Why bankrupt consumers make good prospects

Jim Henry
Automotive News -- March 7, 2012 - 12:01 am ET

It may sound counterintuitive, but customers fresh from bankruptcy or whose cars are being repossessed can be highly desirable customers for lenders and dealers, say two companies that cater to what's politely known as the BK market, short for bankrupt.

That's because close to 40 percent of the customers who can be identified from publicly available U.S. Bankruptcy Court records buy a car within 30 days after their cases are discharged, according to OnlineBKmanager.com of Chandler, Ariz.

"Our focus is to work directly with franchised new-car dealers," said Robert Davies, company president, in a phone interview earlier this year.

The company mines court records to identify people who are approaching the point where they can buy a car again. Dealers and lenders can buy those leads and the company sends direct-mail pieces to the customers. OnlineBKmanager.com has about 800 dealers signed up and a growing number of lenders, Davies said.

For instance, the company announced in February that it had signed up with Prestige Financial Services, a subprime auto lender owned by Utah-based Larry H. Miller Group of Companies.

Tim Condon, CEO of Leap Financial, said in a recent interview that many of the customers who are in repossession or who go bankrupt have had a good credit history in the past.

"Probably half our portfolio are consumers who were prime customers prior to the recession and just hit a bad patch," he said.

Leap Financial buys cars from lenders that are in the process of repossessing them. The company leases them back to the same owners for a lower monthly payment. The lender gets more than it would if it auctioned off the car. The customer gets the car back -- with a GPS-based starter-interrupter that disables the car if the customer misses a payment.

Said Condon: "We get shockingly good results."

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Ally CEO: We have only 1 business -- auto

Jim Henry
Automotive News -- May 23, 2012 - 8:14 am ET
Ally Financial CEO Michael Carpenter: "We will reduce our cost of funds over time. We will free up capital. This will result in an even stronger auto franchise."

Ally Financial Inc. has one focus now, CEO Michael Carpenter says: U.S. auto lending.

That auto emphasis, in fact, is one of the reasons Ally's ailing mortgage unit, ResCap, filed for bankruptcy protection last week, he says.

As of the first quarter, Ally had relationships with nearly 14,000 U.S. dealerships, an increase of about 1,000 from a year earlier. Ally's biggest customers are General Motors and Chrysler Group. Ally is the preferred lender for both manufacturers.

Carpenter spoke about Ally's auto lending business last week with Automotive News Special Correspondent Jim Henry.

You've compared Ally to "category killers" in other industries. Your categories are auto lending and online banking. So ResCap was in the way?

We only have one business. It's a big business, and that's the auto franchise. Ally Bank is a very important part of how we finance it.

What makes Ally different from other banks?

Most banks, if you want subprime, they might say, "On Mondays, Wednesdays and Fridays, we do subprime; on Tuesdays and Thursdays, we do prime" or whatever. That is, when the market is good. But we're there every day.

But you're keeping your U.S. insurance operation, which includes extended-service contracts and other insurance-like F&I products.

Yes, we are. We believe in offering our dealer customers every financial product they need. We finance the entire credit spectrum. We offer leases and loans. We run auctions. We insure vehicles on the lot. We offer insurance products they can sell to their customers.

What's in it for dealers? Is it that if you can lower your cost of funds, you'll be able to offer lower rates?

It really is just about that straightforward. ... We will reduce our cost of funds over time. We will free up capital. This will result in an even stronger auto franchise. ... The reason ResCap went bankrupt, the reason we're selling the international operations, is to make the U.S. business even stronger.

You can reach Jim Henry at autonews@crain.com. Related LinksReaders are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Auto-loan delinquency rates plunge

Auto-loan delinquency rates in the United States have fallen to their lowest point in at least a dozen years, according to risk management firm TransUnion.

The percentage of borrowers who are at least 60 days past due on their vehicle payments fell to 0.36 percent in the first quarter of 2012, TransUnion says. That's the lowest rate since the firm started reporting the data in 1999.

Compared with the first quarter of last year, delinquency rates dropped almost 27 percent from 0.49 percent . From the fourth quarter of 2011, rates fell nearly 22 percent from 0.46 percent.

"Auto loan delinquencies continue to perform exceptionally," said Peter Turek, automotive vice president of TransUnion's financial services unit, in a statement.

Turek said he expects auto-loan delinquencies to remain low for the rest of 2012 because rising U.S. demand for new and used vehicles has spurred an increase in lending and leasing.

Still, Turek cautioned that "a slight increase from this record-low level would not be surprising and should not be construed as a negative event, as lenders continue to originate more loans to consumers across all credit risk levels."

Auto delinquency rates dropped in 43 states from the fourth quarter of 2011 to the first quarter of 2012, TransUnion reported. Last quarter, Montana had the lowest loan delinquency rate in the country at 0.15 percent. Mississippi, with a 0.77 percent delinquency rate, was the highest in the nation.

You can reach Joseph Lichterman at jlichterman@crain.com. Related LinksReaders are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Subprime tarnish fades, finally

Jim Henry is a special correspondent for Automotive News

Dealers have complained for a couple of years now about how long it's taking for subprime auto lending to bounce back.

Sure, the U.S. economy isn't growing as fast as we'd all like. But really, what's taking so long?

How about tarnish by association?

Part of the problem is that ever since the subprime-mortgage collapse, some investors can't bring themselves to buy anything with the word "subprime" in it, said John Di Paolo, principal of structured finance research at Prudential Investments. Di Paolo spoke last week at a conference sponsored by Standard & Poor's Ratings Services.

"Some investors, I don't think, will ever come back to subprime," he said. That's despite the fact that subprime auto loans performed pretty well through the recession and performed a much better than mortgages.

"People don't differentiate," he said.

While some investors have been turned off forever, the good news for dealerships is that many investors are now pouring money into subprime lenders, which the lenders are using to make new loans and grow again. Subprime accounted for 41.5 percent of U.S. loan and lease originations in the fourth quarter last year, up from 38.4 percent the year before, Experian Automotive says.

All indications are that the first quarter this year followed the same pattern, with an increase in subprime share.

Finally, subprime loans are starting to catch up.

You can reach Jim Henry at autonews@crain.com.

Related LinksReaders are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Chief consumer watchdog takes stage, stays mum on auto lending

Jim Henry is a special correspondent for Automotive News

It's too bad that the head of the Consumer Financial Protection Bureau, which prides itself on enforcing transparency in the finance industry, is opaque about its plans for the auto-lending segment.

Apparently, auto lenders and the franchised, new-car dealers they do business with are just going to have to wait and see, even though that's not the answer anybody wants.

At last week's Consumer Bankers Association convention in Texas, Richard Cordray, CFPB director, stuck to his prepared remarks. He didn't even mention the word "auto," although he did mention mortgages, credit cards, student loans and checking accounts.

The Consumer Financial Protection Bureau hasn't gotten around yet to any specific public statements on auto lending. That has done nothing to calm high anxiety among auto lenders and dealers about whether the bureau or other government regulators, such as the Federal Trade Commission, will review the common practice of dealer reserve on indirect auto loans.That's where dealers in effect mark up the customer's interest rate and share in the profits.

As Cordray headed for the exit at the convention, I asked him whether he could talk about the auto sector in general or specifically about dealer reserve. "I respect your right to ask," he said, "but I don't have any news to make on that today."

To be fair, the bureau is still new, and Cordray is newer still, having been appointed in January. Moreover, when the bureau was created in 2010, dealerships were specifically carved out of its jurisdiction. That potentially complicates any rules the bureau might contemplate regarding dealer reserve. Technically, any rules would be for lenders, not dealers.

Still, it was a disappointing appearance for anybody hoping for more details.

You can reach Jim Henry at autonews@crain.com.

Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Bundling, dealer reserve may draw whistles on regulatory gridiron

Jim Henry
Automotive News -- March 28, 2012 - 12:01 am ET

Some items related to auto lending could come under scrutiny by government regulators, speakers at the Consumer Bankers Association convention in Texas said last week. And that could be cause for worry, they said.

1. Bundling: More F&I vendors and dealerships are packaging aftermarket products instead of pricing them individually.

Doug Ekizian, senior manager of the Consumer Finance Group at PricewaterhouseCoopers, said in a presentation on "enterprise risk management" that regulators might not like that.

"Aftermarket products should not be bundled in such a way as to obscure relative costs. ... The total cost of a product, including interest, points and fees, should be easy for a customer to understand," he said.

2. Customer complaints: The Consumer Financial Protection Bureau has launched a Web site, consumerfinance.gov/complaint/, for gathering consumer complaints about financing, including auto. But lenders say the auto finance complaint platform is overly broad. The CFPB has begun to exercise its jurisdiction over depositary institutions -- those offering checking and savings accounts -- but not nondepositary ones, such as captives and independent finance companies. Yet the site is open to complaints about all auto lenders. Lenders worry the site will attract complaints about companies the bureau isn't yet monitoring and can't do anything about. When those complaints aren't addressed, lenders fear consumers will blame them, not the bureau.

The CFPB hasn't said just how it will forward a consumer complaint to a lender that was the subject of that complaint.

"The list of complaints is building," Ekizian said. For example, he said, consumers have read about mortgage "modifications" to keep borrowers in their homes even when they're behind on payments. Some consumers are disappointed to learn auto lenders don't work the same way, he said.

Separately, the American Financial Services Association sent CFPB Director Richard Cordray a written complaint on March 13.

"When they created a credit card [complaint] platform, there was a lot of dialogue back and forth. We didn't see that" for autos, said Bill Himpler, AFSA executive vice president.

3. Dealer compensation: At roundtable discussions last year, the Federal Trade Commission heard repeated complaints about dealership scams such as "packing" cars with unwanted options and so-called yo-yo financing, in which the original deal falls through and the customer has to come back and sign a new and potentially more expensive contract.

Dealer reserve, in which the dealer arranges the financing and marks up the customer's interest rate to share in the profits, also came in for criticism.

Andy Koblenz, chief counsel for the National Automobile Dealers Association, said the industry has three good arguments why there's no need to create new regulations for some common complaints cited at the FTC roundtables:

• They're already illegal. This would apply, for example, to "packing" cars with unwanted options.

• They occur only rarely. For example, yo-yo financing. Consumer-advocate groups see this as a sneaky tactic to get more money. The industry sees it as a mistake most dealers probably prefer to avoid.

• They're based on old information. Overcharging for rustproofing was once a common complaint. Even though it's virtually unheard-of today, it still comes up as an example of shady dealer business practices.

None of those arguments applies to dealer reserve, though, Koblenz said. And that could make it a regulatory target.

"It happens all the time. Is it happening today? It is. Is it currently illegal? No," Koblenz said.

He said one legal argument in favor of today's dealer compensation is that it does no harm. If anything, he said interest rates on indirect loans negotiated by dealers are often lower than direct loans with no middleman.

You can reach Jim Henry at autonews@crain.com. Readers are solely responsible for the content of the comments they post here. Comments are subject to the site's terms and conditions of use and do not necessarily reflect the opinion or approval of Automotive News. Readers whose comments violate the terms of use may have their comments removed or all of their content blocked from viewing by other users without notification.

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Learn how new U.S. rules will affect you

Automotive News -- May 23, 2012 - 12:01 am ET
Reynolds: Points out trouble spots

Auto dealers who have been watching regulatory developments will get some answers next month during Automotive News F&I Week -- a free online conference.

Carole Reynolds, a lawyer in the Federal Trade Commission's Financial Practices Division, will give examples of trouble spots in auto finance and leasing and explore topics from the FTC's roundtable last year on auto lending and related activities.

She will help dealers determine whether they're driving toward danger or steering clear of deceptive practices.

And Michael Benoit, a partner with the Hudson Cook law firm, will spell out what dealers need to know about the Consumer Financial Protection Bureau.

Although auto dealers do not fall under the bureau's direct jurisdiction, there are several ways the bureau can impact dealer behavior. Benoit will explore these issues and help dealers prepare for what may lie ahead.

Benoit: Preps dealers for future

Reynolds and Benoit will be part of a session called "Playing by the Rules -- Federal Regulation and Enforcement Workshop" on Wednesday, June 20, at 3 p.m. EDT.

The moderator will be Dave Robertson, executive director of the Association of Finance & Insurance Professionals, an Automotive News partner in the event.

Six F&I Week Webinars will be held, at 1 p.m and 3 p.m. on June 19, 20, and 21.

The event is designed for F&I managers and staff, dealer principals, general managers, sales managers and business development center personnel.

The sessions can be viewed live on attendees' computer screens or played back later on demand. To find out more about F&I Week or to register, go to fandiweek.com.

What: A free, online conference
When: June 19-21
Main events: Webinars at 1 p.m and 3 p.m. EDT daily
Sign up: fandiweek.com

Contact Automotive News

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