Tesla Inc. financed just 8% of first quarter deliveries and has no plans to offer financing on its most affordable vehicle yet — the model 3 — this year, the company reported Wednesday.
In January, Tesla “adopted a new revenue recognition standard,” which now only reports lease volume originated by Tesla itself, rather than adding in bank partners that offer leases on the vehicles.
To that end, Tesla reported $2.3 billion in operating lease vehicles outstanding, down from $6 billion in combined Tesla and bank financing the same period the year prior.
“We received $112 million in net funding from our vehicle lease warehouse lines, automotive asset-backed notes, auto tax equity fund and collateralized lease borrowings,” the report also stated.
Additionally, Tesla is not offering leasing on its Model 3 line “as we continue to focus on cash sales,” the company said.
The electric car manufacturer has struggled to meet production goals for the Model 3. In the first quarter, it produced 9,766 Model 3 vehicles and delivered 8,182. Tesla was expected to produce 2,500 Model 3s per week by the end of the first quarter but only reached 2,270.
“After all-time record orders in Q3 and Q4 2017, we had our highest ever Q1 for orders. With demand exceeding supply, we are making considerable progress with margin improvement,” the report said.
The OEM has relied on used cars to satiate consumer demand. Servicing and other revenues increased 37% during the quarter to $263 million primarily due to used-car sales, the company reported.
Back in June 2017 during the annual shareholders meeting and prior to the launch of the Model 3, Elon Musk, the chief executive of Tesla, had said the used-section of the website was going to receive “a lot more attention” especially if the car was four-years-old. “It’s got a lot of mileage, [so] you can buy a Model S for as much as a Model 3,” Musk said at the time.
Ford Motor Co. announced the cancellation of its various U.S. sedan models last week to focus on more popular SUV and truck segments, and whether the move is a win for the company or not, it could positively impact the used-car segment more generally.
“We see the downside at this point being relatively small and in fact, there could be some upside potential,” Laurence Dixon, senior director of business development for J.D. Power valuation services, told Auto Finance News. “By taking that volume out of the market it’s obviously going to reduce used supply for mid-size cars, large cars, and even some compact cars and that’s generally going to be supportive of used vehicle prices.”
Trucks, SUVs, and crossovers comprised 65% of new-vehicle sales in 2017 whereas cars made up just 35%, he said. Values for Ford Fusion, Focus, Taurus, and Fiesta were already “below average” due to this general shift toward larger vehicles, and Dixon doesn’t expect those values to drop significantly lower than they already are. In fact, there is some potential upside.
“It’s not as if Ford won’t be able to take care of these vehicles and service these vehicles for a long time to come,” Dixon said. “You’ll have a used Fusion that’s in the market for some time to come that’s a highly competitive product. … These are really nice cars and they are and will continue to be of value for consumers moving forward.”
One thing that could damage their value is incentive spending, Joe Halovanic, vice president of RVI Analytics, told AFN. Despite Ford’s efforts to continue to service the vehicles, consumer perception plays a big role in the values.
“What will wind up happening is that consumer demand will fall for these cars as people realize they are being discontinued, then at that point Ford will raise the incentives in order to generate more interest in the vehicles,” said Halovanic. “However, this won’t be as bad as when GM killed off the Pontiac or [other full-line] brands entirely, because this is just specific vehicles.”
Eric Ibara, director of residual values for Kelley Blue Book, is more optimistic on incentive spending because there’s no immediate need to push those sedans off the lots if there will be no 2019 models to replace them, he told AFN.
“[If there are no more incentives] we would expect little to no impact on auction values and residual values,” Ibara said. “What is unknown is if, for whatever reason, Ford chooses to blow them out — I can’t imagine why they would choose to do so — but, if they were to add more incentives on them then it would be detrimental for used car values.”
Representatives from all three of these companies will be speaking at the Auto Finance Performance and Compliance Summit next week on a panel entitled “Collateral Values: How Much Will Collateral Values Drop?” The event is held at the Omni Dallas from May 9-10. For more information and to register, click here.
Didi Chuxing has teamed up with 31 auto industry partners, including Volkswagen and Toyota, to create the Didi Auto Alliance, a new integrated transportation service initiative that will combine auto leasing and sales, auto finance, auto service, fleet operation and car-sharing, the company announced last week.
Partners in the Alliance include Chinese carmakers such as Geely and SAIC, as well as brands such as Renault-Nissan-Mitsubishi, Toyota, and Volkswagen’s China units. The announcement follows a series of tangentially-related partnerships Didi has made with automakers over the past year. The Alliance will focus on creating purpose-built electric vehicles for ridehailing and other mobility solutions, Didi said in an announcement. Didi declined to provide additional comment.
When it comes to the auto leasing and sales, Didi said it would use its big-data analytics, business scale, operational expertise and network resources to help develop with its partners integrated auto solutions on its car-leasing, car-sharing and after-service platforms. But it does not appear that captives are involved in this.
“RCI Bank and Services is not involved in the Didi Auto Alliance and we are not present in China,” Amandine Monteil, an RCI Bank and Services spokeswoman told Auto Finance News. RCI Bank and Services is the captive for Renault-Nissan-Mitsubishi alliance.
Separately, Volkswagen and Didi are planning to unveil a joint venture to share technology and develop shared-mobility services in China, the companies said Monday.
“At Volkswagen, we place great expectation on the development of innovative mobility services. With Didi we are exploring the first phase of the partnership by exploring mobility projects as well as smart city, autonomous driving and Robo-taxi projects,” Christoph Ludewig, a Volkswagen China spokesman, told AFN, but declined to say what aspects, if any, of auto finance will be incorporated in either the joint venture or the Didi Alliance.
Didi’s alliance plans to roll out its first car model, the D1, in the next three to five years.
Ally, Daimler AG, and Volkswagen AG all saw originations climb in the first quarter, in addition to an increased focus on financing in China for Daimler and VW.
Ally Financial
Ally originated $9.5 billion in the quarter, a 7% year over year increase and took in record-high used volume of $4.8 billion, which reflects the banks’ positioning over the past several years to source more used applications for dealers, Jennifer LeClair, chief financial officer, said on Wednesdays’ call.
“The year-over-year increase in used applications is notable, where we saw 100,000 more this quarter,” she said. “There’s a lot of focus on industry sales or SAR flattening. But we are seeing a lot of opportunities to originate profitable loans to enable us to optimize our risk-adjusted return and drive earnings growth.”
In addition to the used volume Ally also originated $3.6 billion in new retail volume, and $1 billion in leases.
“We’re holding the line on credit, and yields continue to increase. For the first time in a quarter, used originations represented over 50% of our volume,” Jeffrey Brown, chief executive of Ally also said on the call.
But Ally also saw a decline in charge-offs, with net charge-offs of 1.47% of total outstandings down 7 basis points year over year.
“We continue to expect retail auto charge-offs in the 1.4% to 1.6% range, while yields see further upward momentum,” Brown said, while adding later that he thinks there is a “danger” in looking too closely at delinquencies since it is only a snapshot of a particular moment or time period. “I think when we dive into the details, what we’re not seeing is delinquencies falling to loss rates. We’re just not seeing that trend. So we feel good overall about the state of credit,” he said.
Daimler AG
In the Americas Daimler originated $6.4 billion in total volume while worldwide originations grew 6% year over year to $21.6 billion.
“Daimler Financial Services anticipates further growth in contract volume in the year 2018,” the report read. “This will be primarily driven by the strong development of new business in 2017, which should continue at the same high level this year. The division will utilize new market potential, above all in China, as well as through new and digital possibilities for customer contacts – in particular by systematically further developing its online sales channels.”
VW
Volkswagen Financial Services’ number of financing, leasing, service, and insurance contracts originated in the first quarter grew 5.8% to 1.8 million loans. That brought the total number of contracts in the lenders portfolio to 19.1 million — 9% higher year over year.
“Volkswagen Financial Services remained in high demand in the first quarter of 2018, due primarily to the positive development of the overall market for passenger cars and the persistently low key interest rates in the main currency areas,” the report said.
Additionally, VW found that demand for financial services in the Asia-region was mixed.
“In China, the proportion of loan-financed vehicle purchases rose compared to the prior-year period. Despite increasing restrictions on registrations in metropolitan areas, there is considerable potential to acquire new customers for automotive-related financial services, particularly in the interior of the country. A somewhat weaker demand for vehicle financing was seen in Japan,” the report said, but did not break out numbers.
Wells Fargo continues to consolidate its servicing and collections centers with the announcement of three office closures in Rancho Cucamonga and Irvine Calif., according to The Orange County Register.
Workers at the California offices have been given the opportunity to relocate to one of the new offices, but at least 58 have opted out so far.
Laura Schupbach, executive vice president of Wells Fargo Auto, wrote the consolidation would “help the bank deliver a better and more consistent experience for customers and team members,” in a letter to employees earlier this year.
Last year, Auto Finance News reported that the bank’s disparate network of regional centers would be consolidated into three locations in Irving, Texas; Chandler, Ariz.; and Raleigh, N.C. Jobs at the California offices include those in payments, title, insurance, collections, customer service, some underwriting, funding, and quality assurance, according to the report.
Employees were also told they could transition to a Minneapolis, Minn. “go-forward” hub. AFN previously reported that funding operations, specifically, are being consolidated into two centers in Irving and Chandler while dealership sales and relationship teams will remain at a number of current regional centers and over time will be moved into other existing Wells Fargo buildings.
Earlier this month Wells Fargo agreed to pay a $1 billion settlement with the Consumer Financial Protection Bureau and Office of the Comptroller of the Currency over allegations of mischarged auto insurance products and mortgage payments. You can read more of AFN’s coverage here.
For more news like this join us at the Auto Finance Performance & Compliance Summit May 9 and 10 at the Omni Dallas. To register, or to learn more about the 2018 event, visit the event homepage here.
Despite a recent move up the credit spectrum, Platinum Auto Finance is open to the idea of utilizing alternative data in its lending processes, David Knightly, senior vice president of operations, told Auto Finance News. “If it helps me scale in a way that I need, in the space that I play in, then absolutely, I’m interested,” he said.
Alternative data refers to elements of a consumer’s behavior that don’t normally show up in traditional credit reports but could help lenders gain enough insights about to be willing to extend credit. While Platinum is open to having conversations surrounding alternative data, the need for nontraditional underwriting tools lessens as the company is shifting away from its deep-subprime focus.
“As we move out of having a lesser percentage of our new originations that resides in deep-subprime — below 550 or 545 — some of that alternative data becomes less necessary,” Knightly said.
The decision about alternative data falls under the strategic operational initiatives Knightly was tasked with overseeing when he joined Clearwater, Fla.-based Platinum in January. Knightly is also responsible for sales and partnership efforts in the company’s two-state footprint of Florida and North Carolina.
Previously, Knightly was vice president of sales and marketing at Innovate Auto Finance, where his responsibilities included managing and building new sales teams, and leading initiatives for portfolio management. Knightly has worked as a sales manager at Capital One Auto Finance, Exeter Finance Corp., GM Financial, and Gateway One Lending & Finance.
AFN spoke with Knightly about his new role, priorities at Platinum Auto Finance, and his thoughts on the auto finance industry. Following are edited excerpts from the interview:
AFN: What are your main responsibilities as SVP of operations?
DK: I pretty much run the origination side of the business. That channel that drives our revenue reports up through me, and I have a great team below me, so I’m stress-free from a human resource capital standpoint. I also oversee some of the collections efforts. I’m starting to get into that more as it moves along here. I’ve been working on the marketing of the business, [that is,] the way I want to market the company — where I think there’s a fit for us at a car dealership to do financing that maybe others can’t afford, or there’s limited competition in the space because we do it the right way.
AFN: What are your long-term goals for this role?
DK: I wouldn’t say that I have a goal, per se, for my career, although we’ll see where that takes us. But for the company, what pays dividends in the long term is slow, profitable loan growth while remaining patient and under control.
AFN: How are you positioning Platinum Auto Finance to withstand challenges in the market?
DK: The people we bank with are extremely happy with us because we’re able to provide predictable analytics data. We do what we say, our stuff comes in regularly, they like the way we’re scaling, so it becomes less scary. When all the press is negative — [saying things] like, ‘It’s all bad,’ ‘Delinquencies are up,’ and so forth,. what does that mean? Is it a service bucket? Is it a loan charge? You can’t just throw that out and go negative. If you were in the stock market and you were going to invest in it and you said, ’OK, what’s the right time to invest?’ The best time to invest is when the press is all bad and the Dow is down. I mean, lots of millionaires came out of 2008. Those people had money parked on the sidelines. So, all these other lenders that are facing headwinds — both from the auction and from a pricing perspective, because we borrow all our money to loan our money — the smarter that people are that manage through during that period of time, there’s extremely profitable business to be had through there, if you control your prices.
AFN: What are your thoughts on the future of the industry?
DK: I think that the industry as a whole is a lot healthier than is reported. Are there going to be some bumps? Yes, there are going to be more people exiting than jumping into this in a couple years, but this is an extremely resilient business if you do it right. If you’re smart and you have good maturity to do the right thing even when it’s hard, it’s a business that can be really long-lasting. I think all the publicity is pretty negative right now, and I think that’s just wrong.
Ford Motor Credit Co., GM Financial, and Capital One Auto Finance all grew their portfolios in the first quarter despite a mixed environment for originations, delinquencies, and charge-offs.
Ford Motor Credit
Ford Motor Credit originated 93,000 loans in the first quarter down from 98,000 the same period the year prior. Despite that, the company grew its US consumer lending portfolio by 6% year over year to $55.2 billion.
For the foreseeable future, Ford Credit will maintain the period-end portfolio size for the foreseeable future as it looks to manage risk, Chief Financial Officer Robert Shanks said on the call.
“We want to better manage that. So that’s the reason primarily that we’re going to cap them at least for the foreseeable future,” he said.
Charge-offs were down 3% year over year to $93 million as auction values improved versus a year ago by about 1% at constant mix and drove lease residual improvement.
“We now expect full-year average auction values to decline just 1% to 2%,” Robert Shanks, chief financial officer, said on the call.
GM Financial
Retail loan originations were down to $5.1 billion for the quarter compared with $5.6 billion the same period the year prior. Operating lease originations were down as well totaling $5.7 billion for the quarter compared with $6.3 billion in 1Q17
Much like Ford, GMF still managed to grow the overall retail portfolio by 4.6% to $34.3 billion.
Retail finance receivables 31-60 days delinquent were 3.7% of the portfolio, up 60 basis points year over year. Late-stage delinquencies were also up 30 basis points to 1.7% of the portfolio for the quarter. That increase in delinquencies led to an 11% year over year rise in net charge-offs to $172 million for the quarter.
Capital One Auto Finance
“The auto business continues to grow,” Richard Fairbank, chief executive, said on the call. “First quarter auto originations were strong and ending loans were up 10% year-over-year, competitive intensity in auto is increasing, but we still see attractive opportunities to grow. Consumer banking revenue for the quarter increased about 4% from the first quarter of last year driven by growth in auto loans and deposit.”
Net charge-offs made up 1.53% of the bank’s auto portfolio, a decline of 11 basis points year over year. Delinquencies of 30 or more days were increased 12 basis points to 5.15% of outstandings, while nonperforming auto loans also increased 14 basis points to 0.5% of the portfolio.
“In auto, we remain cautious about used car prices and our underwriting assumes that prices decline,” Fairbanks said on the call. “As the cycle plays out, we continue to expect that the auto charge-off rate will increase gradually.”
Mick Mulvaney speaking at the 2018 Conservative Political Action Conference in National Harbor, Maryland. (Photo by Gage Skidmore)
The Consumer Financial Protection Bureau will no longer instruct auto lenders on how to govern dealership practices, Acting Director Mick Mulvaney said during a speech Tuesday at the American Bankers Association conference.
The comments were in line with previous statements Mulvaney made in regards to “not pushing the envelope,” but in this speech he took went a step further to specifically call out how the CFPB under former Director Richard Cordray targeted dealerships, according to reports. While the CFPB does not have authority to regulate dealerships, the regulator has used its power over lenders to make the financial institutions themselves police their dealer partners.
“We are going to do what the law says, but not what the law doesn’t say,” Mulvaney said in reference to Dodd Frank’s restrictions on regulating dealers. “We are going to look at those, we are going to follow those and we’re going to abide by those [limitations].”
Chief among the policies that affect dealerships is the CFPB’s bulletin on dealer markup. The policy encourages lenders to lower caps on how much dealers can increase the interest rate on loans above what the lender has approved. The rule was designed to limit racial discrimination during the finance process.
Earlier this month, the Senate passed a bill that would eliminate this guidance and prevent the bureau from making future rules regarding this policy. A vote in the house is expected to reach the floor by early May.
It’s unclear what practical effect Mulvaney’s comments have on the auto finance space. In December 2016 — prior to Mulvaney taking the reins — head of the now defanged Fair Lending office Patrice Ficklin was already signaling a reprioritization away from auto-lending issues.
“Because the Consumer Bureau is responsible for overseeing so many products and so many lenders, we re-prioritize our work from time to time, to make sure that we are focused on the areas of greatest risk to consumers,” Ficklin wrote in a blog post at the time. “For example, we have examined over a dozen of the nation’s largest auto lenders and achieved important market awareness and movement, and we believe that a wide range of supervisory compliance solutions tailored to each lender will work to secure and advance our progress in protecting consumers.”
Still, dealers and lenders alike are eager to see the CFPB’s dealer markup rules eliminated through legislation.
“We’re mostly on flat [rates] with our captives,” said Jesse Hord, chief executive of Keeler Motor Car Company in Albany, NY. “I think we’ll see some dramatic change in the market,” if the dealer markup rules are eliminated.
For more news like this join us at the Auto Finance Performance & Compliance Summit May 9 and 10 at the Omni Dallas. To register, or to learn more about the 2018 event, visit the event homepage here.
Santander Consumer USA managed to lower net charge-offs by increasing its recovery volume during a period of growing originations, the company announced during its first quarter earning call.
Gross charge-offs during the quarter were actually up 40 basis points year over year to 18.5% of the portfolio. Yet, the lender managed to grow its auction-plus recovery rate by 400 basis points for a net charge-off rate of 8.3% — 50 basis points lower year over year. Delinquencies 30 days or more past due remained flat at 11.1% of the portfolio.
Meanwhile, Santander grew first quarter originations by 18.8% year over year to $6.3 billion. The growth was largely driven by a 24% increase in Chrysler Capital retail contracts compared to the first quarter 2017.
“We’ve had a very good start to the year in terms of originations and credit performance,” Chief Financial Office Juan Carlos Alvarez de Soto, said on the call. “We feel good about where we are and going into the second quarter.”
The banks core retail contracts — the largest portion of its originations — also grew by 4% year over year. However, Chief Executive of Santander Consumer Scott Powell said that may have been a one-time bump due to tax cuts.
“We do believe that folks are starting to see the impact of tax [cuts] on their paycheck, whether that translates into demand for cars is yet to be seen, but it’s certainly not going to hurt us,” he said. “Tax refund season is big for a non-prime business and it’s a big driver [of originations]. We expect declines in core nonprime for the rest of the year, but [continued gains] for the Chrysler part of the business.”
Tidewater Finance Co. has continued to build out its internal audit and compliance team despite waning interest in the subprime auto space from the Consumer Financial Protection Bureau, Kroll Bond Ratings reported in a pre-sale report for the lender’s latest securitization.
Specifically, Tidewater created compliance manuals adopted for use by the legal department and implemented a learning management program, which Kroll said will allow employees and supervisors to track learning objectives and progress throughout the year.
“The objective of both programs is to assure Tidewater Motor Credit is maintaining compliance with new state statutes and the CFPB,” according to the pre-sale report.
The transaction itself is backed by a pool of $130 million in subprime auto loans, down from $143 million compared with the lender’s most recent 2016 issuance. Tidewater’s balance of loans is higher than similar issuance from peers such as Flagship Credit Acceptance and First Investors but much smaller than the biggest subprime players.
The issuance also shines a light on the private company’s originations strategy, which is increasingly reliant on bankrupt customers who have had their 341 meeting of creditors. In 2017, Tidewater originated $90 million worth of auto loans up from $72 million the year prior, and 72% of those loans were made to consumers in bankruptcy.
“In Q4 2015, management reduced originations based on increased competition and negative industry trends, as evidenced by lower margins, increased term, and higher advance rates,” Kroll noted in the report. “Since Q1 2016, the company has been increasing originations in the 341 product and recently discharged bankruptcies, while reducing originations among traditional subprime borrowers. This is because TMC has experienced superior performance of 341 product loans relative to traditional subprime loans.”
The rating agency anticipates a cumulative loss rate between 10.8% and 12.8%. Tidewater makes loans for 872 participating independent and franchise dealers in 35 states.
