Vehicle Finance Financial Bubble WP

Automotive GPS Solutions

Will You Be Ready for the Next Automotive Finance Storm?

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Capitalizing on the Growing Automotive Finance Market. White Paper Presented by Spireon Automotive Solutions

Walk into just about any auto dealership these days, and youll 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.

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2A Closer Look at Todays 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.

Im sure that todays borrowers that are subprime still have low FICO scores, explains Tom Webb, chief economist at Manheim, the worlds largest provider of vehicle remarketing services. But I bet you that many of them have pretty low payment-to-income ratios. These are people who had their credit racked during the recession. Think foreclosures. But they have now walked away from that debt. Theyre now dealing with a rent payment that is much smaller than their previous mortgage payment, and theyre 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.

Despite what their low credit scores may indicate, the large segment of credit-challenged 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.

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 themselves. Over the past year, it appears all the players have started offering sub-prime loans and more of them. For the first time in years, borrowers with low scores were finally hearing the word yes.

Pent-up demand from consumers unable to obtain financing during the 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

For the first time in years, borrowers with low scores were finally hearing the word YES.



4Lenders Go DeepSo just how low are automotive lenders willing to go? The data indicates that lenders across all segments of the industry are going deeper than theyve dared to in the last 10 years. According to a recent Experian study5, in the last year weve seen a nearly 12% increase in subprime financing for new vehicle purchases, and a nearly 31% increase in deep subprime lending to consumers with 550 credit scores and lower. At the same time, weve seen prime financing remain stagnant and super-prime financing decline by almost 4% in the last year.

While not as drastic, this same trend applies for used-car financing as well with a nearly 6.5% increase year-over-year in deep subprime lending, a 2.7% increase in subprime lending, a nearly 2% drop in prime lending, and a 4.9% decline in super-prime lending.

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.

Deep Sub-

prime

35%

30%

25%

20%

15%

10%

5%

0%

-5%

-10%

30.9%

11.5%

5.1%

0.0%

Subprime

-3.5%

Nonprime Prime Super Prime

YOY Change in New Financing

YOY ChangeSource: Experian Automotive

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. Whats 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, weve 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 thats ready once again to compete.

I think everyone would tell you its 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, its 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 weve got the optimism in the marketplace; weve got customers out there shopping again. Weve got banks with money. Weve 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..



6Subprimes Up, Delinquencies Down When you look at what happened to the housing market, sub-prime would seem to be a recipe for disaster. But in the world of automotive financing, subprime is not only experiencing a rebirth, its also undergoing a re-definition.

I suspect that what is being called subprime today is nothing like the subprime of old, says Manheim chief economist Tom Webb.1

And he may be onto something. According to industry data, todays consumers with subprime auto loans are making on-time payments a priority. Whats more, 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.

According to a recent Experian study, repossession rates are plummeting with a 27.6% drop from Q4 2011 to Q4 2012.5

30-day delinquencies have gone down nearly 3% between Q4 of 2011 and Q4 of 2012. Most notably, credit unions saw a near 10% plunge in 30-day delinquencies during that period.4 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 2012, down from 1.11% in September of the same year.1 Sixty-day delinquencies have however started to creep up overall by nearly 3% between Q4 2011 and 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.

Q4 2011

2.80%

2.78%

2.76%

2.74%

2.72%

2.70%

2.68%

2.79%

2.72%

Q4 2012

30-Day Delinquencies

-2.28 BPS DECLINE

Q4 2011

1.60%

1.55%

1.50%

1.45%

1.40%

1.35%

1.58%

1.43%

Q4 2012

Credit Union Delinquencies

-9.76 BPS DECLINE

7The year 2012 represented the best used-car sales since 2007, with 40.5 million units being driven off the lots, a 5% increase from a year ago.

Prices for vehicles up to eight model years in age increased by 2.6 percent to an average of $14,445 in 2012

The percentage of used-vehicle contracts with buyers having FICO scores below 670 is at the highest point since January 2010.

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. Thats 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, theyre look-ing to upgrade to higher-value vehicles, including pre-owned vehicles. The fact is: these quality used vehicles are getting harder to find, especially considering that people during the recession tended to hang onto their cars for longer periods.

This pent-up demand and dwindling inventory serve to drive up vehicle values even more. According to NADAs used vehicle price index, prices for vehicles up to eight model years in age increased by nearly 3 percent to an average of $14,445 in 2012, placing prices 18 percent higher on average than they were in 2007, in the lead-up to the recession.6

This increase in demand is also working to ratchet up the competition among automotive lenders and dealerships. Searching for ways to differentiate themselves, lenders and dealers continue offering subprime loans for used vehicles, with ever-more attractive rates and terms. According to CNW 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?



8The Perfect Storm? 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 weve 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 payroll taxes impacting 77% of US in 2013 impact this situation? Households now experiencing a $75 to $100 on average loss in after-tax monthly income may alter their automotive financing behavior.

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 industrys 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.

A recent study reveals that over 80% of consumers who had embedded telematics solutions stayed on track with their payments, and many of these saw an improvement in their overall credit rating.

9 Preparing for the Storm So what strategies are our industrys 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).

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.

DBRS analyst.2



10GPS Collateral Management 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 vehicles 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 todays highly competitive automotive finance climate. Among lenders using Spireons 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, Spireons solutions have helped our vehicle finance customers increase their return on capital by 87%.

11 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 CMSs, look for a solution that offers the following features, functionality and benefits.

Real-Time TrackingMake sure the CMS you select delivers up-to-date GPS positioning so you know youre looking at the vehicles most current location.

Ease of UseChoose a CMS that serves up your vehicle data as actionable business intelligence via intuitive dashboards and easy-to-use web-based interfaces.

ScalabilityIf you plan on approving more subprime loans, make sure your CMS easily scales to accommodate the growing number of vehicle assets youll need to protect.

Stringent SecurityFederal 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 SimplicityTo 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 ReportingMore 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 ReadyMake sure your CMS is ready to integrate with your current and future portfolio management systems and other third-party applications.

Payment Alerts and NoticesThe 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.



12Best Practices for Choosing the Right CMS (Continued)

Disable FeatureDoes 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 AvailabilityYour 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 youre tracking.

Installation ServicesDoes 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 cant be removed or tampered with.

24/7 SupportPartner with a CMS provider that offers a dedicated account manager as well as 24/7 access to customer service and support.

Powerful PlatformMake sure your CMS providers solution is built on a platform thats 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

Spireon Delivers Best Practices in CMS To meet this checklist of best practices, more members of the automotive financing industry are turning to Spireons 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:

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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 Spireons Automotive Solutions powered by the NSpire platform, visit GoldStarGPS.com, and LoanPlusCMS.com.



Summing it up 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 industrys 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, its 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.

SOURCES1. Competitive Landscape Highlights Subprime Markets 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 Markets 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.

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Vehicle Finance Financial Bubble WP