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So here it is! The moment you all have been waiting for–the top ten hot topics of 2009 (in no particular order of importance). 1. Portfolio Risk Management – You should really focus on this topic in 2009. With many institutions already streamlining the origination process, portfolio management is the logical next step. While the foundation is based in credit quality, portfolio management is not just for the credit side. 2. Review of Data (aka “Getting Behind the Numbers”) – We are not talking about scorecard validation; that’s another subject. This is more general. Traditional commercial lending rarely maintains a sophisticated database on its clients. Even when it does, traditional commercial lending rarely analyzes the data. 3. Lowering Costs of Origination – Always a shoe-in for a goal in any year! But how does an institution make meaningful and marked improvements in reducing its costs of origination? 4. Scorecard Validation – Getting more specific with the review of data. Discuss the basic components of the validation process and what your institution can do to best prepare itself for analyzing the results of a validation. Whether it be an interim validation or a full-sized one, put together the right steps to ensure your institution derives the maximum benefit from its scorecard. 5. Turnaround Times (Response to Client) –Rebuild it. Make the origination process better, stronger and faster. No; we aren’t talking about bionics here — nor how you can manipulate the metrics to report a faster turnaround time. We are talking about what you can do from a loan applicant perspective to improve turnaround time. 6. Training – Where are all the training programs? Send in all the training programs! Worry, because they are not here. (Replace training programs with clowns and we might have an oldies song.) Can’t find the right people with the right talent in the marketplace? 7. Application Volume/Marketing/Relationship Management – You can design and execute the most efficient origination and portfolio management processes. But, without addressing client and application volume, what good are they? 8. Pricing/Yield on Portfolio – “We compete on service, not price.” We’ve heard this over and over again. In reality, the sales side always resorts to price as the final differentiator. Utilizing standardization and consistency can streamline your process and drive improved yields on your portfolio. 9. Management Metrics – How do I know that I am going in the right direction? Strategize, implement, execute, measure and repeat. Learn how to set your targets to provide meaningful bottom line results. 10. Operational Risk Management – Different from credit risk, operational risk and its management, operational risk management deals with what an institution should do to make sure it is not open to operational risk in the portfolio. Items totally in the control of the institution, if not executed properly, can cause significant loss. Well, that’s it. We encourage your feedback on this list. Let us know which of these ten topics is a priority for your institution and what specific areas in each topic you would like to see addressed.
I’m speculating a bit here, but I have a feeling that as the first wave of Red Flag rule examinations occurs, one of the potential perceived weak points in your program(s) may be your vendor relationships. Of particular note are collections agencies. Per the guidelines, “Section 114 applies to financial institutions and creditors.” Under the FCRA, the term “creditor” has the same meaning as in section 702 of the Equal Credit Opportunity Act (ECOA), 15 U.S.C. 1691a.15 ECOA defines “creditor” to include a person who arranges for the extension, renewal or continuation of credit, which in some cases could include third-party debt collectors. Therefore, the Agencies are not excluding third-party debt collectors from the scope of the final rules and “a financial institution or creditor is ultimately responsible for complying with the final rules and guidelines even if it outsources an activity to a third-party service provider.” A general rule of thumb in any examination process is to look closely at activities that are the most difficult for the examinee to control. Third-party relationship management certainly falls into this category. So, make sure your written and operational programs have procedures in place to ensure and regularly monitor appropriate Red Flag compliance — even when customer (or potential customer) activities occur outside your walls. Good luck!
By: Tom Hannagan Part 2 Return on Equity (ROE) ROE is the risk-adjusted profit divided by the equity amount associated with the loan in question. ROE = Risk-adjusted profit Equity amount of the loan There are two large advantages to using ROE. One, you can use it to compare profit performance across asset-based and non-asset-based products. This can’t be done with ROA – if there’s no “A”, you can’t create the ratio. This seems to be a crucial consideration if you are serious about cross-selling non-asset-based products (such as deposits and a long list of non-credit financial services) and if you are serious about being a truly client relationship oriented organization. Second, by using ROE you have the possibility of risk-adjusting the amount of equity used in the denominator of the calculation. Adjusting the equity amount based on risk, in a credible manner, creates risk-adjusted ROE, or what is referred to as risk adjusted return on capital (RAROC). The equity amount applied to the loan represents all of the remaining risk or unexpected loss (UL).instance that we did not account for in the steps that got us to the risk-adjusted profit result. RAROC, or risk-adjusted ROE, is a fully risk-adjusted representation of relative value. This level of risk-based performance measurement also has the advantage of relating pricing and relationship management activities to the bank’scapital management process. So far, we have covered several of the key parts of how risk-based pricing can work. In doing so, we have discussed how the various elements involved in pricing relate to the bank’s books and policies. The loan balance, rate and fee data relates to the banks actual general ledger amounts. The administrative costs are also derived from actual non-interest expenses. The cost of funds is aligned with the policies used in ALSO and in IRR management processes. The cost of credit risk is related to the bank’s credit and provisioning policies. The taxes are the bank’s actual average experience. And, for banks using ROE/RAROC, the equity allocation is related to the bank’s overall risk posture and its capital sufficiency policies. I stated earlier that “Risk-based pricing analysis is a product-level microcosm of risk-based bank performance”. It is that and more. In addition to pricing’s linkage to financial figures and results, risk-based pricing should also be a reflection of the bank’s most critical risk management policies and governance processes.
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With the National Automobile Dealers Association (NADA) Show set to kickoff later this week, it seemed fitting to explore how the shifting dynamics of the used vehicle market might impact dealers and buyers over the coming year. Shedding light on some of the registration and finance trends, as well as purchasing behaviors, can help dealers and manufacturers stay ahead of the curve. And just like that, the Special Report: Automotive Consumer Trends Report was born. As I was sifting through the data, one of the trends that stood out to me was the neck-and-neck race between Millennials and Gen X for supremacy in the used vehicle market. Five years ago, in 2019, Millennials were responsible for 33.3% of used retail registrations, followed by Gen X (29.5%) and Baby Boomers (26.8%). Since then, Baby Boomers have gradually fallen off, and Gen X continues to close the already minuscule gap. Through October 2024, Millennials accounted for 31.6%, while Gen X accounted for 30.4%. But trends can turn on a dime if the last year offers any indication. Over the last rolling 12 months (October 2023-October 2024), Gen X (31.4%) accounted for the majority of used vehicle registrations compared to Millennials (30.9%). Of course, the data is still close, and what 2025 holds is anyone’s guess, but understanding even the smallest changes in market share and consumer purchasing behaviors can help dealers and manufacturers adapt and navigate the road ahead. Although there are similarities between Millennials and Gen X, there are drastic differences, including motivations and preferences. Dealers and manufacturers should engage them on a generational level. What are they buying? Some of the data might not come as a surprise but it’s a good reminder that consumers are in different phases of life, meaning priorities change. Over the last rolling 12 months, Millennials over-indexed on used vans, accounting for more than one-third of registrations. Meanwhile, Gen X over-indexed on used trucks, making up nearly one-third of registrations, and Gen Z over-indexed on cars (accounting for 17.1% of used car registrations compared to 14.6% of overall used vehicle registrations). This isn’t surprising. Many Millennials have young families and may need extra space and functionality, while Gen Xers might prefer the versatility of the pickup truck—the ability to use it for work and personal use. On the other hand, Gen Zers are still early in their careers and gravitate towards the affordability and efficiency of smaller cars. Interestingly, although used electric vehicles only make up a small portion of used retail registrations (less than 1%), Millennials made up nearly 40% over the last rolling 12 months, followed by Gen X (32.2%) and Baby Boomers (15.8%). The market at a bird’s eye view Pulling back a bit on the used vehicle landscape, over the last rolling 12 months, CUVs/SUVs (38.9%) and cars (36.6%) accounted for the majority of used retail registrations. And nearly nine-in-ten used registrations were non-luxury vehicles. What’s more, ICE vehicles made up 88.5% of used retail registrations over the same period, while alternative-fuel vehicles (not including BEVs) made up 10.7% and electric vehicles made up 0.8%. At the finance level, we’re seeing the market shift ever so slightly. Since the beginning of the pandemic, one of the constant narratives in the industry has been the rising cost of owning a vehicle, both new and used. And while the average loan amount for a used non-luxury vehicle has gone up over the past five years, we’re seeing a gradual decline since 2022. In 2019, the average loan amount was $22,636 and spiked $29,983 in 2022. In 2024, the average loan amount reached $28,895. Much of the decline in average loan amounts can be attributed to the resurgence of new vehicle inventory, which has resulted in lower used values. With new leasing climbing over the past several quarters, we may see more late-model used inventory hit the market in the next few years, which will most certainly impact used financing. The used market moving forward Relying on historical data and trends can help dealers and manufacturers prepare and navigate the road ahead. Used vehicles will always fit the need for shoppers looking for their next vehicle; understanding some market trends will help ensure dealers and manufacturers can be at the forefront of helping those shoppers. For more information on the Special Report: Automotive Consumer Trends Report, visit Experian booth #627 at the NADA Show in New Orleans, January 23-26.
The automotive industry is constantly changing. Shifting consumer demands and preferences, as well as dynamic economic factors, make the need for data-driven insights more important than ever. As we head into the National Automobile Dealers Association (NADA) Show this week, we wanted to explore some of the trends in the used vehicle market in our Special Report: State of the Automotive Finance Market Report. Packed with valuable insights and the latest trends, we’ll take a deep dive into the multi-faceted used vehicle market and better understand how consumers are financing used vehicles. 9+ model years grow Although late-model vehicles tend to represent much of the used vehicle finance market, we were surprised by the gradual growth of 9+ model year (MY) vehicles. In 2019, 9+MY vehicles accounted for 26.6% of the used vehicle sales. Since then, we’ve seen year-over-year growth, culminating with 9+MY vehicles making up a little more than 30% of used vehicle sales in 2024. Perhaps more interesting though, is who is financing these vehicles. Five years ago, prime and super prime borrowers represented 42.5% of 9+MY vehicles, however, in 2024, those consumers accounted for nearly 54% of 9+MY originations. Among the more popular 9+MY segments, CUVs and SUVs comprised 36.9% of sales in 2024, up from 35.2% in 2023, while cars went from 44.3% to 42.9% year-over-year and pickup trucks decreased from 15.9% to 15.6%. 2024 highlights by used vehicle age group To get a better sense of the overall used market, the segments were broken down into three age groups—9+MY, 4-8MY, and current +3MY—and to no surprise, the finance attributes vary widely. While we’ve seen the return of new vehicle inventory drive used vehicle values lower, it could be a sign that consumers are continuing to seek out affordable options that fit their lifestyle. In fact, the average loan amount for a 9+MY vehicle was $19,376 in 2024, compared to $24,198 for a vehicle between 4-8 years old and $32,381 for +3MY vehicle. Plus, more than 55% of 9+MY vehicles have monthly payments under $400. That’s not an insignificant number for people shopping with the monthly payment in mind. In 2024, the average monthly payment for a used vehicle that falls under current+3MY was $608. Meanwhile, 4-8MY vehicles came in at an average monthly payment of $498, and 9+MY vehicles had a $431 monthly payment. Taking a deeper dive into average loan amounts based on specific vehicle types—as of 2024, current +3MY cars came in at $28,721, followed by CUVs/SUVs ($31,589) and pickup trucks ($40,618). As for 4-8MY vehicles, cars came in with a loan amount of $22,013, CUVs/SUVs were at $23,133, and pickup trucks at $31,114. Used 9+MY cars had a loan amount of $19,506, CUVs/SUVs came in at $17,350, and pickup trucks at $22,369. With interest rates remaining top of mind for most consumers as we’ve seen them increase in recent years, understanding the growth from 2019-2024 can give a holistic picture of how the market has shifted over time. For instance, the average interest rate for a used current+3MY vehicle was 8.0% in 2019 and grew to 10.2% in 2024, the average rate for a 4-8MY vehicle went from 10.3% to 12.9%, and the average rate for a 9+MY vehicle increased from 11.4% to 13.8% in the same time frame. Looking ahead to the used vehicle market It’s important for automotive professionals to understand and leverage the data of the used market as it can provide valuable insights into trending consumer behavior and pricing patterns. While we don’t exactly know where the market will stand in a few years—adapting strategies based on historical data and anticipating shifts can help professionals better prepare for both challenges and opportunities in the future. As used vehicles remain a staple piece of the automotive industry, making informed decisions and optimizing inventory management will ensure agility as the market continues to shift. For more information, visit us at the Experian booth (#627) during the NADA Show in New Orleans from January 23-26.
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typesetting, remaining essentially unchanged. It was popularised in the 1960s with the release of Letraset sheets containing Lorem Ipsum passages, and more recently with desktop publishing software like Aldus PageMaker including versions of Lorem Ipsum.