The impact of vehicle title brands on loan performance - Experian

[Pages:8]The impact of vehicle title brands on loan performance

Market Insight from Experian | Page 1

The impact of vehicle title brands on loan performance

Executive summary

Vehicle history can have a major impact on loan performance. Significantly higher percentages of title-branded vehicles are financed at Buy Here Pay Here lots, and sold to credit challenged customers. Title-branded vehicles also have a higher percentage of charge-offs for lending institutions. Leveraging the information within vehicle history reports, lenders can identify title-branded vehicles when the loan is made, and mitigate losses from charge-offs and from loss of value when sending repossessed vehicles to auction.

Title-branded vehicle analysis

Lending institutions do an excellent job of developing their loan portfolios using traditional risk categories based on credit score and loan characteristics such as interest rate and loan term. However, many lenders are beginning to understand that vehicle history can also be a significant factor in loan performance. These savvy lenders are using AutoCheck?vehicle history reports to assess the impact of title-branded vehicles on loan delinquencies and defaults.

Experian Automotive recently analyzed automotive credit trends from Q2 2009 to December 2010, looking at current risk distribution of new and used vehicle loans, loan share for various types of lending institutions, and loan characteristics such as loan term and credit score. In addition, the company analyzed what percentage of major title-branded vehicles was financed by various types of lending organizations and risk tiers, and the level of loan attrition in these categories.

Without question, there are clear trends emerging that show credit challenged customers purchase title-branded vehicles at a significantly higher rate than customers with prime and super prime credit. There also is a higher level of vehicle attrition for these vehicles and risk tiers.

Presence of branded title on financing Who financed major brands?

Percentage of financing with a major title brand

9.00%

8.00% 7.00% 6.00%

8.31%

7.32%

5.00%

4.00% 3.00% 2.00% 1.00% 0.00%

1.42%

0.41%

1.89%

2.26%

Bank Buy here/ Captive Credit Finance Other

pay here

Union company

Source: Experian Automotive

2.07% Overall

Market Insight from Experian | Page 3

The impact of vehicle title brands on loan performance

For this study, Experian Automotive reviewed used vehicles from model year 2005 to present, looking at major title brands, including:

? Salvaged/damaged/rebuilt

? Broken odometer/not actual miles/calculated odometer rollbacks

? Manufacturer buyback/lemon

? Auction Announcements

There was a significantly higher percentage of title-branded vehicles at Buy Here/ Pay Here dealerships, which tend to be smaller, independent dealerships catering to customers with non-prime or below credit scores. Of the vehicles financed by these organizations, 8.31 percent carried one of the common title brands. This is a 268 percent higher rate of title-branded vehicles compared to loans from finance companies (2.26 percent).

Banks, captives and credit unions, which typically take a more conservative lending strategy, have significantly lower percentages of loans for title-branded vehicles, at 1.42 percent, 0.41 percent and 1.89 percent, respectively. Even though these lending institutions finance a lower percentage of title-branded vehicles, catching just one title-branded vehicle by using AutoCheck? can produce significant savings. At auction, vehicles with title brands typically lose 35 to 40 percent of their value. Without pulling a vehicle history report when the loan is originated, lending institutions can lose thousands of dollars on a single vehicle when it goes to auction after repossession.

Branded titles and credit scores Where are branded titles likely to occur?

6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

Percentage of financing with a major title brand

4.9%

? 55% of all title brands are financed outside of prime ? 3% of financing outside of prime has a major title brand ? Outside of prime is 1.5 times more likely to have a major

title brand

2.5%

1.8%

1.6%

1.2%

0.0%

Deep Subprime

Subprime Nonprime

Prime Super Prime

Source: Experian Automotive

Page 4 | The impact of vehicle title brands on loan performance

The impact of vehicle title brands on loan performance

Since Buy Here/Pay Here dealerships finance a higher percentage of title-branded vehicles and they cater to credit challenged customers, it stands to reason that credit challenged customers purchase a higher percentage of title-branded vehicles. This is in fact true, as Deep subprime customers finance a significantly higher percentage of title-branded vehicles. But, pulling an AutoCheck report when the loan is originated is still sound practice for lending institutions, as this can help avoid significant losses at auction.

Charge-offs and title-branded vehicles How did brand impact charge-off amount?

Charge-offs and title-branded vehicles

$18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000

$0

$16,549 47.5%

58.7% $12,876

64.1% $13,764

$7,861

$7,556

$8,821

70%

60% ? 2.87% of charge-offs have a major title brand

50% ? 1.43% of vehicles with branded title charged-off

40% - 2.1% of vehicles with frame damage

30% charged-off - 2.0% of vehicles with

20% unibody damage charged-off

10%

0%

Clean

Frame damage Unibody damage

Average amount financed Average charge-off amount

Charge-offs percent of financing

Source: Experian Automotive

Even the type of title brand can have a significant impact on how much a lender stands to lose if a loan goes bad. When a vehicle with a clean title is charged off, the average loss is 47.5 percent of the loan value. For vehicles with frame damage, the average charge-off is 58.7 percent of loan value.

Again, this underscores the importance of understanding vehicle attributes and how they can impact a lender over time. By utilizing the AutoCheck vehicle history report to drill down to specific title brands, lenders can mitigate their risks even further.

Market Insight from Experian | Page 5

The impact of vehicle title brands on loan performance

Attrition by vehicle type and risk segment What loans closed and why?

Attrition rates

25%

24% 23% 3.2% to charge-off

22%

21.1%

21%

20%

19% New attrition rate

4.8% to charge-off 23.8%

Used attrition rate

Average scores

800

782

792

780

760

740

720

700 New financing

747 731

Used financing

Open average score Closed (goods) average score

Source: Experian Automotive

Attrition by risk segment 30%

25.0%

25%

23.1% 20.6% 20.5%

21.5%19.9%22.2%19.6%22.9%21.6%

20%

15%

10%

5%

0%

Deep Subprime Nonprime Prime subprime

Super prime

New financing closed rate Used financing closed rate

Loan attrition for new vehicles was 21.1 percent during the time period from Q2 2009 to December 2010. Of those vehicles, 3.2 percent were charge-offs. For used vehicles, the attrition rate was 23.8 percent. However, for used vehicles, the chargeoff rate was 4.8 percent, or 1.5 times higher than the charge-off rate for new vehicles.

Furthermore, vehicles with longer loan terms are more likely to charge off than those financed for 48- or 60-month terms. For new vehicles, the charge-off rate is 0.32 percent for 60-month term loans versus 1.02 percent for 72-month term loans and 1.60 percent for 84-month term loans. Used vehicles experience even higher charge-off rates, with 0.92 percent of 60-month term loans, 1.22 percent of 72-month term loans and 1.82 percent of 84?month term loans charged off during this review period.

Again, this underscores the importance of gaining a full understanding of all aspects of the used vehicle loan. Certainly, there are higher-risk customers looking for loans in the used vehicle category, but it is also important to ensure that lenders

Page 6 | The impact of vehicle title brands on loan performance

The impact of vehicle title brands on loan performance

have a full understanding of the vehicles themselves.There is a higher default rate on loans for vehicles with title brands, as 1.45 percent of used vehicles with major title brands charged off (versus 1.15 percent for all used cars). Understanding which vehicles have title brands can help lenders significantly mitigate risk.

Conclusion

As lenders look for any new data point to help develop a clearer understanding of vehicle loan risks, understanding vehicle history can have significant benefits. Vehicles with title brands lose value at auction. Finding this out as a previously damaged vehicle goes through the auction lanes can be a painful experience for lenders. Knowing which risk tiers buy title-branded vehicles at a higher rate can provide a red flag for lenders, which could lead to using vehicle history to help mitigate risk. However, an even better strategy would be to pull an AutoCheck report for every used vehicle transaction. As nearly one in 50 vehicles financed has a title brand, and missing this brand could cost thousands of dollars at auction, there is a high rate of return for lenders that invest in AutoCheck when a vehicle loan is originated.

Market Insight from Experian | Page 7

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? 2011 Experian Information Solutions, Inc. ? All rights reserved Experian and the marks used herein are service marks or registered trademarks of Experian Information Solutions, Inc. Other product and company names mentioned herein may be the trademarks of their respective owners. VantageScore? is owned by VantageScore Solutions, LLC. 04/11 ? 5527/5090 ? 5809-CS

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