year, he added.
“The strong summer has left us with used-car prices, on average, up over the last 15 weeks by 1%, when they would normally have fallen by 3.6%,” Smoke said.
In the past five weeks, prices have stabilized. But sentiment reports reveal why there was such a strong summer season. Manheim found that dealer optimism is falling due to rising concerns about tariffs.
“The primary concern of franchise dealers about tariffs is that they will lead to higher prices,” Smoke said. “Dealers are also concerned about limited inventory and higher interest rates.”
With 47% of vehicles sold in the U.S. assembled abroad, section 232 tariff on aluminum and steel would increase import duties and taxes, and new rules on increased average pay for workers would drive the price of vehicles higher. “That tariff also becomes a potential penalty on Mexico and Canada for failing the new content rules,” Smoke said.
Late last year, the Trump administration increased the regional content requirements for light vehicles to 85% of contents coming from countries in North America, up from 62.5%.
Fast moving used retail inventory this summer also drove price demand. Market factors and sentiments signaled to consumers to buy sooner rather than later, according to Manheim.
“We didn’t predict that the president would pursue new auto tariffs,” Smoke said. “We believe that has been the catalyst boosting urgency and demand.”
Manheim predicts that the market will correct itself in the coming weeks and months.
It’s the beginning of October and auto dealers are doing the old car/new car shuffle. Current models are moved out of the indoor spotlight and pushed to the part of the lot where they are “priced to sell.”
Showy 2019 models are off-loaded from haulers and placed under those coveted spotlights. 2018 inventory exposure is calculated, and the cost of 2019 vehicles is factored. Over in the F&I office, the team is putting together packages to make those 2018 models attractive to consumers who are looking to make a deal. So what role does the auto lender play in this transition period?
Have a “Sale” Mindset
Match your auto dealership clients and go into the fourth quarter with a “sale” mindset.
Support value-minded consumers – Some consumers who are taking advantage of fourth-quarter sales on 2018 models are in a value mindset. Whether it’s a matter of limited funds, the need for a replacement vehicle, or simply how they roll, these consumers are pinching pennies and looking for the best deal possible. Capture these loans by offering attractive interest rates, manageable loan term length, or rewards for good credit. Include valuable consumer protection packages that pay dividends immediately.
Speed the process – Just as dealerships are looking to move their inventory, lenders should consider steps to speed the process of locking in a loan. Revisit the website and online pre-approval forms. Competition is strong for digital loan originations. The lender that puts its best foot forward has a better chance of securing the business.
Stay the course – In 2017, banks lost auto loan market share for the fourth straight year, as they backed off from the sector. Ensure consumers know your financial institution welcomes auto loan business. Hang up a banner, run an ad, include promotional rates in all marketing efforts. Actively seek out new business and remind existing customers that favorable credit terms are available.
Reward good behavior – According to Experian, credit scores have improved steadily during the year. When pulling credit histories on a potential loan, review credit score improvements and consider offering more favorable loan terms. These consumers have demonstrated improved creditworthiness. By rewarding good behavior, a lender can gain a customer for life with additional lines of credit.
Uncertain times – Finally, financial markets and trade wars have put the automotive market in a bit of a shaky situation. The Federal Reserve has signaled two more interest rate hikes this year. While the cost of fuel is currently low, fractured discussions with OPEC countries could have an impact at the end of the year. Ongoing trade battles and tariffs could dramatically increase the price of automobiles – or make certain models unavailable. Frank discussions between lender and customer on these topics can make a purchase now the right decision.
Promoting a “sale” mentality to your lender team can have an energizing effect. And, supporting your dealership partners in their efforts to move 2018 inventory is beneficial for the relationship. With more than 40 years in innovating and implementing proven go-to-market strategies in the retail automotive space, EFG Companies knows how to position your institution to make the most of the retail sales cycle. Contact us today to get started.
Credit Karma estimates that consumers overspend $21 billion a year on auto insurance. In light of this, the fintech is providing a simplified service for consumers to find cheaper auto insurance policies.
The company announced this week that it is expanding its auto insurance tool to generate insurance suggestions to consumers by analyzing government information on drivers and vehicles — combined with data from credit bureaus and public insurance rate filings. Now members no longer have to manually input 30-40 data fields as is typical with digital quoting.
Currently, the fintech is only offering the expanded service in Texas and California but intendsto roll it out to more markets in the coming months.
More than 8 million members have synced their vehicles to Credit Karma’s auto offerings since the service launched less than a year ago.
“It’s encouraging to see such high engagement among our members,” Rory Joyce, director of product management, said in a statement. “Because auto insurance is a major expense of owning a car, building an insurance feature was a natural extension to help our members make financial progress.”
Credit Karma will also educate members through an interactive experience that shows how key factors such as moving violations and credit scores can impact insurance rates.
“With our refinance experience, we’ve helped our members save nearly $150 million on their auto loans in under a year,” said Kenneth Lin, founder and chief executive, in a statement. “We plan to do the same for insurance.”
Founded in 2007, Credit Karma identifies financial products for its members and has facilitated more than $40 billion in credit lines across financial products. While the company is better known for providing consumers with free credit scores, it generates a profit by providing leads to financial services.
Federal Reserve Chairman Powell’s announcement on September 26 of the Fed Funds target range increase to 2-2.25% was widely covered in the news. It was generally messaged like most rate increase announcements. That message is that its important news we were all waiting for and could now take necessary action. The truth is, this announcement is for most practical purposes and uses, old news.
In the capital markets area of the auto sector, for example, ABS bonds that trade have been doing so off of higher 1, 2, and 3 year US Treasury benchmarks. Any newly issued bonds have also priced higher off the benchmarks that had moved up slightly this summer. The announcement of raising the target “Fed Funds” rate is a trailing indicator that doesn’t have any practical impact on any of us.
What does have the potential of real impact, and something we should all want the Fed and the news to cover more substantially is Interest on Excess Reserves or IOER for short. This is a little-known rate to the public, but it is one that is very meaningful to banks.
I’ll get back to an auto-related point soon, but for quick background, banks have been holding “Excess Reserves” at the Fed since 2008. This didn’t exist before the financial crisis. The excess reserve level peaked at $2.7 trillion in August 2014 and is now down to $1.8 trillion. This is still a significant amount of cash that can also be described as loanable funds that have nowhere else to go. These funds end up at the Fed because the Fed pays interest on them, and as of September 26, that rate was quietly increased to 2.2%. Banks get this money for simply sending excess cash to the Fed.
Source: Board of Governors of Federal Reserve
Now back to auto, if and when the Fed lowers this IOER rate or banks feel like there is more opportunity in the private sector, the money will begin flowing out. And again, almost $2 trillion is a lot of cash so the economy will feel it, and in a good way.
One strategy for banks would be returning to M&A that was common in previous periods of economic growth pre-financial crisis. A bank could certainly increase lending in its regular business lines, but buying something like a company doing equipment leasing, payments processing, or even an auto finance company maybe, are sensible was to grow and expand vertically and earn more than 2.2%.
With the potential for increased cash coming into the market and target returns now over this 2.2% easy button level, we would see auto loan rates increase. Even for banks that focused only expanding wholesale lending through lines of credit, they would push consumer rates up through higher cost of funds they pass down to the retail financing source.
If and when banks begin pulling back excess reserves, the asset side of the Fed’s balance sheet would decrease through the sale of US Treasury bonds and that would push up benchmark rates, which would, in turn, affect rates on ABS bonds and would push up consumer rates. This could potentially happen at a faster pace than we are used to seeing in the orderly rate increase announcement world.
So as a takeaway, if you want to know what will happen to interest rates in auto finance, turn off the TV news waiting for Fed Funds announcements, and make regular checks with the Fed’s website directly for the direction of excess reserves and the rate they earn, IOER. You’ll at least have a great new word to work into conversation at your next business meeting or social event. If the news won’t cover it, then it’s up to us to help pass on some education along with excellence today in auto finance.
As the auto industry transitions to 2019 models, used-vehicle inventory is incentivized to make way for new stock. But used-vehicle demand could outpace available inventory, Jonathan Banks, vice president of vehicle valuations and analytics at J.D. Power, told Auto Finance News.
The goal is to have a “smooth transition” into the new year where the 2018 model goes away, and the 2019 models come in to boost new-vehicle sales, Banks said. “Ideally, the 2019 model should sell slightly higher than the 2018 model did at the same time last year because incentives naturally go up on a vehicle.”
The hope is that 2019 models have been incentivized enough for consumers to want to buy it so that it’s just slightly more expensive than last year’s used model. However, OEMs with inventory issues are carrying the 2018 models “longer than they should,” Banks said.
From there it becomes a vicious cycle where the OEM needs to put more incentives on new vehicles to bring the price closer in-line with last year’s model. “Consumers will wonder why they should buy a new car when they can get a 2018 model,” he said.
The disconnect is a big factor that J.D. Power monitors, especially as OEMs are revealing 2019 models as the year heads toward its close.
“If 2018 models are everywhere then consumers will want those and that causes a huge problem.” Banks advises that OEMs need to manage that slow down to make a good transition into the new year.
