In this episode of the Industry Pulse, Satyan Merchant, senior vice president and automotive business leader at TransUnion, discusses pandemic impacts, credit performance trends and the state of the consumer against the backdrop of the COVID-19 economic crisis. To view the presentation deck, <a href="http://www.autofinancenews.net/wp-content/uploads/2020/10/TransUnion-Industry-Pulse_Oct-2020.pdf">click here</a>. [toggle title="TRANSCRIPT"] <div class="transcript-scroll-box">Joey Pizzolato 00:02 Hello everyone, and welcome to the fourth episode of our new series The industry pulse a monthly market update on trends in auto finance. Industry pulse features a rotating Faculty of six industry experts that will give twice annual reports on crucial market topics such as credit quality, credit demand, residual values, regulatory compliance, macro economics, and more. It's my pleasure to introduce this month speaker sahjhan merchant, senior vice president in automotive business leader at TransUnion, where he has worked for five years. Prior to joining joining TransUnion. He served as Director of Corporate Strategy at Lenovo and Engagement Manager at McKinsey and Company. He holds an MBA in strategic management, finance and economics from the University of Chicago, and a Bachelor of Science systems engineering from the University of Virginia sajjan. Welcome, and thanks for joining us today.Satyan Merchant 01:00 Thank you, Joey. It's my pleasure to be here. Great floor is yours. Thank you. And I'm going to share with you what I have to present today. Thank you again, Joey. And thanks for anyone else joining again, Southern merchant here, I lead our automotive line of business. And thanks again, Joey for the warm introduction. And I'm here to take us through some trends and information from the auto finance industry. And so where I want to start today is the state of the auto portfolio and the impacts from the pandemic, as well as performance that we're seeing. And I'm going to start talking about auto loan accommodation. So I want to give a quick introduction and definition of what I mean when I talk about auto loan accommodations. These are flags that are that we see in the consumer file that are furnished by by lenders and servicers. Certain types of remark codes, including forbearance natural disaster deferment term, and no minimum payments. And that's been a big topic here, as the pandemic has carried on. So first, what do we see here? This chart shows how accommodations have appeared in the auto on the credit file in terms of auto loans, and auto accounts over the course of the last several months. A couple interesting points here. So we reached a peak in terms of accommodations at 7.4 million in the end of June by the end of June. And as everyone recalls, I know, it feels like it's been a long time. You know, this is when we were in the midst of the pandemic and lots of lenders had been taking actions with their borrowers. And we found again, 7.4 million consumers on an accommodation. Now, the interesting thing here is that today in September, we're at about half that number. So several consumers have come out of accommodation on their auto loan. Some of this has been due to the accommodations that simply expired maybe a 90 day accommodation. Others have worked proactively with lenders and borrowers to ensure that a consumer might be on their feet again, and and ready to remove the accommodation mark. Now, tell us, I'd like to tell you more about what we find within that population of auto consumers in accommodation or hardship. A couple interesting points here, as we meet, we measured over the course of the last few months. And compare that to the to earlier in the year. And last year. What we see here is that in the current state here in September, about two thirds of consumers that are still in an accommodation are consumers that are below prime. And that is much different than in March 2020, right in March, when many, many borrowers and lenders you know really took gotta jump on the on the pandemic to really work together, we found that there was a much more even distribution, or at least more than half of consumers that were in accommodation right at the beginning of the pandemic were above prime. So what this is telling me is that consumers that have that required an accommodation or got one early in the pandemic, the ones that you know, potentially have gotten back on their feet are no longer needed, are in fact out of accommodation. And that the skew is now leading towards those consumers who might be much who might be less prime or in or the below prime space that are still in accommodation. And again, I don't have the total actual numbers here. But remember, here in September, the number of consumers in aggregate and accommodation are far lower than that in March, and even August. Now on to what happens with consumers when they come out of an accommodation, what we find is that a quarter nearly a quarter of auto traders that have exit exited in accommodation have a term extension. Now the vast majority of them have no change in Terminal payment, that's the blue box. But a term extension is something that, that many auto lenders and particularly in the captive space, we see as the way that the lender treats or works with the borrower once the accommodation has expired. Now we're gonna move towards performance. So my chart here shows about the delinquency rates in auto loans. And here defined by 60 days past due for borrowers. Now, what we see is a q3 trend, going back to several years, and we see that while delinquencies have floated up ever so slightly year over year, it seems to be relatively stable for the fourth consecutive year, right? We're talking about a range of less than 10, you know, less than 10% range of motion in the last few years. And not percentage points, which is 10, less than 10%. So very, very little change in terms of delinquency rates. But again, this is a big question on the minds of bar of lenders these days in the auto space, which is what is, you know, what should we expect? And what are we seeing in terms of delinquencies. So if you're an auto lender, you know, perhaps this is a good metric for you to benchmark or see how how your book is doing compared to the overall industry. And and I think for those have, that has have read or seen the recent earnings calls by auto lenders that are public or banks, multi line banks that have an auto portfolio, we heard something similar where overall loss and delinquency has not spiked here in the most recent quarter. That's, again, consistent with the data here. And so the question is what's going on underneath. And that's what I want to take you to here on the next page. So what I did is I looked at not Q, not the entire quarter of q2, or even q3, but the most recent months, right, so here in September, not only that, not just looking at the 60 plus, which is kind of the benchmark of delinquency, but to see if the 30 plus rate shows any, you know, signal or earnings early warning. And what we find here is that the 30 plus delinquency rate, while a month to month increase from August to September, which you see here on the right, a very minor increase. The 30 plus rate in September, compared to last year is September 2019, is actually lower across the board. Now, there are some differences between lender types independence ticked up between last year and this year, you can see from, you know, September of last year 9.9%, to here 11.6%, but all other lender types, the 30 plus rate has moved down. Now, why is that? I think part of what can be driving this is the fact that there are consumers that are still stressed that are in accommodation, and those consumers would not show up as going delinquent, because they're in the accommodation. And to me, you know, the accommodations are working as designed if that's the case. So we don't see any sort of major spike here in the 30 plus here in September. So no huge warning signal, at least from that metric. In the 60. Plus, when we peel that number back a little bit more, we see that there was a pretty significant jump among the independent lender auto lenders in the 60 plus rate, year over a year. Now month to month. Again, I saw call this a slow creep, right that's looking at the blue bars August to September across the board, pretty slow creep up a pretty flat even. But But if you look year to year, we can see any what I would say is the majority of drive or growth behind any sort of uptake in the overall delinquencies. 60 plus came out of the independent lender group. So that was a quick look at performance and what's going on with bars today in terms of accommodation, given this pandemic wherein I want to now turn to auto financing trends and look at some recent trends in the lending space and what's going what's been happening, newly. So one I love sharing this page, this is a really interesting page, I believe, which shows auto credit report volumes that we see in our file. The yellow line is 2020. The blue line is 2019. And we've been tracking this since really the beginning of the year, to show that the auto report credit, the auto credit report volume, really hit that bottom out period in 2020. In April right and this if we can recall six months ago feels like forever ago, at least for me that that was when we were in the depths of the pandemic, with lots of shelter in place. Many many dealerships were not open. And so it's not surprising that the credit report volume as it as a metric or as a signal for for auto applications really dropped and bottomed out in April. However, we see that it came back and in fact by June the auto credit report volume was was higher than the previous year. Now where are we now right here shaded on the right hand side is the most recent period, August, September, October and we see that were slightly down Compared to last year in terms of auto credit report volume, however, I will emphasize the word slightly right. Again, we're still in the middle of a pandemic. And compared to last year, which was a solid year in auto originations, I think that the industry has done a good job and to me a testament of the resiliency of the industry. Now I'll talk a little bit about why I think we're a little bit down in the subsequent slides. Now, let me take you to origination data. Right now, the previous slide was about credit report volumes. But here we have the actual originations right when the deal fully goes through. And here, we have up to q2 of 2020. So I took a look at this to compare to previous second quarter. And what we found is that originations in the second quarter did decline 12%, year over year. Again, I'll remind you that q2 is as April May and June, right. And again, that was when we were in the depths of the pandemic. So not really a surprise that we had a 12% decline year over year in q2 this year. Let's peel back here to though, because it's it is actually a tale of a couple different stories. So April, again, the depths of the pandemic, almost 40% 39.1% reduction in year over year origination growth. Very tough times for many lenders, many dealers, many in the industry. I do believe though the future months show again, that resiliency and I think all of us coming together, right? So April was was very tough. May was down 7.1%, you know, read is not good, no matter what situation we're in, but definitely better than April. And then June, we saw that that's not back right. Now a lot of discussion has been around. How do we describe the recovery? We've heard things like V shape U shape swoosh shape. You know, I think that it's some something of a U shape that we saw on the previous page. And and Rebekah, it's reflected here in June, where that 8.5% growth of originations compared to June of 2019. And now July is actually dipped back down to red. And I'll get into July here on the next page. Just to help, you know, I'll share what my thoughts are and why July and beyond have been a little bit further down. So I think there's two hypotheses, right. One is around the inventory, and the supply of vehicles since since the summer TransUnion. And our credit file, we don't have vehicle inventory information that many of the other industry experts that hopefully you've heard on this panel, speaker series have talked much more about inventory and supplies. And I think many of us in the industry are aware of that there have been supply chain disruptions in in the automotive industry that have led to some slowdown in new car sales new or vehicle sales in originations. So that I'll leave aside in terms of credit, credit policy, though, what we do see here that jumps out is on the left hand side of the page, which is the slowdown and the reduction in subprime lending. And this now page shows the last four months. And it shows that our shows a four month period were in subprime. Each of the each of those months there was a origination decline. Now, that's much much different than each other risks here, right, we see in the other risk tiers that there was a peak up with a blue bar, and then a minor drop back down. And in fact in prime, right, it's continued growth. So we think this is due to some lenders tightening their credit policy, and that might have taken in the place of the pure credit decisioning, or even things like steps and other verification, particularly in the subprime space. Again, right, this pandemic, and this recession is one where many people have been out of work. And I think it you know, we've heard anecdotally that some some auto lenders are, in fact, looking a little bit more deeply or scrutinizing a little more the, you know, the income and the employment status of the borrower. And I would like to mention that today. TransUnion announced that we have entered an agreement with one of the largest payroll providers in terms of income and employment. So I think that's very exciting news. It's something to respond to what the, what the industry has been asking for. Next, I want to talk a little bit more about the trends that we see in terms of vehicle financing. And this the next few pages I think, are really interesting. The source here you can see in the bottom is from our IHS market partnership, our good friends over at IHS market in terms of the catalyst with credit module. I think this shows some great stuff because it combines the credit information as well as vehicle information, vehicle registration information across the country, and we can really get into some good views here. The first one is around the year over year change in amount financed between both new and used vehicles. And I think this is really on the new side where the story is, which is new vehicles Continue to have a larger and larger amount financed here in q2, right year, every year 10% increase from the year before. And and why that's happening? You know, I think it's one a continuation of a trend, you can see the gray line that continues to move up is that vehicles are becoming more expensive, especially on the new side. And then two, it's just the structure of the deal, right? How much amount is financed? Remember, in q2 of last year, there were or rather q2 of this year, there were quite a few incentive programs out there in terms of zero percent, or zero percent financing and zero down payment or low down payments, right. And I think when your down payment is lower, naturally amount finance goes up. borrowers definitely took advantage of those offerings. And so then speaking to the fact that the amount financed went up, however, relatively stable in terms of monthly payment amount, right, so the growth of monthly payment amount, both on new and us, was was tepid, right, it was pretty low number, I think, again, that's a testament to the vehicle amount financed went up, the vehicle prices might be driving that, but lots of incentives and lots of offers. And in fact, a low interest rate environment has helped manage the monthly payment. And we see that in the data here both again in new and used vehicles. So term, right term is an interesting question, because that's also a part of the puzzle when you when you try to figure and take a look at monthly payment amount. And what we what we found is that term groove for both new and used vehicles, again, another continued trend. And we're here we are in the new sub new vehicle side, at over 70 months on the average term of an auto loan finance for New And Used isn't far behind 65 months for a used vehicle. relatively stable, right, going back to two a year looking at quarters was 64. So not that there's been much expansion in that time month, but it's still kind of a stable, and what many would consider a high number in terms of term length. But this is something that I thought was were very interesting, right? So we peeled a little bit deeper into the new vehicle loans exactly in terms of term length distribution over the course of this year, right, going back to January of 2020. And I want to take your eyes to the bottom of this chart here, which is the dark green. And this shows that 84 months or greater term loan term length for loans, excuse me, I'm really had quite a ride here rollercoaster ride here in 2020. Again, this is for new vehicles. And what we saw pre pandemic was, you know, about 14% as a fairly stable share of loans of new vehicles that were at four months or higher, then the pandemic hit in March, and then really took hold in April. Now, if you all recall, if many of the folks here recall, that was a period when lots of lenders, particularly driven by the captives, offered very generous incentive terms, and really cranked up to 84 month loans. And you can see, again, the volume was turned up here. But it came back down. And you can see now here we're into the data shows through June through August, back down to the levels where we were pre pandemic. Very interesting. And I think this is really a testament to the ability of lenders and marketers to get their message out, get their programs out. But consider that, you know, the when they actually need to make that sort of decision make that offering and when they don't. Okay, moving forward to APR, right. So APR reductions were also part of some of those, some of those promotions or incentives that were made available to borrowers, particularly in the pandemic months of q2 of this year. And you can see that the estimated APR that we see in our credit file has also kind of dropped down and help with that moderation of the monthly payments. You can see that both in the new and us vehicle side. New probably contains more sub vented loans than others rather than used. But we're also in a lower interest rate environment, right. And we saw the Federal Reserve take actions through the course of this year as well on interest rates. So not a surprise here. Okay, I'm talking about incentivized or sub sub vented loans, what we see here is again, a huge kind of swing for some period of time in terms of loans that were below 2%, right? We see that prior to the pandemic, very few loans less than 10%, even less than 5%. If you look at January or February, were loans that were less than 2% that has been cranked up and you can see that again in that peak period of April and May. The number jumped over 20 in May, in terms of 20% We're back down below to 15% started here in August, again, low interest rate environment. And, you know, so so the number of loans that are lower is probably sustaining a little bit more than that of the extended terms that we just talked about. Now, lastly, what does that mean for the new vehicle in terms of the lender, right, the new vehicle financing. So again, that combination of low APR and long term length have helped captains really capture quite a bit of share in terms of new financing. In q2 of 2020, you can see this yellow part here, which represents the captives of really growing and taking a massive share over half the share of new vehicles that were financed. In April, May and June, that number has come down, as I would say that we've returned to a little bit of a more call it normal or stable period of time here and in the auto vehicle financing space. So that's what I have. Thank you again, for for joining in with me and Joey. I'd love to kind of pass it back to you with any kind of any sort of questions that you might have.Joey Pizzolato 21:17 Great. Um, Thanks, satune. Okay. Oh, there we go. There we go. Yeah, the screenshare done. Um, thank you so much. Um, I do have a couple questions for you. Um, you know, one thing we talked a lot about, you know, last week at the Auto Finance summit was, you know, what to expect from 2021? kind of given where we're at today, but I thought it was interesting. You know, if you look back to March, I wouldn't have thought we were we would be where we are today on October 29. So if I were to ask you, you know, back in March, what you thought the outlook would be come into October, what would you have said?Satyan Merchant 21:55 So a good question. Yeah, you're dusting off the crystal ball or the magic eight ball? And what did it What did I say back then? Right, or what was I thinking? You know, we had some conversations, Joey, I think, you know, back in, if I put myself back in March, you know, I think that this industry has been quite resilient. And this industry obviously consists of, you know, the entire value chain with the manufacturing the autos, the financing, obviously, is where I'm spending a lot of my time, the dealerships as well. And back in March, you know, I would have and even speaking with other auto lenders and other experts in the industry, I think sort of the consensus was if we can get back to our 2019 levels, by the end of this year, it's a success. What ended up happening, right was again, that, you know, maybe what I'll do, what I'll call a U shaped recovery, is we were really back to our 2019 levels by summer this year. Right. And that was again, in in a world with double digit well over 20% unemployment in some periods this summer, right. And yet, the in terms of origination volumes, and credit report volumes, we were really right back to last year, very much sooner than I thought my you know, my crystal ball was off, I think a testament to how this industry got together how this industry thought about financing. I talked a bit here in the last few minutes about incentives and how you know, certain lenders made it more possible to maintain a reasonable monthly payment for a consumer by taking some other actions on incentives or the way that they're structuring the deal. I also think that, and I didn't have much data here about it, but there has certainly been that accelerated shift to digital and better ways of consumer just purchasing a vehicle and making it possible for that to happen. So I do think that we got back to levels faster than I had expected. And here we are now, you know, again, I think that the levels really did dip a little bit, call it in the summer here. So June, July, August, where again, we're not quite at 2019 levels. We're still in a pandemic. But I think the other thing that I didn't necessarily foresee is that I think we do have this supply crunch, right? It's been the talk lately. There was moments, I think, an extended period where the auction houses just couldn't operate. Yeah, the cares act did also have a hand in terms of repossessions, for instance, right. And there are some states where the repossession activity only resumed here in October, right. So without those repossessions, that's a source of supply as well. So, you know, I think that the industry has, has kind of been resilient, that's a word that I like to use here. And I think also pragmatic in terms of the way that we've approached it. Joey Pizzolato 24:37 Mm hmm. And, you know, when you and I spoke prior to the pandemic, you know, we talked about the increase in 84 month loan terms, as you know, a lot representing a larger portion of originating loans and how that could be a concern in the future. So I'm wondering, you know, we saw, as you mentioned, a lot of those 84 month loan spike in the second quarter So is that spike any cause for concern? I'm pulling ahead. Satyan Merchant 25:08 Sure. Yeah. So I think you know, the last answer I just gave, I sort of ended with the word pragmatic. And I think I think that term length discussion is a real reflection of that pragmatism. And really, I think good, good risk management now, page 19 is the one that I show that's, you know, I call that the roller coaster page. Right? And what that was, again, I think that's just so illustrative. It's sort of, and I love having that in data, right? Because it's, it's what we heard in terms of talk, right, we heard that the strategies at the time where we will die out, we as lenders will dial up these incentives or these programs for the 18 months, 84 month or higher term. And that's to help the consumer right, and we and you know, even the advertising, the marketing said such right now the data shows, that's exactly what they did, I think it was super, it was very responsive, that these lenders dialed it up, and then dialed it right back where we're back at the levels that we were pre pandemic, in terms of the long been extremely long term loans. Right. And I think we're back to I'll use air quotes here normal, and that the lenders really identified and determine like, there is a period of time where we have we need to help the consumer, we need to obviously continue to move the metal and, and sell our vehicles. You know, I think that there's been a phrase out there that I in one of our discussions and one of the discussions I've had before that I heard from a from one of the auto lenders is that everyone was helping the consumer at a time when the consumer needed help. And now the pragmatism is that they were not willy nilly, the lenders, they were not haphazard about keeping these extremely long term loans out there. Certainly the Federal Reserve and against the low interest rate environment has helped to keep that monthly payment in check. And I think that, you know, I can't hear declare, like everything is rosy, right, where again, still on a pandemic. I keep reiterating that. But I do think there's been prudent in terms of the way that lenders have been managing these these loan loan terms. Mm hmm. Joey Pizzolato 27:01 Well, for loan performance is held up, as you mentioned. So um, you know, I, I'm, I'm optimistic as well. Um, last question for you such a lot of great information. Today, if you had to kind of you know.or punch in on like three takeaways that you think are most important for our viewers, what would they be? Satyan Merchant 27:23 Sure. So, you know, let's start again, where I started the presentation accommodations, right? Lots of bars, still in an accommodation spot, but half of where our peak was right, we're under 4 million, and consumers are rolling off accommodation. And lenders continue to work with buyers and, you know, figuring out who needs that accommodation, and how to treat them when they come off. So we're not out of the woods yet here. Obviously, I think everyone knows that. But the pandemic, the lenders are doing what they can I think, to work with borrowers. And I think that's a good thing, too. You just said this performance has held up, right. It's not, you know, where if you kind of zoom out on the world, you this rate of delinquency, most recently that we reported, which is under 1.5%, is kind of still at fairly low levels. Right, very low levels. And we've heard we've seen in the data and heard anecdotally, from from from from the customers that we have, that a concern isn't necessarily the book, believe that the book today is one that was managed? Well, the concern is the crystal ball, right, and I don't have the crystal ball, you don't have the crystal ball. But the concern is what happens in the future. Right. And then lastly, in terms of, of new originations and kind of consumers purchasing and financing vehicles, looking forward, I think that lenders have again been prudent, putting forward the right structures, the right offerings out there. There is certainly a supply issue out there in terms of vehicles, global supply chains, not only in auto but everywhere have been affecting all of us. But I think lenders continue to do make the right decisions in terms of figuring out how to give the consumer the right experience, how to offer the right terms and the loan packages and their loan products and and work again with the dealers and the entire ecosystem to continue to get people and keep them in their vehicles. Joey Pizzolato 29:11 Great. Well, such a thank you so much for the wonderful conversation. It's always a pleasure. That's all the time we have. But please check back for next month's industry pulse, which will feature rusty West, President and market scan Information Systems sahjhan Meanwhile, we'll be back on the industry pulse in April. Finally, for all our viewers, we'd love your feedback on our series. What market trends are you most interested? What? What do you think of this episode? Send us an email at info at auto finance news dotnet. Thanks for joining us, and we will see you next time. 29:46 Thanks </div> [/toggle]
