Weekly Wrap: Fintech, CFPB complaints and vehicle values: a closer look [Video]

This week, Auto Finance News took a deep dive into the driving factors behind the goals of two fintech lenders entering the auto finance space on the heels of pandemic-driven growth. We also looked at the Manheim used-vehicle value index, which soared to record highs in June, and explored how consumer complaints with the Consumer Financial Protection Bureau last month reflected coronavirus-related hardships. In this edition of the Weekly Wrap, Joey Pizzolato and JJ Hornblass discuss news developments during the week ending July 10, and what to expect next week as second-quarter earnings kick off.

Auto Finance Summit, the premier industry event, returns October 20-22, 2020, as a virtual experience. The virtual experience will offer the same quality networking and education as past events, all through an online platform. To learn more about the 2020 event and register, visit www.AutoFinanceSummit.com . Editor’s note: This transcript has been generated by software and is being presented as is. Some transcription errors may remain . JJ Hornblass 00:02 Hi, everyone, I'm JJ Hornblass and welcome to the roadmap from auto finance news since 1996, the nation's leading newsletter on automotive lending and leasing. This is our weekly wrap for what's happening in auto finance for the week of July 6 2020. I want to thank auto finance news, advertisers, Alpha and defi Solutions, FiS and Auto Rack for their continuing support. So thank you to those great institutions and I am joined today by Joey Pizzolato, Interim deputy editor of auto finance news. Welcome Joey. It is Friday, July 10 2020. And this week, we started to see some green shoots coming from the auto industry despite the lingering effects The pandemic predicted particularly across the south, and West Coast. For example, BMW and Daimler saw positive numbers for their electric vehicle sales during the first half of 2020. Despite a slowdown of overall vehicle sales, and I might say of epic proportions, and On the economic front, initial jobless claims it fell by almost 100,000. Last week, this is the most in in around a month to 1.31 million claims. This is for the week of July for economists had been expecting 1.375 million jobless claims last week. So in this pandemic world, Joey, we've got to cling to any good news that we can which brings us to develop In the auto finance market this week, let's start with fintechs entering the auto finance space. We have seen in recent weeks, startups called upgrade and another upstart, which have are announced that they're going to pursue auto finance. Why are they doing this? Now? Even as car sales are falling so severely because of COVID? Joey Pizzolato 02:37 was a great question. And that's a question we looked into this week to try and understand kind of this trend if it has any legs. Or if you know, it's just a product of our current COVID environments. And what it looks like is, you know, auto loans are structured similar to unsecured personal loans. I mean, when you take it at face value, and auto loan is just a personal loan. That's, you know, Backed by an by an asset, particularly a car so, from an from a marketing standpoint, it's it's an easy jump for these for these startups. However, you know auto finance is a pretty crowded space. And they're gonna have I believe they're gonna have a hard time and analysts believe they're gonna have a hard time kind of gaining, you know, the kind of market share that they're envisioning. I know upgrade, I believe, within the first year of launching their full suite of auto products wants to have a billion dollars in originations. And I don't really think that that's a reasonable goal to have that might be shooting a little too high. Another thing that is 03:49 good for these Joey Pizzolato 03:51 startups is that you know, the compliance and regular regulatory requirements is very slim for the US. For like they are the lending platform. The banks that that bad. Yeah, have the compliance resting on their shoulders. So that's also an easy jump that allows them to get an auto pretty, pretty easily, at least from their perspective. JJ Hornblass 04:21 I guess it's a bet on growth in direct lending. I mean, I think that's that seems like what they're and and you know, it's interesting if you look at the adoption rates on e commerce, generally commerce through the pandemic, they've gone through the roof. If you've seen something like that, there's been an estimate that I saw that something like two years of e commerce adoption has taken place during two months of the pandemic. I is that kind of is that Is that play going to? Is that going to happen in direct lending, too? I mean, is there enough runway in direct lending for all these new sources of originations? Joey Pizzolato 05:15 So that's, that's a really good question. And on its face, this, these new fintechs are just jumping into the direct lending, you know, area of auto finance. And when you look at direct lending as a proportion of the entire auto finance market, you're looking at like 10 to 12% of the whole market, which is really still very small compared to, you know, the $1.3 trillion industry that we see which is primarily indirect. So, with that in mind, I'm not really sure that there's a whole lot of you know, market share to be grabbed out of in that. I do think that, you know, the rise of e commerce and users on their platform. is is you know, Giving them a sense that you know, they can jump in auto and they might be able to to get, you know originations on par with their unsecured personal loans but I think auto even though on the face it's similar to unsecured personal it's a very different ballgame. I mean, just just for example, I saw a ad for upstart on one of my social media feeds yesterday, he's listening me I think, uh, but they, you know, they have an ad for unsecured personal loans, and it pretty much says loans for pretty much everything. That's that's their ad. And you don't you don't have that kind of breath in auto finance. JJ Hornblass 06:44 Right. It's a more targeted messaging, you're saying Joey Pizzolato 06:47 exactly, and and the ticket prices is higher as well. You know, I can get a unsecured personal loan for $2,000 to redo the cabinets in my kitchen. But, you know, and I'm saying Your RS secured auto loan for $2,000. The market for that is, you know, not as nearly as large as you know, a used vehicle in the in the price range of you know 20 to $30,000. JJ Hornblass 07:14 Right. Well, let's talk about us vehicles a little bit more. So the June Manheim index numbers came out this week and we we wrote about them on auto finance news dotnet. The numbers were spectacular, I think is a fair word to use. Right. We saw the index rise to 149 in June 6.3% increase over the prior year and nearly 9% month over month increase. The the used retail sales are hit nearly 19 million in June. 2.2 million from May, still down year over year, but a very strong number, especially when you consider that the new car sales SAR was down 27% in June, which hurts. So what does this Bode for new car sales? You know, will the recession continue to push more consumers to the used car market or is this going to become a new car incentives game? And you know, how are we to think about the rise in COVID cases in the south and west coast visa v. car sales for July? Joey Pizzolato 08:56 Well I would say is as far as the new car front goes, we are still dealing with it. Inventory problem. So it's really a function of how auto lenders want or want to incentivize new vehicle purchases, and how that relates back to inventory. I believe consumers because there's an inventory squeeze and we've seen lenders pull back on their incentives programs, they're going to be flocking towards the US vehicle market. As far as how the new cases for COVID in the south, especially in Texas, California and Florida, which are major auto finance markets. That kind of remains to be seen. It really depends on if how far how far the states are gonna walk back their requirements, social distancing requirements, excuse me. If they're gonna, you know, shut down again, close close operations. That will definitely be a huge burden on both us and new vehicle sales if that were to happen. I will say However, they use they usually have index bodes well for for our for our lenders, especially the captives who who are seeing more off lease valid vehicles come back. Now that dealerships are open and a lot of contracts are expiring, it's good for them this month especially to you know, sell those vehicles in auction. JJ Hornblass 10:20 Are we seeing any evidence of like, what what kind of what kind of pricing are we seeing on the used car market? I mean, is our prices remaining strong or is there heavy discounting going on on that side of the coin? Joey Pizzolato 10:37 So we we haven't on the retail side, especially for us. We haven't seen a big drop in vehicle prices, mostly because a lot of dealers and you know, OEMs and captives are expecting or we're expecting the Coronavirus pandemic, kind of be a temporary thing. So we haven't really seen That move just yet. And with the inventory issues on the new vehicle side, I wouldn't imagine that they would be dropping prices on the used market either, especially considering there is a little bit of an inventory squeeze on the US side as well and waiting to Mannheim, JJ Hornblass 11:17 right? I mean, it's there. I think there was some evidence that the inventory issue was starting to ease on the new car side correct. I Joey Pizzolato 11:26 mean, would you expect that to continue through the summer? Um, I believe so. Um, manufacturing has restarted so we're going to get new cars coming off the assembly line and onto dealership lots. And I would imagine if new vehicle sales stay low as they have been, lenders will be incentivizing new vehicle purchase through finance, like zero percent or low financing APR arrangements. 11:59 You The JJ Hornblass 12:01 sales process was kind of set front and center and a piece we did this week on complaints from consumers to the Consumer Financial Protection Bureau, the CFPB. We found when we did an analysis of the June complaints that there was a slight drop in in complaints on a year over year basis. 1.6% drop to 435 complaints, but that the complaints related to quote unquote, getting a loan or lease rose significantly 14% in June, on a year over year basis. Now, these numbers are not big jelly, right? They're not you know, there's not like thousands of complaints. It's a these are really just dozens of complaints, but I mean, to what degree do they hint that a broader problem in auto finance, our layoffs are starting to impinge on customer experience, for example. Joey Pizzolato 13:14 So I do believe that excuse me, that they are indicative of a larger problem. And I think the most notable problem is, you know, call center volume and lenders being unable to manage the influx of consumers that are trying to, you know, work out something with their loan their payments, figuring out the final red tape for returning their off lease vehicle. It is worth noting that, you know, these are these complaints are filed by consumers. So, you know, a lot of the complaints for getting a loan or lease actually were geared more towards managing their loan or lease, but I think underlying you know, that the The larger issue is, is these lenders being able to handle an influx, especially as new cases are coming up, and these different programs that a lot of lenders have incorporated in March are going to start expiring? JJ Hornblass 14:16 Right. I mean, I think, you know, there's just not the diversity of customer service channels that are that auto finance companies serve I mean, you don't see the level for example of kind of like Twitter customer service that you you might see in overall, you know, kind of general banking, General consumer banking, and in other areas. Is there any any size that there are lenders who are kind of trying to up their game on the customer service side, maybe adding for example, like chat service, Joey Pizzolato 14:57 um, no evidence, just yet. Um, a lot of a lot of the larger lenders are pretty tight lipped about, you know, their operational pivots and strategies for dealing with this with this rise in, you know, I guess I wouldn't say consumer interest but, you know, consumer engagement with them, many, you know, Hyundai they have chat bots that are supposed to help ease But eventually, you know, for some of these more complicated issues that, you know, are very particular to as an individual consumer as it relates to layoffs or loss of a revenue stream in their income. Those can't be answered by chat bots. So that takes a real human touch that requires what kind of manpower that you know, some some of these companies might not have as a result of layoffs. Alright. JJ Hornblass 15:55 Yeah, for some industries, you know, social media centered customer service customer experience has been a real positive, not necessarily the sort of, you know, inflammatory, you know, flaming of brands that you saw at the beginning. I think that there there's they've really come a long way. But I just not sure if I've seen that on the auto finance side, have you? Joey Pizzolato 16:22 Well, you know, there are certain lenders that put a very large focus on using their Twitter especially, and other social media accounts to handle customer service. Wells Fargo is one financial institution that uses their Twitter account to handle customer service, Toyota financial services does. So So there are some that are using social in that in that regard, but it's it's not as widespread as you would think. JJ Hornblass 16:53 Right. So you would think that maybe that might, there might be some movement on that as kind of the patient Dammit continues Joey Pizzolato 17:02 here. And it's definitely something we'll be keeping an eye on to see how that customer engagement from the lenders plays out, especially as we hit kind of. I wouldn't call it a second wave I'd say we're still on the first wave of COVID. But as new cases continue to mount JJ Hornblass 17:21 so what else are we going to keep an eye on? Joey? What do we got on in store for our readers next week? Joey Pizzolato 17:28 Next week is the start of second quarter earnings. Naming always a JJ Hornblass 17:33 fun time in the auto finance news. Animals. Joey Pizzolato 17:37 Yes, yes, it is. It's a it's a it's a very hectic three weeks they have but but it's it's right for, you know information. We're going to be looking specifically at originations in how how much they've fallen. I would expect them to fall in tandem with car sales. They kind of go hand in All right, but we are we're also going to be looking at, you know, additional provisions for credit losses that will kind of give us an idea of forecasts in last and what lenders are going to be expecting there or how they're going to be expecting their their auto portfolio to perform in the third quarter, JJ Hornblass 18:20 hundred percent, JP Morgan right there. 18:23 Fargo Joey Pizzolato 18:27 Bank of America and ally are all next week so everyone could be on the lookout for that. JJ Hornblass 18:33 And now everyone knows where Joe is gonna be next week 18:36 on the phone JJ Hornblass 18:38 on their earnings calls. We've got the auto finance summit coming October 2222 Auto Finance summit calm is the website. You can also subscribe to auto finance news at auto finance news.net. We want to hear from you. Please rate the roadmap on whichever plan form you listen to our podcasts and of course, follow us on Twitter and LinkedIn. Thank you all so much for joining us on this episode of the roadmap. We'll see you online at auto finance news dotnet and here next time Thanks, everyone. 19:18 Thank you guys. Bye

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Weekly Wrap: Fintech, CFPB complaints and vehicle values: a closer look [Video]

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