CarMax, about halfway through a test to decide whether it wants to make its inhouse subprime lending business permanent, said it is happy with the auto finance partners it has today.
The company also announced in its quarterly conference call today that 90% of loan applications were getting approval of some kind, according to the two Toms of CarMax — President and CEO Tom Folliard and Vice President and Treasurer Tom Reedy.
CarMax has 120 stores across the nation and plans 13 more by the close of the year.
CarMax Auto Finance, or CAF, has seen its subprime penetration go down slightly in the quarter. “We told you in the third quarter that they had pulled back a little bit,” Folliard said. “And so it makes sense. It was 21% last year when we thought people would be a little bit more aggressive and we saw a little pull back. We were flat in the fourth quarter. We’re slightly down in this quarter.”
They two execs also said they’d seen a slight lift in sales funded by sources outside CarMax’s system of lenders. At the same time, there was a lift in sales funded by the company’s Tier 2 partners. Reedy said the Tier 2 partners had likely picked up some customers that they may have declined in the past.
Reedy said that over time, he would expect the distribution between tiers of lenders to be constantly moving around. Lenders, he said, continue to tweak their scorecards and make adjustments based on the performance of the portfolio that they have originated.
Test Run
At the same time, CarMax is six months into its own in-house subprime financing test run. Reedy said with around $30 million in loans originated to date of an estimated $70 million, the test run is on track, but there is nothing specific to report from it yet.
Reedy said the test was a slight drag on CAF earnings, but not material. The drag comes because the company has to reserve 12 months of losses on those loans.
A spokeswoman from CarMax later confirmed to Auto Finance News that “we do not have any additional information to provide on the CAF subprime test.”
Reedy said the company was being appropriately conservative in terms of its loss provisions on the new subprime loans.
During the first quarter, fiscal 2015, CarMax originated $20.5 million loans in the test. That represented 0.8% of retail sales. As of May 31, 2014, the company had originated a total of $29.6 million loans in-house.
Overall, CarMax Auto Finance increased its income by 8.7% to $94.6 million. The company said the growth was driven by an increase in average managed receivables, partly offset by a lower total interest margin.
Average managed receivables grew 20.1% to $7.39 billion as CAF loan originations have grown in recent years. The total interest margin, which reflects the spread between interest and fees charged to consumers and our funding costs, declined to 6.7% of average managed receivables in the current quarter compared to 7.2% in last year’s first quarter.
