Subprime auto lenders posted mixed second-quarter earnings last week as credit tightened amid ongoing interest rate increases.
Credit Acceptance Corp. (CAC) and Consumer Portfolio Services (CPS) both tightened credit standards in Q2, with CAC posting an 8% year-over-year increase in consumer loan assignments while CPS logged a 41.9% YoY decline in origination volume.
Meanwhile, Carvana is prepping its fifth auto asset-backed securities transaction of the year, a $317.4 million deal backed by prime auto receivables on the heels of a debt restructuring last month.
In this episode of the “Weekly Wrap,” Editor Joey Pizzolato, Deputy Editor Amanda Harris and Senior Associate Editor Riley Wolfbauer discuss the top stories for the week ended Aug. 4, and what to expect in the week ahead.
Auto Finance Summit, the premier industry event for auto lending and leasing, returns October 29-31 at the Bellagio Las Vegas. To learn more about the 2023 event and register, visit autofinance.live/afs/.
Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain.
Hello everyone, and welcome to the roadmap from auto finance news since 1996, the nation’s leading newsletter on automotive lending and leasing, it’s Monday, August 7, I’m Joey Pizzolato, joined by Amanda Harris and Riley Wolfbauer. This is our weekly wrap on what happened in auto finance for the week ending August 4 2023. In general economic news the unemployment rate dropped to 3.5% in July, one of the lowest readings in decades, those readings be the economist estimates of 3.6% on the month, average hourly earnings increased by 0.4% Last month, above the expected rate of 0.3%. auto lenders will soon be able to hedge us vehicle price exposure on an open derivatives market. Exponential exchange a Washington DC based startup founded in 2021, has set its sights on creating a market in which auto lenders, insurance providers and rental companies among others can hedge volatile use vehicle value fluctuations and an open futures market. insurance providers may want to hedge against price appreciation on vehicles they’ve insured and rental companies may want to hedge against price depreciation on their fleet. auto lenders can hedge against residual lease exposure or even credit race. Exponential exchanges targeting a second half 2024 launch in the futures exchange following over the counter deals in the latter half of 2023. In auto finance the volume of digitally originated auto loans increased during the second quarter despite slowing origination volume as consumers expect online channels to speed up the car buying process. The number of auto loans originated through a contracting increase 7% quarter over quarter in 2% year over year to about 2.1 million contracts. According to Wolters Kluwer, the highest volume of digitally originated loans came in May at about 729,000 contracts compared with 668,000 contracts in April in 726 contracts in June. subprime lenders are all also reported second quarter earnings last week Credit Acceptance core consumer loan assignments on a unit basis Rose 30% year over year to just over 82,000 contracts and 8.3% year over year on $1 basis. Credited septons Corp has been originating to a quote higher credit score customer chief Treasury officer Doug Buss and during the company’s earnings call last Tuesday, a savings Rose 4% year over year to 9.6 billion and forecasts and collection rates on loans posted and mixed results. loans originated in 2023, including during q1 held the forecast forecasts and collection rate of 67.5% of 30 basis points from initial forecasts at the end of q1. However, loans originated in 2022 posted the largest decline in forecasted collections linee at 64.3%. Down 170 basis points from q1 and 320 basis points from initial forecasts because it will hopefully have services also reported earnings last week. Riley has the details.
Riley Wolfbauer 3:27
Yeah, consumer portfolio services has been making credit tightening actions since the third quarter last year. So that led to a decrease in originations for the lender of 23% sequentially and 42% year over year to about $318 million. Mike Lavin, the President Chief Operating Officer, CPS call that the reduction in volume was purposeful as they scaled back due to certain macro economic headwinds, and they continue to operate with a tighter credit box and they’re keeping a keen eye on the affordability of their product for consumers. laving also noted that CPS is payment to income ratio across its portfolio trended down during the quarter and the debt to income ratio remained relatively flat. They did not mention specific numbers, but those were the general trends that they saw in their book. As originations fell, their outstandings were flat sequentially at $2.9 billion, but up to 11.5%. Compared with q2 2022. CPS got roughly 8000 applications a day during the quarter and their approval rate came in at 62%. And that’s compared with 59% in the first quarter approve loans, their average APR went up to 21.5%. That’s up from 16.3% in q2 2022. Looking at their credit performance on their portfolio, their delinquencies went up about 200 basis points sequentially. And 160 basis points year over year to 10.25%. Their net charge offs came in at 6.3% of the portfolio. And that was up 280 basis points year over year. So Joey, you noted that Credit Acceptance, their forecast for collections on their 2022 book went down. CPS also added color on their 2022 paper. Chief Executive, Charles Bradley said that their 2022 originate loans are doing well, not as great as they had hoped. But they are still stronger, and they’re pleased with how it’s performing. They’re continuing to monitor it closely. And they’re making progress in getting that to perform where they would like it to perform. But as credit performance deteriorated a little bit, they increase their provision for credit losses to $9.7 million. That’s up 8%, quarter over quarter and 21% year over year. So as you looking at credit, acceptance and CPMs, it’ll be interesting to see how this 2022 paper trends going forward, since there are expectations for a little bit higher loss rates on that 2022
Joey Pizzolato 6:28
Write in on credit acceptances, earnings call and they said that, you know, 2022, as we all know, was a highly competitive market, which usually leads to loans, at least on their portfolio not performing as well. So we’ll definitely look into some of these other 2022 vintages especially in the securitization market, and you know, the next week or the following week, here to see how they’re performing. Last week, we also published our August feature on zombie debt. Amanda, what is zombie debt?
Amanda Harris 7:02
Sure. So to start off, I’ll just kind of walk us through we all know that in general has kind of a lifecycle. So for auto loans, typically the creditor is the the vehicle dealers, that’s kind of where everything starts, they sell the loan to a bank, or credit union or a finance company, whoever is financing that loan for the consumer. And then the debt will go through, you know, collection periods. So either consumers paying or in the case zombie debt, where the eventually gets to, which I’ll talk through in a second, the consumers not paying so eventually goes through a charge off status, you know, delinquencies and then charge off and then it’s rated pretty much just a loss right at the lender. So they’ll write it off as a loss, they typically will then sell it to a debt buyer. Now that debt can go through multiple debt buyers over its lifecycle, as people try to collect on this outstanding debt. Typically, you know, statute of limitations for collections, it does vary, but you know, typically six, seven years last one person’s credit report for about seven years. So over that time period, people are trying to collect on it, they’re selling it off to different debt buyers, well, zombie that tries to come in and kind of at the end of that period, where it has gone through so many different hands, it is now being sold at pennies on the dollar. So it’s not uncommon for them to sell trying to sell this at, you know, five cents to the dollar what it was originally worth. So at this point, people are selling it to each other. So to me that looks to kind of come in after it’s been passed the statute of limitations usually way down the road, it can be 10 years down the road, for example. And it likes to basically take that long charged off debt that’s uncollectable and use it in a way that will help somebody boost their credit score. Now, in doing that, there’s not really a lot of there’s not really a legal avenue to just take someone’s debt over and use it to boost your credit score. But fraudsters are basically coming in and selling this long charge off uncollectible debt. And basically promising to report that back to the credit reporting agencies as fully paid or paid in full or paid as satisfy something to basically try to get the credit updated to where this new owners put on it. And it’s notated as paid to her the new person who bought that debt, usually off of like debt selling website, things like that. They’ve bought it, they’re trying to say they take an ownership of it, they paid a settlement for it. They’re trying to get that maybe Maybe it’s like a $75,000 auto loan, but they paid $1,000 for their by basically saying that I now have paid this you need to notate it on my credit score. And now it looks like they have a $75,000 auto loan that’s been paid off. Obviously, that’s great for them as far as trying to get all of that in the future. You know, that meets their history requirements for a lot of these lenders, but there’s really not a real legal way to do that. So That’s really considered more typically it’s, you know, is considered fraud. And it’s typically tied to synthetic identity fraud, usually when people will take those trade lines and connect it to a stolen or false security number for the person. And then they use that number tied to like this credit history that’s basically been fabricated, to, you know, boost your credit score fraudulently at the lenders. There’s a lot involved in this. But it’s essentially a scheme of trying to take this old debt and use it in a way to boost credit scores, obviously, is a risk. Now we talked to multiple different people in the debt buying space. From a legal standpoint, you know, from a credit reporting standpoint, everyone’s basically saying the way that these zombie debt is kind of being advertised as a way to boost credit. It’s not legal, and it wouldn’t likely not fly at most creditors that have any kind of real, you know, steps in place, they, they may get this letter asking, you know, to reassign this debt, most creditors wouldn’t just reassign that to somebody else wouldn’t let someone just assume it without, you know, a pretty thorough process in place to assume that debt legally. And, you know, to underwrite that new buyer, or new borrower, I should say. So there you know, there’s definitely steps in place, but it is something that’s becoming, you know, more and more involved in auto, it’s pretty new and auto, it’s something has been around mortgage sees it quite a bit, we’re hearing about these zombie mortgages that people are also getting calls for, and for mortgages that they like paid off 10 years ago, or maybe never had. So it is happening in other areas of credit, but we’re seeing it pop up in auto now. It’s just like this new scheme, or they’re selling off these like package loans or individual trade lines with these faults, you know, credit repair promises. So it is something that people need to be aware of, it’s something to look out for, if you’re getting, you know, request to update long charged off loans, and you no longer even maybe service or furnish to the credit reporting agencies about, you know, that’s definitely a red flag. And it’s definitely something that lenders should be aware that, you know, it’s happening and people are trying to do whether or not they’re super successful at it, they are trying to do this as a way to boost credit. It’s another credit repair fraud, we’ve been talking about that being an issue in auto for a long time, this is yet another kind of avenue that people are trying to do this list and it just happens to be trying to leverage, you know, this old kind of debt for sitting out there for it could be a decade or more and that’s where it kind of gets this term from. So that’s that’s the kind of gist of it. Our future goes in way more in depth. If you want to know more about how this is handled, how to to maybe look out for avoiding this and some of the legal implications. The widest maybe shouldn’t work very well that could possibly work depending on the circumstances, I definitely recommend reading the whole feature.
Joey Pizzolato 12:47
Definitely. That about does it for today’s episode. As a reminder nominations are now open for the 2023 auto finance Excellence Awards. With celebrate achievement in the automotive lending and leasing industries. It will be presented at the auto finance summit in October. In Las Vegas. auto lending companies and executives may nominate themselves or colleagues for excellence in community service, competitive performance, customer service, human resources, information technology, leadership and operations. The deadline to submit nominations is Timber 22nd. Thanks for joining us on the roadmap and be sure to follow us on Twitter and LinkedIn and we will see you online at auto finance news.net in here next time