Car Lending Draws the Public Market’s Interest

There might be some periods when credit unions can operate in their cooperative sphere with little regard for the doings of Wall Street.

2020 does not appear to be one of those years.

Recent ventures in the public sector have cast light on what is gaining the attention of people who create companies and those who invest in their ideas. They include:

• GTE Financial Credit Union became the first credit union sponsor of asset-backed securities sold on Wall Street. The $175 million ABS issue was sold in November.
• Carvana, which went public in 2017, ramped up its internal lending last year, lessening its past reliance on loans through banks, credit unions and other partners. It’s also selling those loans as automotive-backed securities.
• LMP Automotive hasn’t turned a profit yet, but the company just west of Fort Lauderdale, Fla., went public in December with a bold plan to offer online subscriptions to use a car for six, 12 or 24 months.

Automotive-backed securities have been rising, but their supply has been limited by lower sales of new cars. Credit unions are seen as a new source with many prime borrowers, and as institutions that are reliable loan generators and experienced servicers.

Asset-backed securities are sought by investors because they offer attractive margins for their level of risk. And they provide flexibility for credit unions that might want to shift an auto-heavy portfolio into other lending areas.

GTE Financial of Tampa, Fla. ($2.2 billion in assets, 228,299 members) sponsored the deal with the blessing of the NCUA.

A 2017 NCUA opinion found that federal credit unions did have the authority to issue asset-backed securities because they met the requirements under existing law that the activity was useful, similar to existing business practices and involved similar risk as its existing business.

“Securitization can increase the amount of credit available to consumers and businesses,” Michael J. McKenna, the NCUA’s then general counsel, wrote in his June 2017 opinion.

A December report by Brian Ford of the Kroll Bond Rating Agency in New York, N.Y., said it expects automotive-backed securities to rise 2% to $125 billion in 2020. Non-automotive securities are expected to rise 6.7% to $132.5 billion, led by double-digit growth for securities backed by student loans and consumer loans.

Part of the reason for the slowing of auto-backed securities is a crimping on production because of lower new car sales. Ford cited GTE Financial’s offering as a possible sign that credit unions could provide more loans to the market.

“Although the deal was just $175 million, if other credit unions begin to tap the ABS market for funding rather than rely on their deposit base, this could be a source of growth in the asset class,” he wrote.

As of October, credit unions held $148.8 billion in new car loans and $233.6 billion in used car loans. They accounted for about 32% of the $1.19 trillion in U.S. auto loans in September, according to the Fed.

Another newcomer to auto-backed securities last year was Carvana, the Phoenix company founded in 2012 that sells used cars online.

Carvana issued four sets of auto loan-backed securities in 2019. The last, $507.26 million issue was backed by used car loans to prime and subprime borrowers with a weighted average FICO score of 634. At the time, the loans had an average principal balance of $18,545, a weighted average interest rate of 13.59%, a weighted average original term of 70 months and an average remaining term of 69 months.

The Carvana model is one that matches an elegant delivery of a reward with an online process that is frictionless from shopping to financing.

“On our platform, you can truly execute the entire transaction online in a matter of minutes without talking to a single person, if you don’t want to,” Carvana CFO Mark Jenkins told analysts at a conference last November in Nashville.

He said the online platform with 20,000 cars in stock last fall is “built to deliver the same level of customer experience that e-commerce customers are used to … putting the entire process online, not just parts of it,” adding, “If you sign your contract with your finger by noon today, you’ll have your car tomorrow at 9 a.m.”

Part of its interest in lending comes from making the buying process seamless, but it also fits a pattern of development among many high-growth companies.

Carvana’s sales have more than doubled every year since 2016. As of November, Carvana estimated it would end 2019 with sales of 174,000 to 176,000 cars, an increase of 85% to 87% from 2018. It expects revenue to roughly double to $3.85 billion.

Yet, such is the fragmentation among used car retailing that Carvana had only a 2% market share last fall in its most mature market.

“It’s likely given the fragmentation that we’re drawing from everybody, and it may be imperceptible if you’re selling one out of 50 cars less than you were a few years ago because Carvana is taking a 2% market share,” Jenkins said.

But Carvana’s presence is likely to be felt more keenly among auto dealers – and lenders – if it achieves its long-term goal to sell two million cars a year, which would give it about a 5% share of the U.S. market of 40 million cars a year.

Part of that plan is to move into new areas, including parts of the Midwest, Rockies and Pacific Northwest.

As it runs out of new places to serve, it will need to carve out larger shares in the places it is established. It will also be under pressure to find growth areas besides just buying and selling cars.

Carvana is increasingly emphasizing lending as part of its vertical integration. Its gross profit for each car sold is expected to be $2,825 to $2,875 for 2019, up from a $2,133 gross profit per unit (GPU) in 2018.

In the third quarter, GPU was nearly $3,000. “Our team continues to make progress on a number of key GPU drivers to achieve our long-term financial goals, most notably buying cars from customers and monetizing our finance platform,” Jenkins said.

About a third of that GPU came from Carvana’s financing activities, boosted significantly by net gains from its third auto loan securitization, selling $600 million of principal balances. Total finance GPU was $1,078 in the third quarter, up from $705 a year earlier.

Credit unions can learn from Carvana as it sells loans, but what about startups that put people in cars they don’t own? Who can help people who are not sure what kind of car they want, or how long they’ll need one? Who can help people who want flexibility?

LMP Automotive Holdings, Inc., of Plantation, Fla., went public in December to provide solutions that include subscriptions to cars. The company offers new and used cars for rentals and subscriptions and still sells some used cars, its original business from its 8,771-square-foot, 1.25-acre facility. It began operating in early 2017, and as of July 2019, had 128 cars subscribed and 20 rented; its SEC prospectus said it has the space there to handle more than 1,000 subscribers.

A subscriber can pick a car, truck, SUV or crossover on its website, and then pick a subscription plan that includes scheduled maintenance and upkeep, license and registration, and in most cases roadside assistance. At the end of every month, the subscriber can switch to another vehicle for a fee.

Say your fancy this month is its 2019 Toyota Camry SE with 31,083 miles and a manufacturer’s suggested retail price of $26,574. You can pick one of three subscriptions:

• Six months at $275 per month plus a $1,665 non-refundable activation fee.
• 12 months at $370 per month plus a $2,221 fee.
• 24 months at $420 per month plus a $3,380 fee.

Subscribers are charged $0.15 per mile for any miles over 1,000 per month. Right now those plans don’t include car insurance.

For the 12-month deal, the website estimation tool found the total due at signing for a person from South Carolina would be $2,837, including the upfront fee, the first month’s subscription, $186 in sales taxes and a $60 state surcharge.

Excluding state taxes and surcharge, the total cost for 12 months is $6,661. If the $6,661 was spread out evenly over 12 months, the monthly subscription would be $555. That compares with $2,281 per month to buy the car with a 12-month loan at 5.5% and no down payment.

LMP Automotive’s website calculator estimated the swap fee based on that car and a 12-month subscription would be $144.45, including another $60 state surcharge and $9.45 in sales taxes.

It also offers a subscription program with weekly rates for drivers for Uber, Lyft and other ride-sharing apps, stating: “You do the driving and make money. We handle everything to do with your vehicle.”