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We recently released our Q2 2020 State of the Automotive Finance Market report, and a few interesting trends emerged. And one that caught some attention was the continued decrease of subprime originations—those with a credit score between 300 and 600. At first glance, you may think that this means that subprime consumers are being locked out of the automotive finance market and unable to acquire necessary funds to purchase a vehicle, but that’s not the whole story. When looking at any data point in the automotive finance industry, it’s important that you have full context, and one of the easiest ways to do this is to look at a trendline. Then you can better understand whether the data point is part of a drastic shift or result of a slow progression. In the case of subprime originations, it’s the latter.   As seen in the chart above, subprime originations have been steadily decreasing since Q2 2015. Why? There isn’t just one driving factor, but it’s likely a result of a number of things. Increasing credit scores According to the Q2 2020 State of the Automotive Finance Market report, the average credit score for new and used vehicle loans has steadily increased over the years, coming in at 721 and 657, respectively, in Q2 2020. This is also reflected in Experian’s State of Credit report, which found that the average VantageScore® credit score was 682 in 2019—the highest average score seen since 2011. This shows that consumers are prioritizing their financial health and ensuring they’re responsible with their borrowing choices. Ultimately, this means that there could be fewer car shoppers who fall into the subprime tiers. Pandemic impacts on in-market shoppers In Q2 2020, the overall volume of originations, including subprime, saw a decrease. It wasn’t unexpected—Q2 was the first quarter of the year to see the full impact of the pandemic on shopping habits. Between stay-at-home orders and fluctuating financial situations, the reality is that subprime consumers may not be in-market for a vehicle right now. The situation continues to be dynamic, which is something that lenders and dealers need to keep in mind and define strategies accordingly. Loans are still available Another important component to keep in mind is that lending is still available for subprime consumers. Many experts have tried to correlate our current economic situation to that of the Great Recession, but the causes are so drastically different that it’s hard to compare. In 2007 and 2008, subprime lending comprised a larger portion of lenders’ portfolios, and we did see lending become harder to acquire for subprime borrowers, as lenders didn’t want to take on the additional risk. But that’s not what we’re seeing now. Loans are still available from a variety of lenders, which is further proof that subprime consumers aren’t being locked out of lending. In fact, subprime loans for used vehicles saw growth among independent dealers this quarter, from 36.79% in Q2 2019 to 38.84% in Q2 2020. Data is critical to make informed decisions, especially in our current environment. As the pandemic is unlike anything we’ve seen before, dealers and lenders need to stay close to the trends to better understand the activity in the industry and continue to steer toward recovery. To view the full Q2 2020 State of the Automotive Finance Market report, click here.

This is the fourth in a series of blog posts highlighting optimization, artificial intelligence, predictive analytics, and decisioning for lending operations in times of extreme uncertainty. The first post dealt with optimization under uncertainty, the second with predicting consumer payment behavior, and the third with validating consumer credit scores. This post describes some specific Experian solutions that are especially timely for lenders strategizing their response to the COVID Recession. Will the US economy recover from the pandemic recession?  Certainly yes. When will the economy recover? There is a lot more uncertainty around that question. Many people are encouraged by positive indicators, such as the initial rebound of the stock market, a return of many of the jobs lost at the beginning of the pandemic, and a significant increase in housing starts. August’s retail spending and homebuilder confidence are very encouraging economic indicators. Other experts doubt that the “V-shaped” recovery can survive flare-ups of the virus in various parts of the US and the world, and are calling for a “W-shaped” recovery.  Employment indicators are alarming: many people remain out of work, some job losses are permanent, and there are more initial jobless claims each week now than at the height of the Great Recession. Serious hurdles to economic recovery may remain until a vaccine is widely available: childcare, urban transportation, and global trade, for example. I’m encouraged by the resilience of many of our country’s consumer lenders. They are generally responding well to these challenges. If past recessions are a guide, some lenders will not survive these turbulent times. This time, many lenders—whether or not they have already adopted the CECL accounting standards—have been increasing allowances for their anticipated credit losses. At least one rating agency believes major banks are prepared to absorb those losses from earnings.  The lenders who are most prepared for the eventual recovery will be those that make good decisions during these volatile times and take action to put themselves in the best position in anticipation of the recovery that will certainly follow. The best lenders are making smart investments now to be prepared to capitalize on future opportunities. Experian’s analytics and consulting experts are continuously improving our suite of solutions that help consumer lenders and others assess consumer behavior and respond quickly to the rapidly fluctuating market conditions as well as changing regulations and credit reporting practices. Our newly announced Economic Response and Recovery Suite includes the ABCD’s that lenders need to be resilient and competitive now and to prepare to thrive during the eventual recovery: A – Analytics. As I’ve written about in prior blog posts, data is a prerequisite to making good business decisions, but data alone is not enough. To make wise, insightful decisions, lenders need to use the most appropriate analytical techniques, whether that means more meaningful attributes, more predictive and compliant credit scores, more accurate and defensible loss forecasting solutions, or optimization systems that help develop strategies in a world where budgets, regulations, and other constraints are changing. For example, Experian has released a set of Spotlight 2020 Attributes that help consumer lenders create a positive experience for customers who have received an accommodation during the pandemic. In many cases motivated by the new race to improve customer experience online, and in other cases as a reaction to new and creative fraud schemes, some clients are using this period as an opportunity to explore or deploy ethical and explainable Artificial Intelligence. B – Business Intelligence. Credit bureaus like Experian are uniquely situated to understand the impact of the COVID recession on America’s consumers. With impact reports, dashboards, and custom business intelligence solutions, lenders are working during the recession to gain an even better understanding of their current and prospective customers. We’re helping many of them to proactively help consumers when they need it most. For example, lenders have turned to us to understand their customer’s payment hierarchy—which bills they pay first when times are tough. Our free COVID-19 US Business Risk Index helps make lending options available to the businesses who need them most. And we’ve armed lenders with recommendations for which of our pre-existing attributes and scores are most helpful during trying times. Additional reporting tools such as the Auto Market Tracker, Ascend Market Insights Dashboard, and the weekly economic update video provide businesses with information on new market trends—information that helps them respond during the recession and promises to help them grow during the eventual recovery. C – Consulting. It’s good to turn data into information and information into insight, but how do these lenders incorporate these insights in their business strategies? Lenders and other businesses have been turning to Experian’s analytics and Advisory services consultants to unlock the information hidden in credit and other data sources—finding ways to make their business processes more efficient and more effective while developing quick response plans and more long-term recovery strategies. D – Delivery.  Decision science is the practice of using advanced analytics, artificial intelligence, and other techniques to determine the best decision based on available data and resources. But putting those decisions into action can be a challenge. (Organizations like IBM and Gartner estimate that a great majority of data science projects are never put into production.) Experian technologies—from our analytics platform to our attribute integration and decision management solutions ensure that data-driven decisions can be quickly implemented to make a real difference. Treating each customer optimally has a number of benefits—whether you are trying to responsibly grow your portfolio, reduce credit losses and allowances, control servicing costs, or simply staying in compliance during dynamic times. In the age of COVID, IT departments have placed increased priority on agility, security, customer experience, and cost control, and appreciate cloud-first approach to deploying analytics. It’s too early to know how long this period of extreme uncertainty will last. But one thing is certain: it will come to an end, and the economy will recover someday. I predict that many of the companies that make the best use of data now will be the ones who do the best during the recovery. To hear more ways your organization can navigate this downturn and the recovery to follow, please watch our on-demand webinar and check out our Economic Response and Recovery Suite. Watch the Webinar

Since the start of the COVID-19 health crisis, gross domestic product (GDP) has continued to fall in the U.S. In fact, the GDP collapsed at a 32.9% annualized rate last quarter, which is the deepest decline since 1947. But as some states throughout the U.S. begin to relax their stay-at-home orders and start to reopen businesses, economists are taking note of how this will affect the nation’s recovery as a whole. When it comes to tracking the nation’s economic recovery, economists and policymakers need to account for all of the factors that will influence the outcome. This includes tracking the performance of individual states and understanding each state’s trajectory and recovery prospects. There are many factors that will impact each state’s trajectory for recovery. One example, in particular, can be seen in a state’s preparedness level and rainy day fund that’s set aside for emergencies. At the onset of the pandemic, many states were unprepared for the financial crisis. The Government Finance Officers Association recommends that states set aside at least two months of operating expenses in their rainy day funds – or roughly 16% of their general fund. However, although some states had set aside some budget to prepare for a recession, it was simply not enough. Only a few states were able to fulfill this requirement. Other factors that will impact each state’s recovery include: the efficiency of its unemployment program, state lockdown measures, and the concentration of jobs in vulnerable industries. Our new white paper, featuring key insights from Joseph Mayans, Principal Economist with Advantage Economics, provides a deep dive on: The economic landscape at the onset of the pandemic Statewide discrepancies for unemployment programs, lockdown measures, and labor markets Underlying factors that determine a state’s recovery prospects Why tracking state-level economies is critical for national recovery Listen in as he describes the importance of having a different perspective when tracking the national economy and download the white paper for greater insights. Download White Paper Now