Subprime auto lender(s) cutting independent car dealers.

[Jeff Kershner]

I don't have my pulse on the Independent side of the business BUT there seems to be a storm brewing - I've heard of and read where some of the larger Banks that offer financing services to Independent dealers, are no longer. There is an 8-year low on credit availability (excluding the pandemic era).

Regional Acceptance, a major subprime auto lender are cutting independent car dealers from their portfolio.
Regional is a subsidiary of Truist bank - the 7th largest bank in the U.S.

Atlantic Union Bank is officially ending *all* indirect auto lending.

What happening and what other banks are potentially doing this?

 

[Ryan Everson]

I don't have my pulse on the Independent side of the business BUT there seems to be a storm brewing - I've heard of and read where some of the larger Banks that offer financing services to Independent dealers, are no longer. There is an 8-year low on credit availability (excluding the pandemic era).

Regional Acceptance, a major subprime auto lender are cutting independent car dealers from their portfolio.
Regional is a subsidiary of Truist bank - the 7th largest bank in the U.S.

Atlantic Union Bank is officially ending *all* indirect auto lending.

What happening and what other banks are potentially doing this?

1) Defaults are up.
This is hurting lenders' current portfolio performance. Also, lenders' loan pools from independent dealers often perform worse than franchise dealers for a variety of reasons and their loan volume is also typically lower. That's why lenders typically cut off independent dealers first vs franchise dealers.

2) Fed fund rates went from essentially 0% to 5.25% in a year.
This affects lenders' cost of capital and carrying costs on portfolios in the billions of dollars. Ask your dealer principal how much their floorplan costs were a year ago and how much they are today (not including any floorplan credits). Now imagine that on a much grander scale.

And in the sub-prime market, the max allowable interest rate is often already being charged to borrowers. That leaves no room to pass the added costs back to the borrower, leaving the lender to either eat the costs or pull out of that segment. Which ultimately hurts consumers who will be forced to go to buy here pay here dealers and end up in a vicious cycle that is difficult to overcome.

Regional and Atlantic weren't the first lenders to drop in the past few months, and they certainly won't be the last. That makes it more important than ever to keep your contracts in transit cleaned up.

I would expect to see a lot of smaller independent dealers close up shop over the next year as they struggle to find lenders and floorplanning. You're even seeing the bigger players pull back like with Penske pausing the growth of their used car chain CarShop. Not to mention the recent closures of US Auto Sales' 39 dealerships and American Car Center's 50 dealerships.

 

[joe.pistell]

I asked GPT4:

The automobile industry is a giant conveyor belt. New cars become used, used car become junk. All Car Buyers trade their aging cars and their aging cars get resold to buyers with fewer means. What would happen to the 'giant conveyor belt' if the independent used car dealer lost support from the banking industry​

GPT4's reply: https://chat.openai.com/share/e4307a29-660c-4571-9309-f936aa41c820​

​

Topics that popped for me:

• Higher Prices
• Slower Depreciation
• Fewer Sales
• Impact on New Car Market

Add to this, cars are lasting longer and new car supply is tight. The 'conveyor belt' will be slowing down. We're over-stored across the entire conveyor belt, the weakest will feel the greatest pain. Dealers will be doing more 'belt-tightening'. Those that 'make the cut' are focused, disciplined.

 

[joe.pistell]

All of the above made me think that Carvana is in big trouble and the table below is proof.



I compared total listing volumes by year of ALL car dealers (blue) vs Carvana listings (red).

NEW CAR TRADES is something Carvana can't buy at any price.​

Ouch.
p.s. Add to this 2020 was the year that COVID began, and new car SAAR fell off a cliff.

 

[joe.pistell]

data for the chart:

Yr	CarGuru's listings	CarGuru's Ratio of total	Carvana	Carvana Ratio of total
2023	2,868	3%	236	1%
2022	8,849	8%	2,078	7%
2021	12,835	12%	2,118	8%
2020	27,411	25%	2,288	8%
2019	14,950	14%	3,183	11%
2018	8,207	7%	3,378	12%
2017	6,912	6%	3,456	12%
2016	6,132	6%	3,143	11%
2015	5,760	5%	2,541	9%
2014	4,703	4%	2,036	7%
2013	4,025	4%	1,424	5%
2012	3,169	3%	1,004	4%
2011	2,600	2%	555	2%
2010	1,861	2%	375	1%
total	110,282	100%	27815	100%

Gurus radius set at max 100 miles. I chose trenton NJ zip for max listing hits, it's densely populated there.