Weekly Wrap: Pass-through agreements and the upside of chip shortages

Last week, Global Lending Services entered into a pass-through agreement with Nissan Motor Acceptance Corp., and a report from Moody’s Investors Services outlined the upside of the semiconductor chip shortage for securitized loans the auto finance industry. Meanwhile, the Consumer Financial Protection Bureau’s report to Congress on consumer complaints related to debt collection and vehicle financing offers insight into what the industry should prepare for in the coming months. In this episode of the Weekly Wrap, Associate Editor Amanda Harris and Editor Joey Pizzolato discuss the top stories of last week, and what to expect in the coming days. Subscribe to The Roadmap Podcast on iTunes , Spotify , or download the episode. Auto Finance Risk Summit, the premier event for risk and compliance in auto finance, returns May 11-12, 2021 as a virtual experience. The virtual experience will offer the quality networking and education of past events, all through an online platform. To learn more about the 2021 event and register, visit www.AutoFinanceRiskSummit.com . Video Transcript: Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain . Joey Pizzolato 00:02 Hello everyone and welcome to the roadmap from auto finance news since 1996, the nation's leading newsletter on automotive lending and leasing. I'm Joe Pizzolatgo, editor of auto finance news. And joining me today is Amanda Harris, Associate Editor of auto finance news. This is our weekly wrap on what happened in auto finance for the week ending March 26 2021. As always, before we start, like to think auto finance news advertisers alfa, defi, Market Scan Dealertrack, PointPredictive, State National, Stook & Strook & Lanan, and Westlake financial for their continued support. In general news, the ever given that massive cargo ship that was wedged between the banks in the Suez Canal for five days and preventing other ships from passing, was freed late last night or earlier this morning, depending on where you are in the world. Roughly 13% of all global train passes through the Suez Canal every year, and delays caused by the blockage are estimated to be in the billions of dollars. The Center for Disease Control and Prevention this morning also confirmed that the Pfizer and Madonna vaccines are 90% effective in preventing Coronavirus infections. After a study conducted on 4000 frontline workers reaffirmed the findings the two companies had during their respective clinical trials. Finally, initial jobless claims dropped well below median forecast last week coming in at 684,000. On granted, that's still a really high number. But both the unemployment numbers and the CDC study points of the continued recovery in the economy, which is great for auto finance, and auto finance. Last week, we had a handful of stories that examine on how some concerns outside of the auto finance industry could affect the auto finance industry, particularly the semiconductor chip shortage, which has created production headwinds in the automotive industry. And the Consumer Financial Protection bureaus report to Congress on the federal Debt Collection Practices Act. But before we get to that, Amanda, you had a story last last week about global lending services in Kenya pasture agreement with Nissan. So I thought we can start by talking about about that, and you know, its significance.Amanda Harris 02:21 Sure, um, so basically this program, Nissan, it's really Nissan Motor accepting corpse program. So their captive is basically a program that they've had in place since 2014. So it's not a new program. But they've had this in place to basically allow customers who wouldn't normally, you know, get qualified for financing through in Max, the actual captive when they're applying for a loan on a Nissan use or new vehicle, to instead go through one of the two lenders in this program to get a loan and still benefit from, you know, Nissan's incentives and things like that. So basically, it's a pastor program, they've always had two lenders signed on for this, Santander consumer USA has been a long partner. And so the update here was that global lending services, has joined this program in place of another lender, which they are naming, you know, but this is this is who is going to run it now. So it's between JLS and scenting, Santander consumer, USA, where customers who maybe don't apply are adult, qualify for financing through the captive can go through one of those two lenders, and hopefully get approval, and then they still get to access, like the incentives and everything that they would if they weren't getting financing through Nissan Motor acceptance Corp. So that's this, basically, the benefit to the consumer is if they, you know, want those incentives, and, you know, if there's a benefit for them to still be a part of this program that gives them that kind of leeway a little bit. And it's really more towards like, the subprime borrowers. Joey Pizzolato 04:05 Well, those incentives they seem, they seem like they're their kicker, right? Like, they're, that's pretty consequential, subprime lenders don't usually qualify for any sort of incentives. So, you know, that would be, you know, a cherry on top, if you will, to get some of these deals funded. Especially considering, you know, subprime is is, you know, significantly down as a result of the pandemic. Um, the other thing that I was thinking about in regards to this is, you know, this is a second move. Global lending services is main. And I can't remember exactly when the are the true, true, not the true card, the CarGurus deal was, um, but it definitely seems like you know, they're they're making moves to try and increase their volume a little bit. And this Nissan thing could could be pretty cynical. For them, especially considering there's only two lenders on this program. Amanda Harris 05:04 Yeah, and, you know, not really, it's not very clear, you know, how much how much business this program sees, you know how much they're passing through to these two lenders, you know, it's, it's pretty, pretty like hushed kind of program. So there's not a ton of details on, you know, really how much they're seeing in this, but it does give that option. And then, of course, customers have to weigh, you know, going through this versus just trying to find financing through maybe a lender outside of, you know, the program, and then coming in buying a vehicle at Nissan with that loan instead. You know, so it's just one of those another option, basically, for those consumers, and I think it is, you know, help with, we know, subprime has been kind of struggling during the pandemic, so the more options that are there, and the more lenders who kind of offer these types of programs, I'm sure help those bars just have a little bit more leeway, and some of the options available to them. And maybe that will, that will help because as a new program, so it's kind of yet to be seen, how big of an impact this would have, you know, but is there So, Joey Pizzolato 06:15 I would imagine, excuse me, I would imagine that, um, you know, they will they won't ever release, um, you know, details on, you know, volume that comes through this. But, you know, I think, you know, like, like you mentioned AI, it's, you know, it's significant in the fact that just, it exists, right? And, you know, whether or not consumers actually see that they're getting passed or not, I'm not sure if that's the case, but at the end of the day, you know, the rates that, you know, Santander and GLS would be able to offer them in the absence of, you know, kind of that nice prime captive rate that, you know, consumers would get if they qualified. I'm sure is somewhat, you know, close. Amanda Harris 07:05 Yeah, I mean, there's obviously a reason this program exists, right? Like, there's some incentive to have that option versus going if you're denied for a Mac loan, going somewhere else completely, and trying to get a loan and coming back the person before that, like this, obviously, would provide some kind of incentive. Like I said, they do get to get options for those actual incentives. I don't know if they get like the 0% or anything like that. But there might be something that Nissan can offer them, that they wouldn't be able to had they gone outside of. Joey Pizzolato 07:35 Yeah, absolutely. And I would imagine they're definitely not getting that 0% you're definitely getting a, you know, a some prime rate. But, but as you said, um, you know, the fact that it exists, I would be really interested to see how these passer agreements kind of changed. As you mentioned, you know, you go to a dealership, you say, I want this car. They're like, Oh, well, let's see, oh, you don't qualify for enmax here's the rate, we can give you a GLS I wonder how that process change changes? As we kind of look at these kind of omni channel approaches that lenders have been taking to financing. Maybe I'll have to buy a car or something. Amanda Harris 08:18 And I'm due for one so we'll see. Joey Pizzolato 08:21 Maybe you buy a car? Because I live in New York. I don't I don't want a car. Alright, moving on. Um, so we also did a story on the semiconductor chip shortage and its effect on the auto finance industry. Um, for those that aren't aware, semiconductor shortage has been one of the, I guess, tail, tail winds, no headwinds, excuse me. Kind of that have come from, you know, manufacturing and production shutdowns that happened over the last year. We know the automotive industry is still kind of struggling to get production back up to where it was in the semiconductor chip shortage is hampering OEMs abilities to make new vehicles. We've already seen Ford come out and say that they would be producing some vehicles without some of these chips. And I believe General Motors has also kind of taken a similar approach to some of its models to and or some of its factories and or models, to, you know, deal with this. But for the auto finance industry, particularly, you know, the lenders and captives that securitize on the ABS market. This is actually a good thing for a couple reasons. First, you know, simply put, lack of new vehicle inventory pushes consumers to the US vehicle market, which pushes prices up. And because loans in lease securitizations are collateralized. You know about You know, 50 or 62%, depending on the deal on the actual value of the vehicle. These are five year usually five year deals, leases only run three years. So any of these any of the any of this paper that's in that deal, the rest of that of that amount that's owed to investors needs to come from somewhere. And that comes from the residual value of the vehicle. So this is going to push down losses on as as us V or us vehicle prices stay high, that's going to push down on push down on losses and end up being a really, you know, good a credit positive as newbies put it for, you know, these lease securitizations. Also, one thing that we didn't explore the story, which I thought was significant, is floor plan, abs is actually also going to be propped up by the semiconductor chip shortage. Mostly, because dealers aren't re upping their inventory as often as they would if new vehicle production was high. So those floor plan lines are staying a little bit lower than usual. And monthly payment rates, because sales are strong and inventory is low is staying really strong. So that is also credit positive for the ABS industry. Granted, and I'm almost done here, I'm off my soapbox. Granted, you know, this, this, this problem with the semiconductor chip shortage is it's unknown how long it's going to last. But I think the consensus is it should figure itself out by you know, in the second half of the year, in which case us vehicle values probably will normalize back kind of to a more normative level. We know that they're super high right now. I believe mid month. March. Manheim was another record, not a surprise, but we'll definitely be keeping an eye on that going forward. So shifting gears Amanda Harris 12:06 and information they're doing. Joey Pizzolato 12:08 Yeah. Thanks. Thanks. Yeah, that's what I'm here for. Yeah. All right. Shifting gears one more time. Amanda, last week, you took a look at some complaints in auto on the, at the Consumer Financial Protection Bureau. And we also examined the Consumer Financial Protection bureaus, a 2020. Report to Congress on the federal debt collections Practices Act, otherwise known as the FDCPA. So what do we find there? And, you know, what, do we kind of going to be keeping an eye on this week? Amanda Harris 12:44 Yeah, definitely. Um, so the initial report didn't have a lot to do with auto. So there, there were quite a bit of complaints related to debt collection, Debt Collection Practices, right? In 2020, compared to a year ago, that's not to be that's not very surprising. With the pandemic and everything. Of course, there's a lot of deferrals and, and things like that happening. So there is price and confusion from consumers. Also, their, you know, consumers were struggling a little bit. So of course, that collection, any of that happening during a pandemic is going to prompt some complaints. So there was about 80,000 complaints and 2020 specific to debt collection practices of those and the CFPB did release a more in depth report, which we're going to have a story on this week, to kind of break down to this little little bit more, but auto kind of about 4% of those complaints. So it wasn't a ton and auto and again, that's not very surprising, because, you know, there's a lot of moratoriums on debt collection. So, repossessions weren't really happening. There's a lot of, you know, payment deferrals, things like that in place, stimulus help consumers out in auto. So there was a lot of help in the auto industry to kind of prop up consumers and kind of put a hold on taking back cars and things like that. So that that's not surprising that this wasn't really a huge thing in our industry. But you know, given that there were some complaints, and there's just some things that, you know, auto lenders may be aware of, you know, that there is confusion from customers on how these some of these deferrals work. And we're going to kind of get into that in or more in depth story, but that might prompt more this year as these programs and you know, there is some concern that consumers may not understand that they still owe the full amount that was deferred. There might be some concerns as these moratorium repossessions and that might prompt some some new complaints. And overall, and we'll get into this later as well. But you know, overall, there was higher complaints in work related to vehicle loans and leases, not necessarily the debt collection side just in general. So what kind of breaking this down a little further, as we got the bigger report, and it is a large one. So I'm really kind of helps to put this in perspective. You know, well, Joey Pizzolato 15:11 the CFPB is not known for, you know, clear, concise or Consumer Reports, maybe not clear, clear is probably not the right word but concise, or short. They're not known for. Yeah, Amanda Harris 15:25 this one basically, the gist was, you know, there was more complaints related to debt collection, but auto was a pretty small part of that. So for us, it wasn't, you know, super concerning for this particular year, next year, maybe complete opposite story. So Joey Pizzolato 15:40 we'll see. Yep, yep. Well, we know that you know, gave you waigeo and the CFPB. In general, whenever Rohit Chopra gets confirmed, they are going to put in added invits emphasis on, you know, how consumers retreated during the pandemic. So we probably will see a lot of kind of retroactive supervisory initiatives and or enforcement actions. If it was determined that you know, auto lenders, were not completely forthright, at least in the cfps view with their consumers, so we'll definitely keep an eye on that. Um, I believe that's all we have for today. Um, you know, we want to hear from you our listeners, rate the roadmap on whatever platform you use, so listen to the roadmap. Follow us on Twitter and LinkedIn. Amanda, thanks so much for joining me. And we will see everyone online at auto finance news dotnet or here next week on the next episode of the weekly wrap. Thank you.

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