The Truth About Cars » Finance The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. Sun, 27 Jul 2014 20:45:49 +0000 en-US hourly 1 The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars no The Truth About Cars (The Truth About Cars) 2006-2009 The Truth About Cars The Truth About Cars is dedicated to providing candid, unbiased automobile reviews and the latest in auto industry news. The Truth About Cars » Finance Outstanding Subprime Loan Balances Hit 8-Year Highs Fri, 25 Jul 2014 14:24:55 +0000 445x350x20subprime-blog480-445x350.png.pagespeed.ic.uIhvuYIPjL

Buried in a feel good story about auto loans comes the news that subprime auto loans are at levels that we haven’t seen in nearly a decade.

Citing data from Equifax, Automotive News reports

The credit bureau also noted originations and total outstanding balances for subprime auto loans — defined as loans to customers with credit scores of 640 or below — also hit recent highs.

Equifax said subprime originations were 2.6 million units year to date through April, representing 32 percent of all auto loan originations. The total outstanding balance of subprime auto loans was $46.2 billion — the highest in eight years, the credit bureau said.

Don’t expect that 32 percent figure to let up any time soon. The glut of credit available for auto financing - driven by securitized auto loans sold as investment grade instruments – is going to keep the auto financing business alive and kicking for the foreseeable future.

But don’t worry, guys. This time, it’s different.

]]> 103 OCC Warns Of Auto Lending Risk Thu, 03 Jul 2014 14:48:24 +0000 20140701_auto2

The Office of the Comptroller of the Currency, a government entity that regulates and supervises banks, is sounding the alarm regarding risks related to auto loans.

In its semi-annual report released earlier this week, the OCC warned about the usual factors that TTAC has been discussing for some time: rising loan terms, an increased focus on monthly payments and deteriorating underwriting standards

Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates,
and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly
monthly-payment driven, with loan terms and LTV advance rates easing to make financing more
broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs
of increasing risk are evident. Average LTV rates for both new and used vehicles are above
100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on
products such as extended warranties, credit life insurance, and aftermarket accessories into the

The average loss per vehicle has risen substantially in the past two years, an indication of how longer
terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender
types over the last year. These early signs of easing terms and increasing risk are
noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure
that banks manage growth and exposure prudently.

The OCC report did not single out subprime loans specifically, but instead focused on the entire auto loan sector. The full report is available here.

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Chevrolet Offers 14.7% APR Financing To “Well Qualified” Corvette Buyers Fri, 27 Jun 2014 10:40:41 +0000 download

While perusing Chevy’s website to see if there is any color of the 2014 Corvette that actually makes the car look halfway decent, I came across the financing offer pictured above. And, no, I did not enter any personal info that would lead GM’s captive Ally Financial (or whoever the hell GMAC is now) to deem me only eligible for such a high interest rate. Just what is going on here?

A quick look at other Chevrolet vehicles on the site show financing offers of 3.9% to 4.9% APR. These rates may be subvented, or bought down by the manufacturer to help move slow-selling iron, though with car loan rates being under 2.0% by independent banks in much of the US, one has to wonder how much Ally is being charged for their money. Even if they are paying a sky-high 4.0%, it is a mystery why they would advertise a 14.7% loan on the Stingray, rather than, say 6.0% or 7.0%. Ally and the dealers would make a fortune on this 72-month loan but I don’t think they will get any takers because unlike buying the Corvette itself, with dealer price gouging running rampant, consumers actually have many choices when it comes to financing.

I can only conclude that either this offer is in error (maybe even their marketing folks are slammed by the recall crisis) or Ally Financial is simply not interested in $50,000+ loans.

What say you?


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Tesla Is World’s Most Important Auto Maker, Says Tesla Debt Underwriter Mon, 23 Jun 2014 11:00:59 +0000 550x365xtesla-model-s-logo-550x365.jpg.pagespeed.ic.C2rTVvi0LG

A recent research note from Morgan Stanley dubbed Tesla the “world’s most important auto maker”, on account of its innovation in the area of electric vehicles, autonomous cars and connectivity. Could there be another reason for such enthusiasm?

Observers will remember that earlier this year, Morgan Stanley raised its share price for Tesla to $320 per share, amid talk of Tesla disrupting the energy sector with is new battery-producing gigafactory. One day after that, Tesla announced a $1.6 billion debt offering underwritten by…Morgan Stanley.

In the case of the $320 share price target, analyst Adam Jonas was wildly optimistic about Tesla, even suggesting that the company could help bring about a “utopian society” by 2026. Jonas is also the same analyst labeling Tesla as the most important car maker…in the wuurrlld.

Coincdence? A massive breach of the Chinese Wall? Or a symptom of a press corp that is near-universal in its reluctance to “disrupt” Tesla’s brilliant PR narrative (hip, successful entrepeneur from Silcion Valley looking to topple one of Industrial America’s most sclerotic, antiquated industries)? Likely a combination of all three. Or, tell me why I’m wrong in the comments.



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Captives Dominating Auto Financing As Banks Resort To Risky Loans Thu, 19 Jun 2014 15:27:47 +0000 logo_toyota_credit_a

OEM captive financing arms are increasing their share of new car loans, with banks resorting to underwriting riskier loans in the used car market and to less credit-worthy buyers.

Citing data from credit agency Experian, Reuters reports that the captive arms of Ford, Honda and Toyota made up half of all new car loans in Q1 of 2014, up from 37 percent in the prior year. Buoyed by low interest rates, which allow for greater incentives, captive financing arms can offer better rates and other subsidies to consumers, enabling them to get in a new car more easily, while generating stronger sales numbers for the OEM.

At the same time, low interest rates have also created an environment where fixed income yields are low, causing investors to turn towards securities backed by auto loans, which can provide greater yields than other fixed income investments. This in turn is said to be fueling the supply of available credit for auto loans.

According to the article, certain banks (Ally and US Bancorp were among the examples cited) have turned towards financing used cars and buyers with subprime credit scores as a way of competing in the lucrative auto financing market. US Bancorp now makes 15 percent of its auto loans to buyers with subprime scores, compared to zero in previous years. Although it only represents one data point regarding financial institutions, the Reuters piece also claims that captives are increasing their share of subprime loans, while offering increasingly longer loan terms – in line with previous reports regarding declining underwriting standards and lengthier loans.

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Loan Terms, Monthly Payments Hit Record Highs In 2014 Mon, 02 Jun 2014 17:05:57 +0000 MK-CC261A_CarAd_G_20130408211241

The easy-credit train keeps on rolling in the auto world, with credit rating agency Experian reporting new records in key auto finance metrics.

Loan terms for new vehicles stretched to 66 months in Q1 2014, up from 65 months a year earlier. Loan terms for used cars grew up 61 months on average, up from 60 months one year prior. The average monthly payment for a new car was up to $474 per month, a 3.3 percent increase year over year, while used car payments ticked up 1.1 percent. The actual amount financed was up to $27,612 for a new car, up 3.6 percent, while for used cars, the amount was $17,927, a 2.3 percent increased.

Experian’s Melinda Zabritski was candid about the cause of the record debt that Americans are now taking on, stating

“As the cost of purchasing a new vehicle continues to rise, consumers clearly are stretching the loan term to help lower monthly payments, keeping them at a manageable level,”

Remember, you heard it here first.

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No Credit Score? Show Your Cable Bill, Get Approved Wed, 14 May 2014 11:15:37 +0000 450x304xavenger1-450x304.jpg.pagespeed.ic.pDSlDpswsq

New technology is allowing buyers with no credit score – due to a lack of credit history or a personal bankruptcy – to get vehicle financing via examination of documents like the payment history of their cable or cell phone bill.

Automotive News reports that companies like Equifax can provide information for customers who have been diligent about paying their bills, even if they have not yet tapped traditional lines of credit.

Lou Loquasto, who runs auto finance for Equifax, told AN

“One thing that Equifax and others have is nontraditional credit. Equifax can tell a lender, ‘Hey, this customer has a $200 cell phone bill, they’ve got $400 in utilities, they’ve got $100 in cable, and they’ve had this for four years. They’ve paid perfect.”

Of course, there’s also the question of whether this initiative is just a way to issue more subprime loans, which can then be securitized and sold to yield-hungry investors. That’s usually been the big fear with extending credit for auto loans, but an Equifax economist told AN that there are other ways of looking at data over a longer timeline

“They’re not subprime individuals, they just have a subprime credit rating…There’s a lot of connotations with that, and I think it’s wrong, particularly after what we’ve seen with the recession, where a lot of people fell on hard times. Bad things happen to good people, and a lot of it is out of their control.”

A TTAC source at an OEM captive finance arm concurred with this assessment, telling us that they have spent a fair amount of effort in retaining customers who once leased their vehicles, but had fallen on hard times during the recession. Their less than stellar credit scores were the result of circumstances, rather than delinquent payment histories, and getting them back into a new lease was a goal for the captive.

Even so, a healthy dose of skepticism is required when taking a look at subprime auto loans. A February report by RatingsDirect shows that both losses and delinquencies are on the rise, while the market remains hungry for these types of loans. As a result, underwriting standards are changing as more and more consumers are being approved – including many who might not get financing in the first place. All of this adds up to a riskier loan pool, and the rise in losses and delinquent payments isn’t expected to fall any time soon.


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Tesla Follows The Money, Launches Financing Arm Tue, 08 Apr 2014 17:29:12 +0000 550x365xtesla-model-s-logo-550x365.jpg.pagespeed.ic.C2rTVvi0LG

After setting up a retail lease program, Tesla is now moving closer towards a full-fledged captive financing arm, by launching a financing unit for corporate leases.

According to a statement released by Tesla,

The Tesla business lease is available through Tesla Finance, a subsidiary we’ve set up especially to offer this new product to business customers. The lease program completes a suite of products, including the Resale Value Guarantee and loans from our banking partners, that covers a comprehensive range of financing needs for Model S customers.

While Tesla touts the simplicity of the lease, which contains a simple agreement that can be completed electronically, the real news is the establishment of Tesla Finance. The business lease program could very well be a stepping stone to a full-blown captive financing arm for Tesla, which would enable them to expand sales of their future products to a wider customer base, as well as providing a new revenue channel for their auto manufacturing business.


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Tesla’s Latest Filing: The Good, The Bad And The EPS Thu, 27 Feb 2014 12:00:18 +0000 nikola-tesla

Tesla’s shares roared to over $250 on Tuesday February 5th, amid release of financial results. Tesla’s 8-K regulatory filing highlights a record 6,892 Model S’s sold, non-GAAP earnings of $46M ($0.33 on a per share basis), and projected vehicle delivery growth of 55% among others. The shares are currently trading just above the $260 during after-hours trading.

Here we find ourselves at yet another quarterly earnings report, and yet again when looking at the GAAP figures, Tesla posts a net loss of about $74 million, and an EPS of -$0.62. Yet another year of losses for Tesla, but the punch line for accounting stiffs like myself seems to be “who cares!”

From this time last year Tesla’s share price has grown over 600% (this time last year, it was trading at $34.38 versus $248 today).[1] For those of you who have consulted my past work for free investment advice in the past, I apologize, but I am quickly learning that a business degree doesn’t turn you into Jordan Belfort overnight. To capture the highlights of Tesla’s recent results I present you with the good, the bad, and the ugly.

The Good

Tesla exhibited strong quarterly sales growth with revenues up by 43%. An even more impressive figure is the fact that Tesla’s revenue grew by 387% from 2012 to 2013 which was a result of the company’s ability to deliver 22,477 vehicles throughout the year.

Tesla was also able to vastly improve its gross margin. In 2012 the company’s gross margin was just over 7%. In 2013 the margin had improved to almost 23%. By contrast, Porsche’s gross margin in 2012 was 37%.[2] Continued growth in gross margin will be a key factor moving forward to improve profitability.

Strong cash flows from operating activities amount to roughly $258 million. This is the first year for Tesla in which it has exhibited positive cash flow from its operating activities. Tesla also has a large cash balance of over $845 million, largely driven from the proceeds of debt and equity financing.

The Bad (aka the not so good)

While I would be hard pressed to call a net loss of $74 million good, there is still some upside when comparing the loss figure to last year’s loss of $396 million. The 82% reduction in net loss and continued upward trend is a definite positive to Tesla’s less than stellar earnings. Sales growth and increased margins will only help to bring Tesla into the black in future.

However, it still seems that operating expenses are getting the best of the company. While in 2012, total operating expenses amounted to 103% of total revenues, they are only 26% in 2013. Despite the reduction, with a gross profit of only $456 million, the related operating expense figure of $517 million is gobbling up what remains of the gross profit. Selling General and Admin expenses increased by 90%, while Research and Development expenses decreased from $274 million to $232 million. As a high growth company that relies on continued innovation for success, it will be interesting to see how the company will manage R&D expenditure in the future. Tesla could find itself in a Catch-22 situation whereby revenues are dependent on new technology, but profits cannot be delivered without a decrease in its cost structure, which includes spending on this precious R&D.

The Ugly

The ugly fact remains that Tesla’s earnings per share is negative $0.62. Based on Tesla’s February 25th closing stock price, its Price to Earnings multiple is negative 400. Simply put, investors are willing to pay $400 for every $1 in losses the company incurs. If I were to get a message in my inbox that told me that a Nigerian Prince was willing to pay me $400 for every dollar of student debt to my name, it would quickly become part of my Happy Hour story-telling repertoire.

Now I understand that the basic fundamentals of valuation are based on a company’s future earnings, and not their past, but I wouldn’t put my precious dollars into a company before I saw some concrete return.


NB: All calculations completed using Tesla’s 8-K and 10K figures

[2] Calculated using: pg. 131

Note: Article was ammended due to the reporter mixing the R&D and SG&A numbers.

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In $4.35 Billion Deal, Fiat Will Acquire Rest of Chrysler from UAW Retiree Health Care Trust Thu, 02 Jan 2014 11:00:41 +0000 marchionne

Fiat SpA said on Wednesday that it has signed an agreement to buy the remaining 41.5% stake in Chrysler that it does not own from the United Auto Worker’s retiree health-care trust, known as VEBA, for $3.65 billion in cash up front and another $700 million after the deal is completed. The agreement will allow Fiat and Chrysler CEO Sergio Marchionne to realize his dream of creating a global automotive group out of the two companies. The joint automaker would be the 7th largest in the world.

Fiat and the trust have been negotiating over the stock’s value for more than a year. Part of that sparring included the VEBA exercising its option to force an initial public offering of Chrysler stock to determine a true market value. An IPO would have made it more difficult for Marchionne to consolidate the two firms but now it’s a moot point, as is the lawsuit filed by Fiat to determine a share price.

According to the terms of the deal, Fiat will put up $1.75 billion and Chrysler $1.9 billion, both in cash, to buy out the trust, with the remaining $700 million to be paid out by Chrysler in equal annual payments over four years. The contracts will be signed and the deal closed on or before January 20, 2014. Because some of the cash is coming from Chrysler, Fiat will not have to make any capital increase through a rights issue.

Marchionne needs Chrysler’s cash and current profitability to prop up Fiat, suffering because their core market, Europe, is still in the doldrums, but he can’t spend Chrysler’s cash on Fiat’s operations without a formal merger. Chrysler booked $464 million in profits in the third quarter of 2013 on strong sales of the Ram pickup and Jeep Grand Cherokee in North America. That was the Auburn Hills based automaker’s ninth straight quarterly profit. Fiat’s share of Chrysler’s profits were $260 million and without them Fiat would have lost $340 million for the quarter.

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Hammer Time: Financial Hypnosis On A Per Mile Basis Tue, 10 Dec 2013 17:16:15 +0000 ttac

The three year lease.

It entrances and traps the most spellbound car aficionados into a monthly payment that keeps them at the altar of the car payment.

Is that a bad thing? Well, depends on the way you want to look at it. What can’t be argued is that both sides get what they want, and after three years, that customer can choose to stay with the manufacturer or go somewhere else. To me at least, that seems like a fair bargain.

But what if the automaker could offer a better deal? For both parties?

Per mile cost of ownership models are still in their infancy. Yes, there are tacky penalties that are added to most lease agreements in the U.S. and elsewhere. Other countries have also developed unique pricing models, such as in Israel. Where car buyers (in the absolute loosest meaning of that phrase, since most cars are leased) get to own a car for a specific period of time, and then skip the last ‘ballon payment’ and give it back to the dealer who initially sold it.

What I’m thinking is a bit simpler than that.

You have a sliding scale. New cars would start off on the same type of leases that exist now, except they would be marketed on a per mile basis.

Lease a Corolla for only 25 cents a mile! Blow your financial brains out on a BMW for only 59 cents a mile! There would be minimal mileage requirement, say you have to pay for at least 10,000 miles a year, and all the other usual small print that comes with a typical lease.

Except it wouldn’t be a lease. You would be renting it and have an automatic draw done on your credit/debit card on a weekly basis. No hassle. No haggle. Just a flat rate for as long as you want to own drive the car.

Sounds a lot like the past standard rate plans we have with cell phones? Well, sure, but a driver can do a lot more damage to a car than a cell phone. The manufacturers want to protect their own assets, and auto insurance companies don’t make allowances for the lead foots and pigpens of the modern marketplace.

So with that in mind I want to immediately inform you that there will be a few (cough! cough!) restrictions and opportunities that would come with the contract.

Let’s start with the good news. Low cost and no obligation.  Insurance, maintenance, taxes… everything except the source of propulsion would be paid for with your per mile rental price. If either you or the automaker are unsatisfied at any time, simply make the necessary arrangements and move onward with your lives. No debt. No worries.

If you don’t like the way the car drives, looks, steers, looks or smells, you can throw that smelly fish back in the sea of automotive inventory. Of course that luxury would come at a premium on your per mile price. But the actuarial scientists will figure out a way to make it all work for you.

They may also ask for a few healthy modifications to your driving style.

For starters, the speed limit IS your limit. There will be a little warning light that will post on the dashboard for excessive speeds.

During such times your car may be ‘throttled’ to limit the excessive acceleration. Sounds Draconian? Cell phone providers have been doing it to you for quite a while now.

You could press the emergency button to override this feature, which would immediately notify the nearest law enforcement officers that you need to proceed to the nearest medical center. As a public service you will be escorted. and of course, a false alarm associated with abuse of the manufacturers property will result in immediate loss of use of said property, speeding fines, public endangerment fines, a bill for unwarranted use of public services, remedial driving classes, community service, and an uncomfortable visit with the dour men who wear black robes.

Then again, what’s there to worry about?  You, Mr. Customer, aren’t a lawbreaker. So obviously you won’t have to worry about any of this.  As a courtesy, let me inform you of a few other things you won’t have to worry about.

Certain irrational driving behaviors that can damage the vehicle, such as shifting from reverse to drive, will first be met with a warning. Then a fine. Then the disabling of the vehicle with nearby officers en route while a driver training video blares forth on the dashboard.

It may be this one for distracted driving.

Click here to view the embedded video.

This one for excessive speed. (Note: NSFW)

Click here to view the embedded video.

Or even this one in the case of an odd vehicular malfunction.

Click here to view the embedded video.

Long story short, there will be no hooning with these rented rides. No texting. Hell, you better be wearing gloves tighter than OJ’s to make sure it stays in clean condition as well. The low cost of the rental is entirely dependent on a high resale value, which means you must walk that line you agreed to when you signed on the dotted line.

What else? Seat belt? Emergency brake? Mirrors? Turn that phone off!

And a 5 cent per mile credit for good behavior… at least for now…

Here’s the brutal truth folks. I know that there are a few (cough!) exaggerations with this model. And yet, if the marketplace eventually moves forward with driverless vehicles, virtually everything I mentioned above may become a reality for millions of people who see cars as little more than transportation modules.

In otherwords, the majority of today’s automotive market.

Most consumers don’t want to own their cars. They don’t want the debt of a consumer loan. They don’t want to pay lump sums in taxes, insurance and a long line of licensing fees. And they certainly don’t want to be caretakers of a piece of property that they don’t even know how to maintain.

Some of these consumers want low cost while others want excitement. Not so much ‘driving’ excitement, but ‘fashion’ excitement. They want to be seen and be seen in the hottest fashion accessory, while the other folks just go about their business in a comfortable minimal cost module.

Enthusiasts, like you and me, are a declining market. I don’t believe that this is the case because enthusiasts aren’t willing to pay a direct premium for the joy of their ride. Miatas, Vettes, Mustangs, Camaros and the FR-S all call out to our joy of driving. The manufacturers aren’t the ones letting us down here.

What’s killing the enthusiast is the cost of that fun in the form of revenuing schemes by local and state governments, higher taxes and fees, substantial higher insurance costs, and that hidden tax that comes with getting nailed on the open road. This is especially true for the young adult enthusiast. One bout of responsible driving at a high rate of speed for them can result in a four figure blow to their bottom line. Most young people can’t afford that, and once they get stung with that venom, many will opt for the low cost lemming model.

I think in the future a lot of manufacturers and third parties will embrace a permanent rental model. The car ‘note’ will be sold to a third party in much the same way as collateralized debt obligations and your own car note are already sold to third parties. They will be able to handicap you based on your past driving behaviors, and a trade will be made.

Your freedom, for less money.

I know most of you wouldn’t make that trade. It’s the ones who have other priorities in their life that I’m not too sure about.

Would it be a bad thing?



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The Continuing Saga Of The Consumer Financial Protection Bureau And Dealer Interest Rate Markup On Car Loans Wed, 04 Dec 2013 14:00:09 +0000 Click here to view the embedded video.

It is no surprise that U.S. automobile dealers have been in a tizzy the past few months as the Consumer Financial Protection Bureau (CFPB) has been rattling its swords threatening to ban them from marking up interest rates on car loans, a sacred profit center for dealerships. Using methodology that assumes a person’s race can be determined by their last name and their gender by their first name, the CFPB claims that certain protected classes are being discriminated against in terms of being charged higher interest rates and thus the practice must stop.

What is a surprise is that Congress is equally annoyed with the agency’s strategy and lack of transparency, and recently announced new regulations limiting their power. No matter the outcome, there is a real possibility that the unintended consequences of the CFPB’s actions will be higher car loan rates for you.

The three-year old CFPB faces several obstacles to reach their objective. The agency has been unable to produce a single example of a consumer complaint about this issue. They also have no authority over automobile dealerships, where cases of discrimination might exist, so their plan is to punish the banks for the actions of their dealers. Bear in my mind that lenders, be it a captive like Ford Motor Credit or a non-captive like Wells Fargo, never see the client, do not ask questions about race on credit applications, and pointedly do not ask for a copy of the buyer’s driver’s license until after the deal is done. Nonetheless, the agency has been demanding that banks produce data so they may study the customers’ first and last names and the rates they were charged.

Until three weeks ago the CFPB steadfastly refused to answer banks’ and Congress’s queries asking them to produce specifics of their strategy to uncover cases of discrimination. They were then summoned to a Senate hearing, where the CFPB chairman pledged to be more open and accountable. The House Financial Services Committee was not impressed and they imposed new measures on the regulator to insure they behave.

The CFPB then proposed an alternative method of compensating dealers: banks could pay them a flat fee for arranging consumers’ car loans as a substitute for rate participation. The problem with that scenario is that if Bank A approves a customer at 2.9% paying the dealer a $500 flat fee and Bank B approves the same customer at 3.9% with a $750 flat fee, the dealer will offer the latter to buyers. At which point the CFPB can produce another study and be outraged that people with certain first and last names were charged a higher rate.

Click here to view the embedded video.

The CFPB is not alone in their quest. The Department of Justice recently successfully prosecuted the type of case the CFPB is desperately trying to find. They fined a Korean-owned Los Angeles bank and a Korean-owned Mitsubishi dealership for discrimination for their charging Hispanics consumers higher interest rates than non-Hispanics. The CFPB has not acknowledged this case as it is not the type of racial discrimination they are seeking.  Let’s face it, a Chrysler Capital or U.S. Bank will be perceived as “white” and if their dealers are charged with discriminating against minorities, they will be shamed by the media and the CFPB will be the hero.

The State of California – always irritated when the Feds find a business practice to regulate before they do – just announced a 2014 ballot initiative to ban interest rate markup by automobile dealers. The proposal includes other new dealer regulations, one of which prohibits dealerships from hiring individuals who have been convicted of identity theft. No dealer in their right mind would knowingly employ such a person but the strategy is to have it on the ballot so voters can think, “Damn car dealers, they must stop hiring convicted felons!” Like the Feds, Sacramento legislators know anything they can do to discredit automobile dealers will be cheered by the press and the populace.

So our question to the Best And The Brightest is this: if you are in the business of profiting by buying a product at wholesale and selling it at retail – and an interest rate is a product – should the government have the power to stop you from doing just that?

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Off-Lease Boom Means Major Conflict For All Automakers Tue, 03 Dec 2013 15:57:13 +0000 2013 Hyundai Elantra GT Exterior
The Great Recession has given us so much since it began five years ago with the fall of Lehman Brothers and Washington Mutual, from underwater mortgages and high unemployment, to bailouts of the financial and automotive manufacturing sectors and credit freezes.

Regarding the last item, a byproduct from said freeze will flood automakers with the potential to retain and steal customers when more and more leases draw to completion in the next year.

Leasing has come back into vogue as of late due to low interest rates, easy credit terms and improved residuals, allowing automakers to keep more of their profits while giving the lessee lower payments. In turn, 23 percent of new-car registrations through September 2013 are through leases, a number that should rise as wave upon wave of lease customers return to the showroom for the latest and greatest.

This fact is not lost on any of the automakers wanting to bag and tag as many customers from the booming off-lease salmon run as possible. Case in point: GM, who rolled out their lease-conquest program nationwide last month, offering $500 through January 2, 2014 to non-GM customers to lease most of the Chevrolet and all of the GMC lineup. Meanwhile, Hyundai will offer more early-termination deals so that their customer base never even make it to the run.

And how long will this run last? ALG Inc. president Larry Dominque says automakers should have plenty of fish to catch until 2017, with those whose customers are loyal will focus on retaining their stocks while those who ready to fill their coolers will be aggressive with their bait, such as lower payments and nicer incentives.

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Generation Why: No Job, No Money, No Car Thu, 24 Oct 2013 17:27:09 +0000 Teen-graph

“Too Poor To Drive”. This is the gut level conclusion that’s been propagated in “Generation Why” since January, 2012, long before the theory gained currency in the broader automotive world. In the nearly two years since, the “kids aren’t interested in cars because of technology/the environment/urbanization” meme has held up tenaciously – and it’s not entirely false.


The main issue has been a lack of data to support our argument. Hard data costs lots of time and money, something that is precious in the world of automotive reporting. On the other hand, there are plenty of people who really want the alternate theory to be true, and they’re happy to help their cause with lots of alarming but inaccurate articles.

Juan Barnett of DC Auto Geek has analyzed a new study by the IIHS, which looks at unemployment figures, the number of insured teenage drivers and graduated licensing laws, shows that unemployment for both teens and their parents, is by far the biggest factor in preventing younger people from driving. Without the resources for a car, insurance and gas, young people don’t have much hope getting behind the wheel or any car, let alone their own car.




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Mainstream Press Finally Worried About Cheap Car Loans Mon, 14 Oct 2013 16:00:41 +0000 Subprime-Auto-Lenders

Months after TTAC started to relentlessly bleat about the glut of money flowing into the auto loan sector, the mainstream media is finally taking notice. Automotive News is finally expressing some worry over the factors that we’ve been discussing for some time: car loan terms are getting longer (to help keep payments low), subprime lending is increasing and an expected rise in interest rates could put an end to the new car market’s exuberant performance.


This phenomenon is being primarily driven by low-interest rates, which allow consumers to finance vehicles cheaply, even as transaction prices creep upwards. Meanwhile, financial institutions are happy to provide the loans, particularly to those with poor credit, since they can be securitized and sold off to fixed income clients looking to get decent yields in the same low-interest environment.

The topic of auto financing has been rather divisive, to say the least, and we at TTAC remain bearish on the outcome, though the likelihood of any systemic risk seems to be diminished as OEMs choose to expand existing factories rather than build new ones. But we’re hardly alone anymore.

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GM Canada CEO Sounds Alarm Over Cheap Loans Wed, 09 Oct 2013 16:05:24 +0000 kevin_williams.jpg.size.xxlarge.letterbox

GM Canada’s CEO is expressing apprehension over the way cheap auto loans are fueling vehicle sales in Canada.

In an interview with The Globe and Mail, CEO Kevin Williams said

“Macroeconomically, there’s some reason for optimism [but] nobody in the industry had the industry pegged at this number,” Mr. Williams said. “Nobody had the industry running this high.”

2013 is expected to see a record 1.73 million new vehicles, but much of the growth seems to be stemming from long-term loans designed to keep payments low.  According to a JD Power study cited by the Globe, 64 percent of Canadian car loans have terms lasting for 6 years or longer.

Consumer debt has been a controversial topic in Canada, with Canadians taking on accumulating record debt amid low interest rates and easily available credit. But the concern over easy credit in the auto sector is unlikely to become a systemic risk, even as interest rate hikes loom on the horizon.

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MQB Costs May Put The Squeeze On VW Profit Goals Fri, 20 Sep 2013 14:30:59 +0000 volkswagen-unveils-mqb-platform-42306-7-450x229

A German business publication published a report this week claiming that Volkswagen won’t meet its 2015 profit goals, in part due to the costs associated with the new MQB modular platform.

Manager Magazin said that MQB’s costs (pegged by Morgan Stanley at around $70 billion), as well as decreased profitability of the next-generation Touran minivan and Tiguan SUV would reduce VW Group’s overall profits. VW’s CFO Hans Dieter Poetsch is also said to be looking to cut costs by as much as 1,000 euro per vehicle.

Volkswagen released a statement refuting the claims of Manager Magazin, stating

The speculation in the latest Manager Magazin article is without any foundation. The suggested impression that Volkswagen does not stick to its targets any more is wrong. Volkswagen Aktiengesellschaft remains fully committed to its statements on the future business development of the Group. This was stated by the Volkswagen Group on Thursday.


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Auto Loan Delinquencies, Reposessions Up In Q1 2013 Thu, 16 May 2013 12:30:31 +0000 20130515_auto1_0

Bad news on the subprime front, as credit rating agency Experian reports a rise in delinquencies and repossessions for auto loans in Q1 2013.

Melinda Zabritski offered a rather dubious explanation for the nearly 17 percent rise in repos (as well as the 1.3 percent uptick in 30 day delinquencies and 12.4 percent rise in 60-day delinquencies)

“Obviously, we never want to see a rise in delinquencies or repossessions, but when you compare the current findings with previous years, they are still lower than the recession-level rates…However, one thing most lenders will agree upon is that today’s subprime borrower is less delinquent than those in the past.”

Zero Hedge, reporting on the latest data from the Fed, is reporting a nearly 24 percent rise in delinquent balances year-over-year. Experian only expects things to get worse, stating

“As we continue to move forward, we should start to see more increases as some of the subprime loans coming onto the books begin to deteriorate.”

And still, financial institutions are happy to keep pumping out bad loans. The total dollar volume grew to $726 billion, up from $663 billion in Q1 2012. Banks increased their loan portfolios by $20 billion, finance companies by $18 billion, credit unions by $14 billion and captive finance arms by $12 billion, while but average charge-off amounts rose by 9.8% to $7,401 on each defaulted loan. But, as Experian kindly reminded us, “Charge-offs are still well below recession levels, however, as Q1 2009 average charge-offs were $10,126.”

That’s definitely reassuring news!

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Tesla Revises Financing Plan Mon, 06 May 2013 15:22:25 +0000 photo-41-450x337

Tesla is changing course with its lease/financing plan, with CEO Elon Musk tacitly admitting that Tesla got it wrong the first time around.

Initial calculations of the Tesla “lease” program included some overly optimistic values for things like gas prices as well as how much one’s time was worth (and this, how that could be saved by not having to fill up with gas). According to Wired magazine, the new calculator is much more grounded in reality, with Musk describing the changes himself

“Everything except gas prices are off by default on the new payment calculator on the website…We’ve changed the defaults to be more conservative. [In the original calculator] we included too many non-financial elements.”

Tesla has also managed to extend the financing terms from 63 to 72 months, while Musk’s resale value guarantee has now been extended to be better than “any premium sedan made in volume,” with low volume high performance models specifically excluded.

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America’s Next Top Bubble: Delinquencies Down, Deals Up In ABS Land Tue, 30 Apr 2013 11:00:44 +0000 The largest asset-backed securities deal since prior to the mortgage crisis, worth $1.6 billion, was announced last week. Meanwhile, one ratings agency is touting their low delinquencies as positive signs in the ABS market.

The subprime mega deal was reportedly helmed by Santander, a major Spanish bank that is also Chrysler’s lending partner. Recent developments have had many observers questioning whether Chrysler’s phenomenal sales boom in 2012 was in fact spurred on by subprime loans. Credit rating agency Experian said that nearly 30 percent of new car loans issued by Chrysler went to subprime buyers. Meanwhile, a Top 10 car list for subprime buyers compiled by one online lender showed that Chrysler products made up 40 percent of the list.

Meanwhile, ratings agency Fitch was rosy in its outlook of ABS products, noting that

Both losses and delinquencies declined across prime and subprime auto ABS even as used vehicle values softened and are expected to moderate further this year. Subprime 60+ day delinquencies fell to 3.02% in March from 3.65% in the prior month, dropping 17% both on a MOM (month over month) and YOY (year over year) basis. Subprime ANL (annualized net losses)  were 3% down in March to 5.36% from 5.53% in February. On a YOY basis, subprime ANL  were still 14% higher in last month versus March 2012.

Our usual grain of salt comes in the form of cautious practices on the part of Fitch. The agency has been more conservative than most in rating subprime ABS deals, to the point where Fitch has been excluded from rating deals that some observers have considered rather risky.

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Tesla Reports Q1 Profit, Cancels 40 kWh Model Mon, 01 Apr 2013 17:05:38 +0000

Just ahead of their Q1 2013 earnings called, Tesla announced that they were profitable in the first quarter of the year, with deliveries exceeding their own targets. In addition, Tesla has also decided to discontinue the base trim of the Model S due to a lack of demand.

Tesla reported 4,750 deliveries of the Model S, up from their own estimate of 4,500 units, which, according to the company, helped them turn a profit this quarter. Crucially, Tesla claims that profitability is achieved even using GAAP principles, since non-GAAP accounting is more easily manipulated to reflect positive results.

The 40 kWh car, which started at just under $60,000, apparently had a take rate of just 4 percent, leading to Tesla’s decision to axe it. Instead, customers who ordered the base model will get a 60kWh model electronically limited to only use 40kWh of energy. Buyers can have this reversed by Tesla if they wish, and future owners will be able to perform the procedure as well. 60 kWh cars will also be Supercharger ready across the board.

Given that Tesla’s customer base is made up of extremely wealthy EV enthusiasts who are looking to the Model S as either a) a status symbol b) a third car or c) an outright toy, the death of the 40 kWh model makes sense. Few would realistically want a base Model S whether because of status signalling or the reduced performance (in terms of both acceleration and range). Customers interested in the Model S are much more likely to gravitate to the 60 kWh model or the full-bore 85 kWh version, in the same way that the S63 AMG is the best way to use the Mercedes S-Class as an expression of one’s wealthy.

The higher profit margins on the more expensive models are also beneficial to Elon Musk’s vision of a profitable auto maker. Despite his grandiose vision of himself as a 21st century version of Henry Ford, there is little margin in producing mainstream cars. Better to let Tesla continue to market to the very wealthy while slowly allowing their product to become more accessible, rather than an ill-timed push into the mainstream.

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The 1991 GMC Jimmy SLE – The Car I NEVER Should Have Bought Wed, 13 Mar 2013 12:11:24 +0000

1991 GMC Jimmy SLE

The 1991 GMC Jimmy was a throwback to a better time. The design, originally introduced in the 1973 model year, was all truck and its square, upright design spoke volumes about American strength and power. Over the years, the design gradually evolved and towards the end of its product run even gained small touches of luxury. Don’t be misled by the soft velour seats and carpeted floors, though, under the skin the truck was still all business. It was a serious rig for serious men and it required a seriously big wallet to fill its seriously big fuel tank. I didn’t know it then, but I was in serious trouble the minute it hit the driveway.

The Jimmy, resplendent in its two-tone grey paint and rolling on raised white letter tires and aluminum rims that look suspiciously close to a set of Centerline Racing wheels, is the “car” I never should have bought. Despite the fact that I was making almost weekly trips to visit my girlfriend on the other side of the state, 5 hours and a high mountain pass away, it was more vehicle than I needed. Still, my off-road adventure in my tiny Geo Metro had left me aware of the perils involved in the trip, especially in mid winter, and earnestly believed that a four-wheel drive was necessary to ensure that my love life remained uninterrupted.

I had begun the process of replacing the Metro by looking at the big GMC’s little brother, the S-15 Jimmy and it’s Chevrolet sibling the S-10 Blazer. What I found was disheartening and I have since become convinced that these vehicles are the 90’s version on the 70’s Camaro, usually bought cheap by young people and thrashed from the minute they leave the lot. Every one of them I looked at was in poor condition, frequently dented by off-road adventures and usually with some crappy aftermarket radio shoehorned into a hole hacked into the dash. The bigger, K series trucks seemed to be in better condition and despite the fact they were bigger than I wanted, I soon found myself gravitating towards them. The more I looked, the more comfortable I became with their price and size and so, when I found a 1991 Jimmy in great condition I jumped at the chance to buy it.

I’m ashamed to say that P.T. Barnum was right, there is a sucker born every minute. That day, it was me. Thanks to a poorly negotiated deal, something I was about to repeat, I was seriously upside down in the Metro. Add to that payoff a generous mark-up on the Jimmy at a convenient “no haggle” price and you can imagine the total that was presented to me. Today, almost 20 years later, I would beat it out of the show room in a hurry, but back then I was so clueless that I sat there while the sales manager worked to get me into the right loan that would let me take the prize home. Unfortunately, they were successful and ,in the end, I ended up paying about $330 a month for 6 years on a 5 year old used truck with around 90K miles!

The truck itself was a beautiful machine. Papers I found in the glove box indicated that the truck was a top of the line machine that had actually been given away as the grand prize, along with a matching bass boat, at the Outdoorsman’s Expo in 1991 and it still looked the part. ‘91 was also the last year of the big, square style Jimmy and although it was old school on the outside, under the hood it featured the latest fuel injected 5.7 liter engine. Inside was nice, with comfortable buckets seats, a huge plastic console and all the available options.

Reverse angle of my Jimmy

It did great in the snow and I regularly used it to storm over the Snoqualmie pass and across Washington state. Equipped with a hitch and a transmission cooler, the truck was also a great towing rig and I used it that summer when I decided give up the long weekly commute and moved to Pullman. I really loved the truck, but gradually the high cost of fuel and the poor loan terms I had received, combined with a poor employment situation, began to take a toll.

By 1999 I was at a low point in my life. A whole series of poor decisions had finally joined together in a perfect storm and I was really behind the 8 ball. I had finished college but the better life I had thought would surely follow failed to materialize and I ended back with my mother in my childhood bedroom. I felt like a heel. To make matters worse, I still owed so much money on the truck that there was no way I could finance a more fuel efficient vehicle and, broke, I couldn’t even sell it at a loss. Finally, with a job in Japan on the horizon, my mom stepped up and paid the loan down enough for me to sell it.

The guy who bought it was as thrilled with his purchase as I had originally been and he gleefully took it off my hands. I wish I could say that I was as excited to be out from under the truck as he was to buy it, but the truth is I was emotionally drained by the whole experience. Unemployed and beat down by life, I met with a recruiter for an English school in Japan and, after taking another loan from my mother and headed for Japan where I willingly stepped into an obviously dead-end job and began to rebuild my life. To this day, I can’t think of the Jimmy without a flood of world-weary, unhappy emotions welling up. It’s too bad really, that truck was one for the ages.

So now, for our entertainment, let me ask you to reach into that darkest part of your soul and tell us – What is the vehicle you should never have purchased?

Thomas Kreutzer currently lives in Buffalo, New York with his wife and three children but has spent most of his adult life overseas. He has lived in Japan for 9 years, Jamaica for 2 and spent almost 5 years as a US Merchant Mariner serving primarily in the Pacific. A long time auto and motorcycle enthusiast he has pursued his hobbies whenever possible. He also enjoys writing and public speaking where, according to his wife, his favorite subject is himself.

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Tesla’s Q4 Results Raise Questions About Long-Term Future Thu, 21 Feb 2013 14:34:00 +0000

Tesla Motors Inc. released its Fourth Quarter & Full Year 2012 Shareholder letter on Wednesday. While the letter provides a very positive outlook for Tesla’s future, there are some questions looming in the background once we dig deeper into Tesla’s balance sheet.

Despite supply chain issues, Tesla has apparently achieved their stated goal of producing 400 cars per week at their Fremont, California factory. Tesla hopes to capitalize on its new found production ability, an annualized rate of 20 000 units per year, to take the Model S into Europe and Asia. However, there is still no indication whether Tesla will be reporting their sales figures in the United States like other auto makers do.

When viewed in isolation, Q4 has undeniably been one of the most successful sales periods for Tesla. 74% of Tesla’s overall revenues were recognized in Q4 alone, and reported sales growth from Q3 to Q4 was over 500%. But Tesla’s broader financial health isn’t nearly as rosy. The firm’s Q4 loss is reported at almost $90 million or $0.79 on a per share basis. Tesla’s net loss this year is almost $400 million, or $3.69 per share. Despite the fact that Tesla has slowly been improving its operating margin, which currently is at 8%, Tesla has not been able to carve enough contribution out of its sales to help cover its staggering Research and Sales expenses.

These costs combined make up 103% of Tesla’s overall revenues. Despite the fact that Tesla estimates a 15% reduction in its R&D costs for 2013, it is still fighting an uphill battle. Expansion into Europe and Asia will also require more retail and marketing resources, which will only further add to Tesla’s profitability woes.

At this time, Tesla remains highly leveraged, with a debt to equity ratio of 3.62. With some $450 million in long term debt sitting on its books (and nearly $1 billion in total liabilities), and no earnings to repay it with, Tesla’s future stability is questionable. While it does have approximately $200 million cash on hand, between a negative cash conversion cycle of 46 days and interest payments on the debt, not to mention negative free cash flow of over $500 million, one can only wonder how long until the well runs dry. Despite Tesla’s stated “cash flow positive” status in Q1 2013, this is using non-GAAP figures.

Hope still remains for the zero emissions car manufacturer as it looks to achieve economies of scale and reduce its fixed costs through improved production efficiencies. The projected increase in volume will also help towards the bottom line.

N.B: GAAP Figures used

Graeme Kreindler is an HBA Candidate at the Richard Ivey School of Business at The University of Western Ontario. 


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EU Approves Banque PSA Financing, Demands Total Restructuring Mon, 11 Feb 2013 20:28:48 +0000

After approving a $1.6 billion loan guarantee for PSA’s captive finance arm, the European Commission demanded a restructuring plan for all of PSA within six months.

Reuters quotes an EU spokesman as telling the French government

“We expect France to notify to us of a restructuring plan, not just for the banking arm but for the whole PSA group, because this aid also benefits the whole group,”

Government aid for Banque PSA was first proposed back in October, as it became difficult for the finance unit to borrow money due to the overall weakness of PSA itself. A bailout of Banque PSA was also seen as more palatable than providing aid to the car making unit.

Details of any potential restructuring are unclear, but the EU wants to make sure that PSA’s business will remain viable without any further state aid. Either way, PSA will be under the gun even further, as attempts to cut jobs have already raised the ire of France’s powerful labor unions and the current left-wing government.

Lacking the same profit sources as its French rival Renault (like low cost cars and exposure to healthy markets), PSA has been in the toilet financially, bleeding as much as 200 million euros per month. Even the new 208, France’s best-selling car last month, hasn’t been enough to help stem the tide.

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Avis Budget Group Buys Zipcar For $500 Million Wed, 02 Jan 2013 12:29:25 +0000

Zipcar, the leading player in car sharing in North America, is about to be acquired by Avis Budget Group for $500 million in cash. The rental car firm will pay $12.25 per share, a whopping 49 percent premium relative to Zipcar’s closing price on December 31st.

Rivals like Hertz and Car2Go, a Daimler-backed car sharing service are slowly expanding into urban areas in the United States and Canada, looking to establish a presence in markets where Zipcar is already an established player. Zipcar is on the verge of 1 million subscribers in North America, and rolled out innovative new services, like a by-the-hour cargo van service. The firm’s financials are starting to even out as well, after years of less-than-solid profitability. From a mobility standpoint, car sharing has a lot to gain given Generation Y’s apprehensive attitude regarding car ownership. In my hometown, Zipcar is a popular alternative for young people who still need a car for trips to Ikea or the grocery store but are unwilling – or more often unable – to deal with the annoyances of parking, insurance and fuel prices in a city that is increasingly hostile to motorists.

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