Crediauto Restarts Subprime Originations With Tightened Scorecards, Auto Decisioning

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Subprime lender Crediauto USA Financial LLC restarted originations earlier this year following a one-year break from funding loans to add auto-decisioning software, improve its credit underwriting standards, relaunch the brand, and refinance its outstanding debt, the company told Auto Finance News.

Investment firm Arena Investors LP is providing Crediauto with a “multi-million” credit line to refinance its debt capital and get the company back to originating, especially to Hispanic communities in the Southwest.

Auto-decisioning is a software that automatically approves borrowers for loans if they have the right credit metrics. So far, the revamped scorecards along with the implementation of auto-decisioning software are paying off for the company as delinquencies are down 60% compared with what they were before the hiatus, Rafael Gómez, chief executive of Crediauto, told AFN. Additionally, Crediauto ran its old portfolio data through the new system and found that losses would be reduced by 86%.

The improved outcomes are also likely the result of taking its collections team in-house, he said. Previously, First Associates was servicing the portfolio per the agreement of a $75 million investment facility from a New York hedge fund in 2015.

“It makes sense because no one is going to collect on your portfolio better than you because you know that if you don’t collect you’re in trouble,” he said. “Third-party companies are not aligned because they get a fee per contract, regardless of whether the borrower pays or not. It’s a very different approach to serving and collecting, and it shows in the numbers.”

Crediauto’s program is similar to Credit Acceptance Corp.’s dealer purchase program but looks to take its competitors head-on by offering additional perks to its dealer partners. It’s a complicated system that will be explained below, but what it boils down to is that dealers take on more of the loan risk to receive more cash flows up front.  

Crediauto calls it a “pool-based profit-sharing model” in which dealers are required to send the lender at least 50 loans to fill a pool. Dealers are paid an advance worth up to 110% of the vehicle’s Kelley Blue Book value (based on the risk of the consumer) as they fill the 50-car pool, and once it’s filled they receive an additional 10% of the original value for each vehicle. Crediauto collects interest and dealers pay back the advance over time as they receive the borrower’s monthly payments toward the principal of the loan.

“This program aligns the risks and rewards with the dealer — If the borrower pays well, the dealer get more money and if the borrower doesn’t pay well then the dealer doesn’t,” Gómez said. “[They receive] up to the full amount financed of each loan, provided there are no loses in their pool. If they are seeing losses in their pool those losses get charged to any income or receivables that the dealer is entitled to get.”

Competing programs, he says, typically only offer an advance of 80% of the vehicle’s value, require the advance to be paid back in full before the dealer can start receiving payments, and require a pool of 100 vehicles.

More than 203 independent and franchise dealers are signed up for the program in Southern California, Houston, and Las Vegas, but originations have been “slow in the beginning” since restarting operations in April, Gómez said. “It’s a harder pitch with dealers than a regular financing program.”

Still, the company is looking to expand in all the states in which it is currently active and add Arizona to the list in the next two months, he said. Crediauto is also actively seeking a couple of acquisitions for growth.

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As Assistant Editor at Auto Finance News, William specializes in covering compliance, operations, and subprime issues. As a Brooklyn implant by way of Ohio, he's happy to discuss the triumphs and pitfalls of Cleveland sports as well as the latest music trends. Former bylines include Candy & Snack Today, Inverse, and The Tennessean.

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