Summary
With the federal government taking a more active role in the affairs of the Detroit automakers there was hope that there would be a positive impact on the auto lenders who have been pulling back over the past several months. No such luck.
Analysis
As President Obama passed the 100-day mark of his presidency a few weeks ago, legal and compliance analysts have offered their perspectives on how his administration is impacting the auto finance market.
One of these impacts has been a reduction in subprime loans. The study found that many consumers and dealers are finding that most of the near-prime and subprime lenders have pulled out of that market niche. This has impacted retail sales, leaving many dealers with a high near-prime and subprime customer base feeling the pinch.
There's been a a greater focus on consumer protection and industry regulation, which has the positive effect of forcing some dealers to reflect on their internal practices and ensure that their stores are taking the necessary steps to reduce risks both to themselves and their customers.
Regulators are feeling more empowered than they were during the previous administration. More stringent regulatory exams and a rising number of enforcement actions during the first quarter of this year are evidence of that.
Lenders have become more adamant about making sure they're taking all the steps to identity theft, money laundering, etc. Dealerships are feeling the pinch with lower loan to value callbacks from their lenders, shorter terms and more cash down from customers.
Early last year advances (the amount lenders would agree to finance against the invoice price of the vehicle) ranged from 110% to 180% of invoice. Lenders now typically advance 80% to 110% of invoice, depending on credit risk.
Dealers see similar advance-rate reductions on used vehicles.
Honda, Toyota, and some noncaptive lenders are using Black Book instead of NADA book to calculate advance limits. Since the price in Black Book is generally lower than NADA, there is a 10% reduction in advance as a result. As a result, the public dealer groups have seen mounting pressure on their F&I margins and finance penetration.
Behind the lenders shrinking advance rate are mounting repossessions. More customers are defaulting on their loans, and the loss per repossessed vehicle has risen.
Indeed, the percentage of auto loans made through dealers that are 30 days or more past due reached a ten year high at the end of March.
There are some good signs for dealers. Some lenders (GMAC) recently eased their standards slightly. Residual values for used cars are stabilizing, which reduces the financial burden on upside-down customer (customers who owe more on their vehicle than it is worth).
