Exeter Finance Corp.’s January rollout of a new origination platform has reshaped the subprime lender by enabling it to offer quicker loan decisions. The shift marked an overhaul of Exeter’s corporate structure to a centralized model — from the branch network upon which the company was founded back in 2006.
“Part of our original strategy was to open a number of local branches to support our dealers’ business,” a company spokeswoman told Auto Finance News. “It added credibility for us in the early days. Now, because of the efficiencies of our new origination platform, notably a much faster decision time, we do not require the same amount of underwriters to process applications.”
By June, all underwriting, funding, verification, and servicing will occur in the company’s operations centers in Clearfield, Utah, and Irving, Texas.
“This is an important step for Exeter, and one that should help dealers sell more vehicles,” the spokeswoman said.
But the changes have come at a cost. Exeter co-founders Richard Frunzi and Kenneth Wardle — executive vice presidents in charge of originations and portfolio management, respectively — have left the company. Though the spokeswoman declined comment, a Feb. 24 securitization presale report by Standard & Poor’s noted that “their departures were associated with the strategy change from a branch-based model to a centralized origination platform.”
Also, Chief Financial Officer Cliff Buster resigned Jan. 30, after about a year on the job. Without elaborating, the company spokeswoman confirmed that Exeter is seeking Buster’s replacement.
This recent activity has occurred under the watch of Thomas Anderson, a seasoned financial services veteran brought in last November to “position Exeter for the next stage of its growth and development,” according to a company press release at the time. Anderson replaced Chief Executive Mark Floyd, who grew Exeter’s portfolio to $3 billion from about $100 million in 2010. Floyd remains on the Exeter board of directors.
Anderson’s vision for Blackstone Group LP backed Exeter is to streamline the manual processes necessary in the subprime business, while improving risk-management procedures. For starters, the new automated underwriting system “is expected to provide enhanced compliance and controls” and “allow for more consistent loan approvals,” according to a Feb. 23 presale report from DBRS, the rating agency.
Previously, loans originated at the branch level underwent a judgmental review process. With the automated system, “all underwriting decisions are made based on company credit policy with no exceptions considered,” according to DBRS. The move comes at a time when lenders face heightened scrutiny from regulators related to potential disparate impact.
With the new loan-origination system, Exeter’s capture rate on callbacks — that is, the volume of loans booked after the dealer receives approved terms — is “up 30% to 40% across the board,” Anderson told AFN in an interview in February. The improvement stems, in part, from reduced decisioning time, which dropped to 20 seconds from 20 minutes. In addition to the rapid responses, the new platform allows Exeter to adjust loan terms in real time.
Next on Anderson’s radar are verification procedures.
“There is some opportunity to really make some innovative changes on that side,” he said. “So that’s a focus for us in 2015. That’s not purely a technology-based solution — some of it is — but some of it is also different processes, and trying to make it easier for the consumer and the dealer to complete what they’re trying to complete, so I think that’s the big delta.”
Anderson talked about plans for a third servicing center, as well as the potential for a subprime bubble and other industry trends. A portion of his comments follow.
AUTO FINANCE NEWS: In June 2014, Exeter opened a new servicing facility in Utah. How has that transition been?
THOMAS ANDERSON: It’s been going way better than we actually could have expected or hoped. I think the first employee there was on June 9, and we have over 200 employees there now. We tried to be very thoughtful about it. We started off with it just being a servicing center, and as time has gone on, we’re putting originations there, as well. So we’ll have all of our various personnel, from originations through all of servicing. That allows us to have better flexibility, time zone management, resources available when the dealers need it.
AFN: Do you have plans to increase Exeter’s staff or will you make adjustments as you grow?
TA: We do adjust as we go along, but as you can imagine, the more loans you have, the more people you have to service. It’s a fairly formulaic model, and based on our continued plans to grow, we expect to continue to add people. We’re almost 100% full in [our Irving,] Texas, [facility], and we’ll be 100% full in Utah in the first half of 2016, so we need to start planning now for the next facility.
AFN: There has been a lot of conversation lately about whether subprime volume is reaching a dangerous level. What are your thoughts?
TA: I’ve been asked this by folks both inside the industry and outside the industry, and nobody has a perfect crystal ball. If you look at the relative volume overall, it doesn’t look like a bubble. If you look at the performance and behavior of the participants in the space, it certainly doesn’t look that way. Now I don’t know exactly what all of our competitors do, but usually if things are getting crazy or overheated, you start seeing strange underwriting behaviors — pricing that’s irrational, competitors that are buying silly paper. We don’t see any of that. I think this is more media and some regulators. That doesn’t mean we don’t worry about it, and we ask the question every day. It doesn’t appear to be showing up in any of the behaviors in the market, and the volumes haven’t reached levels that you think are crazy. If you look at the percentage of autos that are sold, it doesn’t seem out of whack.
AFN: As a subprime lender, what are your thoughts on how companies in the sector are being perceived in the media lately?
TA: We can debate whether it’s a good thing or not, but the fact is that in the U.S., for the vast majority of the population, you can’t function in our society without access to transportation, most notably an automobile. It’s just a reality of our society, and there is a meaningful percentage of the population that, for whatever reason — the last recession, the jobs they’ve chosen, where they happen to be born — are financing an automobile, and their financial record is not as clean as others.
So the choice is, you can either make an automobile available to them, and in this case it’s trying to find those folks that can manage it responsibly and work through it. Or the alternative is to have no access to an automobile, in which case they are probably worse off, their economics deteriorate, they can’t get a job, and they can’t take their kids to school. So to me this isn’t a question of, “Should we be doing it,” it’s, “Can we do it in a way that’s responsible, that treats people fairly, and that tries to manage the situation?”
The problem with risk is, if I could know with 100% certainty, which of these individuals will never have a life event that’s economically challenging or would never lose their job, of course we’d only lend to them. But we don’t know that, so we try to do it as best we can, then manage it appropriately and treat them fairly. So to me, it’s a silly conversation for people to talk about should they not be doing it, because by not doing it, they’re going to harm a ton of people.
AFN: What other changes can we expect at Exeter?
TA: It’s fairly straightforward. Exeter is not that old of a company, [and it] grew quite fast. What tends to happen is that when a company gets to a certain size, there are very few entrepreneurs who know how to take it to the next level Exeter’s not a turnaround, but it is a company that needs to keep changing. We’ve moved from a small company to a midsize company to a pretty big player, and our expectations are to get even bigger, to be a major factor in the industry and hopefully influence it in a way that not only continues to do business, but ensures all the players behave well. As I’ve told people here, the norm in society and in business is change. The world is changing faster all the time. So my view is: We’re going to have to change as the industry and the country changes. So, yes, there will be changes — I just don’t know what they all are yet.
Learn more about risk and compliance in auto finance May 18 and 19 at the Auto Finance Risk & Compliance Summit 2015 in San Diego. Register here.