Will You Be Ready for the Next Automotive Finance Storm? - WHITE PAPER Automotive GPS Solutions
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WHITE PAPER
Will You Be Ready for the Next
Automotive Finance Storm?
Automotive GPS Solutions
WHITE PAPER
Preparing for the Down Cycle:
Follow the Smart Money
GoldStarGPS.com
Capitalizing on the Growing Automotive Finance Market.
White Paper Presented by Spireon Automotive Solutions
Walk into just about any auto dealership these days, and you’ll see something that was sorely missing just
a few short years ago: Customers. Not just car-shopping customers, but car-buying customers. To look at
recent sales figures coming out of dealerships, it appears as though the automotive industry is once again
on the move.
Much like the housing market during the economic crash in 2008, the automotive industry took a near-
devastating hit as credit dried up, capital froze, and consumers struggled to find work and pay their bills.
Lenders in both industries realized they had been too liberal for too long with their terms, too lax in their
due diligence, and too ready to finance consumers who — under closer scrutiny — probably should not
have been approved for non-traditional subprime loans.
Reacting to the subprime back-lash, lenders began to crack down on non-traditional loans. As with the
housing market, the subprime automotive loan options all but disappeared — leaving an entire and rapidly
expanding category of credit-challenged consumers with no avenue for purchasing the vehicles they
needed to get to job interviews and places of work. This lack of financing options proved not only bad for
the consumer, but also bad for the automotive financing industry.
For more information, please visit GoldStarGPS.com
or call 1-866-655-8825
©2013 Spireon, Inc. All Rights Reserved.
A Closer Look at Today’s 2
Credit-Challenged Consumer
Consider the profile of this credit-challenged consumer
looking to purchase a much-needed vehicle. In many cases,
the car-buyer with the low FICO score is not your typical
dead-beat who displays a pattern behavior of delinquency and
defaulting on loans. Rather, increasing numbers of consumers
with damaged credit are among the millions of homeowners
who, drowning in underwater mortgages, were forced to walk
away from their homes and file for bankruptcy. Consequently,
their credit ratings plunged. At the same time, so did their
Debt Obligation Ratios.
Despite what their low credit scores
“I’m sure that today’s borrowers that are subprime still have may indicate, the large segment of
low FICO scores,” explains Tom Webb, chief economist at credit-challenged consumers remain
Manheim, the world’s largest provider of vehicle remarketing responsible members of the middle
services. “But I bet you that many of them have pretty low class. They have good jobs, earn
payment-to-income ratios. These are people who had their decent salaries, have lowered their
credit racked during the recession. Think foreclosures. But they debt, and for the most part pay
have now walked away from that debt. They’re now dealing their bills on-time.
with a rent payment that is much smaller than their previous
mortgage payment, and they’re actual income has not
changed. It may have even gone up.”1
As the economy began its slow but steady recovery, these
credit-challenged consumers have been regaining their
financial footing and their consumer confidence. Despite what
their credit scores may indicate, the growing majority of these
consumers remain responsible members of the middle class.
They have good jobs, earn decent salaries, have lowered their
debt, and for the most part pay their bills on-time.
And yet, these same bill-paying, gainfully employed
consumers are still saddled with low FICO scores that prevent
them from qualifying for traditional auto loans. To meet the
needs of this significant consumer segment, and to stay
competitive in a rapidly recovering industry, lenders are once
again starting to offer more subprime auto loans options.
Automotive GPS Solutions
3 The Rebirth of Subprime
As the economic recovery continues, vehicle sales are on the
rise. At the same time, automotive financing has experienced
a tremendous rebound. Leading credit rating research firm
DBRS expects lenders to start loosening their credit standards
in 2013 to support growth as the auto finance market regains
traction and credit becomes more available.2
This trend was already off to a strong start in 2012, particularly
in the resurgence of subprime auto financing across all
segments of the industry: automotive lenders and finance
companies, banks, credit unions, and even the dealerships For the first time in years,
themselves. Over the past year, it appears all the players borrowers with low scores were
have started offering sub-prime loans and more of them. For finally hearing the word “YES.”
the first time in years, borrowers with low scores were finally
hearing the word “yes.”
“thePent-up demand from consumers unable to obtain financing during
recession has not been fully released and will continue to contribute
to auto sales growth as these consumers get access to credit.
”
– say analysts.3
©2013 Spireon, Inc. All Rights Reserved.
Lenders Go Deep 4
So just how low are automotive lenders willing to go? The data YOY Change in New Financing
indicates that lenders across all segments of the industry are 35%
going deeper than they’ve dared to in the last 10 years. 30.9%
30%
According to a recent Experian study5, in the last year we’ve
seen a nearly 12% increase in subprime financing for new 25%
vehicle purchases, and a nearly 31% increase in deep subprime 20%
lending to consumers with 550 credit scores and lower. At the
15% 11.5%
same time, we’ve seen prime financing remain stagnant and
super-prime financing decline by almost 4% in the last year. 10%
5.1%
5%
0.0% -3.5%
While not as drastic, this same trend applies for used-car 0%
financing as well — with a nearly 6.5% increase year-over-year
-5%
in deep subprime lending, a 2.7% increase in subprime lending,
a nearly 2% drop in prime lending, and a 4.9% decline in -10%
Deep Subprime Nonprime Prime Super
super-prime lending. Sub-
prime
Prime
YOY Change
Source: Experian Automotive
Consumers with lowest credit scores — those considered
non-prime, subprime and deep-subprime show a combined
average growth of 15.8% for new car loans and a 3.3% for
used car loans for 2012 over 2011. And as credit continues to
loosen, the average approval-worthy credit scores will
continue to decline.4
Consumers with lowest credit scores — those considered nonprime,
subprime and deep-subprime show significant growth overall for both
new and used vehicle financing.
Automotive GPS Solutions
5 Competing on Terms,
Rates and Payments
Players in the automotive financing industry are doing everything they can to get credit-challenged
borrowers into vehicles. This includes making subprime auto loans available with more flexible terms, such
as longer payment periods extending up to 70 and even 80 months. What’s more, interest rates are con-
tinuing to drop, making it easier to get approved for a car loan. For instance, average loan rates on new
cars dropped to 4.36% and used to 8.48%.5
Over the past year, we’ve also seen slightly lower payment amounts for the deep subprime and subprime
categories. Consumers are now getting into vehicle without having to make big upfront payments, as well.
Flexible terms, lower rates, smaller payments — they all point to an automotive financing market that’s
ready once again to compete.
“I think everyone would tell you it’s been hyper-competitive with a lot of capital coming into the subprime
auto finance space,” agrees Mark Floyd, the chief executive officer of Exeter Finance, a specialty auto
finance company. “But at the same time, it’s been a good year for the industry because there is so much
capital available in the space. The good news from where I sit is that lenders have been competing on price
and structure and not chased credit, not looking for volume by being too aggressive on credit.”1
Melinda Zabritski, director of automotive credit at Experian Automotive, agrees. “Now, it seems like we’ve
got the optimism in the marketplace; we’ve got customers out there shopping again. We’ve got banks with
money. We’ve got open lending programs and really the ability and willingness to fund.”1
The question remains: Do all these newly approved subprime auto loans pose a potential threat to this
rosy industry outlook? As of right now, the industry seems to think not.
.
©2013 Spireon, Inc. All Rights Reserved.
Subprimes Up, 6
Delinquencies Down
When you look at what happened to the housing market, sub- 30-Day Delinquencies
prime would seem to be a recipe for disaster. But in the world
2.80%
of automotive financing, subprime is not only experiencing a 2.79%
rebirth, it’s also undergoing a re-definition. 2.78%
-2.28 BPS
2.76% DECLINE
“I suspect that what is being called subprime today is nothing
like the subprime of old,” says Manheim chief economist 2.74%
Tom Webb.1
2.72%
2.72%
And he may be onto something. According to industry data,
2.70%
today’s consumers with subprime auto loans are making
on-time payments a priority. What’s more, longer payment 2.68%
Q4 2011 Q4 2012
periods are allowing consumers to maintain lower payments
for extended periods of time. As a result, lenders are seeing
fewer delinquencies and a steep fall-off in repossessions rates.
Credit Union Delinquencies
According to a recent Experian study, repossession rates are 1.60%
plummeting with a 27.6% drop from Q4 2011 to Q4 2012.5 1.58%
30-day delinquencies have gone down nearly 3% between 1.55% -9.76 BPS
Q4 of 2011 and Q4 of 2012. Most notably, credit unions saw a DECLINE
near 10% plunge in 30-day delinquencies during that period.4 1.50%
Analysts from S&P Dow Jones Indices and Experian report
that the auto-loan default rate hit a record low of 1.01% in July 1.45%
1.43%
2012, down from 1.11% in September of the same year.1 Sixty-
day delinquencies have however started to creep up overall by 1.40%
nearly 3% between Q4 2011 and Q4 2012.
1.35%
Q4 2011 Q4 2012
Longer payment periods are allowing consumers to maintain lower
payments for extended periods of time. As a result, lenders are seeing
fewer delinquencies and a steep fall-off in repossessions rates.
Automotive GPS Solutions
7 Driving the Value of Vehicles
Credit-challenged consumers with subprime auto loans are
making on-time payments for several reasons: one being they
aspire to drive a better quality car. The data clearly indicates
this demand exists. The year 2012 represented the best used-
car sales since 2007, with 40.5 million units being driven off the
lots. That’s up 5% since 2011, which saw 38.8 million units sold.
As credit-challenged consumers begin to achieve financial
stability, enter new jobs and move up in careers, they’re look-
ing to upgrade to higher-value vehicles, including pre-owned
vehicles. The fact is: these quality used vehicles are getting The year 2012 represented the best
harder to find, especially considering that people during the used-car sales since 2007, with 40.5
recession tended to hang onto their cars for longer periods. million units being driven off the
lots, a 5% increase from a year ago.
This pent-up demand and dwindling inventory serve to drive
up vehicle values even more. According to NADA’s used vehicle
price index, prices for vehicles up to eight model years in age Prices for vehicles up to eight
increased by nearly 3 percent to an average of $14,445 in 2012, model years in age increased by 2.6
placing prices 18 percent higher on average than they were in percent to an average of $14,445
2007, in the lead-up to the recession.6 in 2012
This increase in demand is also working to ratchet up the
competition among automotive lenders and dealerships. The percentage of used-vehicle
Searching for ways to differentiate themselves, lenders and contracts with buyers having FICO
dealers continue offering subprime loans for used vehicles, scores below 670 is at the highest
with ever-more attractive rates and terms. According to CNW point since January 2010.
Research, the percentage of used-vehicle contracts with buyers
having FICO scores below 670 is at the highest point since
January 2010.7
Indeed, the data shows that values are on the rise — particu-
larly the value of pre-owned vehicles. Better vehicles come
with higher sticker prices that require larger loans and higher
monthly payments. Lenders must stop and ask themselves:
Will credit-challenged consumer be able to sustain these
larger payments for longer periods of time? Are we looking at
an increased likelihood of defaults on these larger subprime
loans down the not-too-distant road?
Or are we ignoring the signs of an impending storm ahead?
©2013 Spireon, Inc. All Rights Reserved.
The Perfect Storm? 8
Increasing numbers of deep subprime and subprime loans.
Looser credit standards. Longer payment terms. Rising vehicle
values. A heightened competitive landscape. Never before
have we seen this combination of factors converge and
descend upon the automotive financing market.
On the surface, it all sounds like welcome news for the industry
as well as for car-buyers. But as we’ve witnessed only too
recently, peaks are followed by valleys. Booms often bring on
bubbles that eventually burst. Which leads us to wonder: Is
this the calm before the storm? And could the new increased A recent study reveals that over 80%
payroll taxes impacting 77% of US in 2013 impact this situation? of consumers who had embedded
Households now experiencing a $75 to $100 on average loss in telematics solutions stayed on track
after-tax monthly income may alter their automotive financing with their payments, and many of
behavior. these saw an improvement in their
overall credit rating.
Whether that storm hits one year from now or 10, our industry
must take the appropriate measures today to prepare for its
arrival, while at the same time preparing for success. Cognizant
of the opportunities and the potential pitfalls in the current
and future automotive financing landscape, the industry’s
smartest players are already taking precautions to safeguard
their collateral and their profitability when conditions once
again turn turbulent.
Never before have we seen this combination of factors converge and
descend upon the automotive financing market.
Automotive GPS Solutions
9 Preparing for the Storm
So what strategies are our industry’s smartest players implementing now to prepare for whatever the future
brings? Some have started increasing their use of extensions or deferrals as a way to help keep potentially
borderline borrowers from losing their vehicles should they encounter a sudden and temporary credit road
block. The downside to this strategy, however, is it may make it more difficult for lenders to identify poorly
performing auto loan pools.2
Other lenders are taking the approach of tightening their due diligence, even while loosening credit
standards. Smart lenders are taking every precaution to make sure the subprime loans they approve are
air-tight. Industry experts caution those lenders who return to slack standards to push through more
subprime loans in an effort to compete.
“The continued increase in competition may drive some market participants to reduce the level of disci-
pline and originate loans of lesser quality,” explains a DBRS analyst. “In a competitive market, aggressive
buying practices and reducing loan quality to achieve volume expectations is a practice that should be
monitored and is unsustainable in perpetuity.” Lenders must be extremely careful when assessing and
offsetting risk factors that can impair the performance of their auto loans.2
As part of this increased due diligence, some lenders are employing more stringent stipulation verification
to ensure all the documentation is present and in order for proof of income, residence, insurance and any
additional information needed to approve the auto loan.
But of all the strategies lenders are putting into place to prepare for the storm, the most effective safe-
guarding measure is quickly proving to be GPS-based Collateral Management Systems (CMS).
“loan
In a competitive market, aggressive buying practices and reducing
quality to achieve volume expectations is a practice that should be
monitored and is unsustainable in perpetuity.
” – DBRS analyst.2
©2013 Spireon, Inc. All Rights Reserved.GPS Collateral Management 10
System (CMS): A Secure Strategy
Collateral Management Systems (CMS) may be a new category of solution for many members of our
industry, but it certainly presents long-term advantages for organizations who integrate CMS into their
overall financial strategy. And indeed, a growing number of lenders, banks, credit unions and self-financing
dealerships are adopting GPS-based CMS technology, with successful results.
As its name implies, GPS-based CMS uses Global Positioning System technology to improve the way
lenders and their collection departments manage their collateral. GPS units embedded in vehicle assets
capture information about that vehicle’s location, movement and status. Collection managers and staff
access this data to track and locate vehicle assets on demand — allowing for quicker, more efficient and
cost-effective recovery of assets should the need arise.
Increasing numbers of automotive lenders are proactively implementing GPS-based CMS to mitigate their
risk and positively impact customer payment behavior. When the finance metrics begin to erode, their
collateral recovery process is ready to go and their profits remain stable even in a down-turn.
Those lenders who have implemented a CMS are already experiencing a performance edge, even in
today’s highly competitive automotive finance climate. Among lenders using Spireon’s GoldStar CMS:
• 84% report a reduction in delinquencies
• 78% have been able to finance customers with lower credit
• 68% have been able to finance customers with smaller down payments
• 77% show significant improvement of customer credit ratings
All of which translates into lower risk, lower losses and lower costs. In fact, Spireon’s solutions have helped
our vehicle finance customers increase their return on capital by 87%.
Automotive GPS Solutions11 Best Practices for
Choosing the Right CMS
Not all CMS solutions are created equal. While most CMS that employ GPS technology will allow you to
track the movement and location of vehicle assets, your CMS should do much more to help you reduce
costs, increase efficiencies, and control risk. When comparing GPS-based CMS’s, look for a solution that
offers the following features, functionality and benefits.
Real-Time Tracking
Make sure the CMS you select delivers up-to-date GPS positioning so you know you’re looking at the
vehicle’s most current location.
Ease of Use
Choose a CMS that serves up your vehicle data as actionable business intelligence via intuitive dashboards
and easy-to-use web-based interfaces.
Scalability
If you plan on approving more subprime loans, make sure your CMS easily scales to accommodate the
growing number of vehicle assets you’ll need to protect.
Stringent Security
Federal and state security regulations are tight, and likely to get tighter. Ask your CMS provider what
security protocols and standards they have in place to back-up and protect your borrowers’ sensitive data.
Cloud-Based Simplicity
To avoid having to install and manage complex, costly hardware and software, we recommend choosing
a cloud-based remotely hosted CMS you can access through the web.
Robust Reporting
More than raw data, your CMS should connect you to actionable, easy-to-understand business intelligence
through customizable reports that let you measure your performance.
Integration Ready
Make sure your CMS is ready to integrate with your current and future portfolio management systems and
other third-party applications.
Payment Alerts and Notices
The best CMS will send the borrower alerts and notifications when payments become due or overdue. This
goes a long way to promoting on-time payments and reducing delinquencies.
©2013 Spireon, Inc. All Rights Reserved.12
Best Practices for Choosing the Right CMS (Continued)
Disable Feature
Does the CMS allow you to remotely disable a vehicle that is delinquent? A starter disable feature pro-
vides added incentive for borrowers to make their payments on-time, as well as aiding in faster, more
cost-effective recovery.
High Availability
Your CMS should have the capacity and through-put to provide continual, uninterrupted access to your
vehicle data — including historical data — regardless of the number of vehicles you’re tracking.
Installation Services
Does the CMS provider offer turnkey installation services for the GPS devices, performed by certified and
highly trained technicians at your or your customers’ location? Professionally installed devices ensure your
CMS will perform properly and can’t be removed or tampered with.
24/7 Support
Partner with a CMS provider that offers a dedicated account manager as well as 24/7 access to customer
service and support.
Powerful Platform
Make sure your CMS provider’s solution is built on a platform that’s able to support your requirements with
the highest service availability, speed and reliability. For more information on what to look for in a CMS
platform, visit Spireon.com to download our white paper “Do You Know Where Your Data Is? Five Critical
Questions You Should Be Asking Your M2M Provider.”
A CMS that delivers these advantages will enable you to continue selling more subprime loans with added
confidence and reduced risk, while also benefiting the customer directly.
• Increase loan originations and bulk purchases of commercial loans
• Protect your assets
• Change borrower behavior and build borrower relationships
• Help borrowers rebuild credit and qualify for higher-value auto loans
• Reduce delinquencies and defaults
• Cut costs associated with repossession and skip-trace
• Compete more effectively on loan terms and rates
• Maximize collection resources and staff productivity
• Drive cost savings with automated efficiencies
Automotive GPS Solutions13 Spireon Delivers Best
Practices in CMS
To meet this checklist of best practices, more members of the
automotive financing industry are turning to Spireon’s game-
changing GPS-based collateral management solutions. A
leading provider of mobile resource management (MRM)
Business Intelligence Solutions, Spireon offers a comprehen-
sive suite of Automotive Solutions built on the powerful,
scalable, reliable and secure NSpire M2M Intelligence
Platform. These solutions include LoanPlus CMS designed to
optimize the way automotive lenders, banks and credit unions
manage and protect their collateral, maximize their loan
performance and improve borrower and member services; and
GoldStar GPS for dealerships seeking to enhance the
performance of their in-housing financing departments while
meeting the needs of more credit-challenged customers.
Engineered from the ground-up, the NSpire Intelligence
Platform supporting these solutions connects members of the
automotive financing industry to the critical information they
need to reduce risk, enhance portfolio performance, control
costs and increase profitability. A private cloud-based
environment, NSpire currently supports 1.5 million subscribers
and counting with:
• Instant access to real-time information
• Superior reliability and performance with uninterrupted service
• Supreme scalability for growing demands and changing needs
• Robust security features to protect sensitive data
• High capacity — stores historical data and makes it easily accessible
• Ability to quickly add features and integrate with 3rd party systems
To learn more about Spireon, visit Spireon.com. To learn more about Spireon’s Automotive Solutions
powered by the NSpire platform, visit GoldStarGPS.com, and LoanPlusCMS.com.
©2013 Spireon, Inc. All Rights Reserved.Summing it up 14
Industry studies and statistics show every sign that the automotive financing industry is rebounding. Data
also shows that this resurgence is being largely driven by an increased availability of credit and a strong
growth in subprime and deep subprime auto financing. While lenders are seeing a sharp drop in delin-
quencies and repossessions, we believe that a convergence of unique industry factors — more subprime
loans with longer terms, higher vehicle values, limited inventory, and increased competition — requires that
lenders be prepared today for whatever may be around the corner tomorrow.
The industry’s smart players are implementing strategies now to safeguard their collateral, assets and
borrowers for the future. One of the most effective strategies for mitigating risk, reducing loss and
controlling costs is the adoption of a GPS-based Collateral Management System. Choosing the right
CMS, however, can mean the difference between success and failure in the subprime market. Now more
than ever, it’s important for lenders to understand and adhere to best practices when selecting a CMS
solution and provider to help them weather the storm and come out on the other side stronger than ever.
SOURCES
1. “Competitive Landscape Highlights Subprime Market’s Rebound.” SubPrime Auto Finance News, December 19, 2012.
2. “DBRS: More Credit Loosening Coming in 2013.” SubPrime Auto Finance News, Ja nuary 11, 2013.
3. “Competitive Landscape Highlights Subprime Market’s Rebound.” SubPrime Auto Finance News, December 19, 2012.
4. “State of the Automotive Finance Market Third Quarter 2012.” Experian.
5. “State of the Automotive Finance Market Fourth Quarter 2012.” Experian.
6. NADA Automotive MArket Report: 2012 Market Analysis and 2013 Used Price Forecast.
7. Retail Automotive Summary Feb. 2013, CNW Research.
Automotive GPS SolutionsLeading Provider of GPS Tracking Devices
Call us today at: 1-866-655-8825 or visit: GoldStarGPS.com
17600 Gillette Avenue, Suite 100 . Irvine, CA 92614
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