Consumer credit roiled by COVID-19

Data sets that auto lenders typically use to determine who is creditworthy have been upended by the fallout of the coronavirus, consumer credit experts say.
As a result, lenders concerned with loan losses and fraud have clamped down on access for customers they believe pose more risk to their business. Subprime customers, with credit scores typically below 620, especially are having a harder time getting approved and dealers say that customers on unemployment are being rejected out of hand.
To make matters worse, sorting through the confusion prompted by massive job losses and unprecedented federal intervention could take years for lenders as the industry struggles to compete in a market with wild swings in supply and demand. This means over the long term that lenders could increasingly be exposed to potential losses and limited in taking on new business while they grapple with who is creditworthy.

The federal government’s pandemic provisions protect consumer credit scores, preventing lenders from counting negative information against potential customers. Credit standards remain tight as lenders navigate the uncertain circumstances sparked by the pandemic.
Credit tightening for subprime borrowers began in April and continued into May, said Jonathan Smoke, chief economist at Cox Automotive, noting declining approval rates for automotive loans and the shift in credit distribution toward those in higher tiers.
Subprime consumers made up 8.8 percent of the market in May and June, Smoke said, citing Equifax data. That’s down from 14 percent in May and June of 2019.”You’re particularly making it more difficult and less attractive for subprime people to get a loan,” Smoke said. “You’re limiting nearly a quarter of consumers.”

Sorting out who is creditworthy has been more of a challenge during the pandemic than in previous downturns. Americans weren’t provided the same tools, including stimulus checks and enhanced unemployment benefits, during the financial crisis of 2008. Therefore, consumers found themselves in delinquent status before they could get assistance.
Provisions of the rapidly deployed Coronavirus Aid, Relief, and Economic Security Act shielded consumer credit portfolios from negative data, including missed and late payments on existing credit products. Millions of consumers have taken advantage of these benefits since March, particularly with automotive bills.
Automotive accounts in financial hardship status — which could mean a deferred payment, frozen account or frozen past-due payment — reached 7.04 percent in May, up from 3.54 percent in April.
Accounts in financial hardship aren’t expected to go delinquent and don’t have a negative impact on a person’s credit score. But lenders may have to incorporate new decisioning processes when it comes to working with consumers who have several credit products in forbearance status vs. those with just one or two.

Vladimir Kovacevic, co-founder and managing partner of Inovatec, a leading software provider to U.S. and Canadian financial institutions, said the financial hardship status may eventually need to be factored into decisioning algorithms.
For consumers with multiple products in financial hardship status, “Is there any indication … that means you’re at high risk or a lower risk?” Kovacevic said. “I don’t think anybody knows that yet.”
Joanne Gaskin, vice president of scores and analytics at credit-scoring agency Fair Isaac Corp., said the company’s scores focus primarily on a consumer’s payment history, so an unexpected job loss or financial hardship is weighed appropriately. If an unexpected job loss prevents customers from paying their bills, their credit history should provide sufficient information for a lender to make a measured decision, she said.

“We want to make certain that the model is intuitive so you’re not going to see something strange from the consumer or lender’s perspective,” Gaskin said.
In general, consumers with a history of struggling to stay current on repayment of credit products have a harder time getting approved for auto loans, said Dina Wilson, general manager and head of finance at Timbrook Kia in Cumberland, Md. About one-third of Wilson’s customers have subprime credit, she said.
“If you have a lot of bills that you aren’t paying, your risk is much higher than someone who only has medical bills they aren’t paying,” Wilson said.

Mounting unemployment during the coronavirus recession is further straining the new-vehicle market in lower credit tiers.
Geography and employment type are key when it comes to which consumers needed assistance and were exposed to job losses or job reductions. The pandemic impacted different factions of the work force than in the last recession, with jobs in entertainment, the service industry, travel and transportation being more at risk.
Some of the data lenders relied on to determine what types of jobs are considered risky won’t be useful in this environment, said Dan Faggella, founder of artificial intelligence consultancy Emerj. The influx of new information likely will hinder accurate decisioning processes at auto lenders.
“It’s obviously going to tilt the keel of the entire economic ballgame,” Faggella said. “Because of that, our historical data about who has been more likely to pay or not pay may be much less trustable with machine learning algorithms because we’re now dealing with a new normal.”
Chevrolet dealer David Vara said there hasn’t been much of a noticeable change in how the lenders that work with his store in San Antonio want deals constructed. But he has noticed lenders more frequently asking for proof of employment — even for customers with credit scores above 700.
“If you have more people out of work, you’re going to have less sales,” Vara said. “But if anything, lenders are going to be more aggressive because there’s less business.”
Government stimulus has boosted the buying power of many American consumers. But for those assisted by the extra unemployment cash, lenders aren’t willing to take the gamble.
Wilson said several of her customers applying for auto loans on unemployment have been rejected outright by subprime auto lenders — even the larger, more established lenders.
“We’re having a harder time getting them bought,” Wilson said. “In this area, you have people making more money on unemployment than on the job. From the lender side, they’re saying, ‘What if their job’s not there when they get back?’ ”

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Glimmer of sales hope for luxury brands?

U.S. luxury auto sales stirred to consciousness last month after having been KO’d by the coronavirus pandemic early this spring.
While results for the April-June quarter look grim, with the segment tumbling 31 percent from a year ago, June heralded a brisk bounce back from the global economic crisis. The segment sustained only a 5.5 percent year-over-year decline for the month, J.D. Power data showed.
At the end of June, luxury brands accounted for 12.9 percent of total U.S. industry sales, according to the Automotive News Data Center. That’s up from a 12.7 percent share midway through 2019, a record year for premium sales.
And the momentum continues to grow. For the week ending July 5, premium retail sales were 11 percent above the pre-virus forecast, compared with 8 percent above in the prior week, J.D. Power reported.
April was a grisly month for premium brands, with sales cratering by nearly half from the prior year, and major high-end retailing hubs such as Los Angeles and New York shuttered by the health emergency.
Luxury-brand customers, 55 percent of whom lease vehicles, stayed out of the market during March and April, sometimes by extending their contract with a phone call, said Tyson Jominy, vice president of the Power Information Network at J.D. Power.
But those customers are now returning to premium-brand stores as the warranty coverage on their vehicles lapse.
“Consumers could indefinitely extend their leases that were due in March and April, but they don’t want to be responsible for maintenance of a vehicle outside of warranty,” Jominy said.
Propelled by strong demand for its core crossovers, Mercedes-Benz extended its lead over rival BMW in the U.S. luxury sales race.
But premium brands still have a ways to go to recuperate from the bloody quarter, and first half. Every luxury brand reported double-digit declines in the second quarter as demand evaporated and showrooms shuttered for weeks.

“From April to June, the effects of coronavirus had a strong impact on our deliveries in Europe and North America,” Mercedes-Benz global marketing and sales chief Britta Seeger said in a statement last week.
Mercedes delivered 59,461 vehicles, excluding commercial vans, in the second quarter, down 22 percent from a year ago. The GLE crossover led totals with 9,500 sales, followed by the flagship GLC SUV with sales of 9,461.
But Mercedes is making sure to avoid a repeat of last year when BMW ended Mercedes’ three-year streak at the top of the luxury sales chart. For the first six months, Mercedes had a nearly 16,800-vehicle lead over its rival.
BMW sold 50,957 vehicles in the U.S. in the second quarter, down 39 percent from the same period a year ago. BMW’s quarterly sales were buoyed by additions to the 2 Series and 8 Series sedan lineups.
In the luxury market, Lexus’ U.S. sales fell 27 percent in the second quarter to 50,456. Tesla deliveries tumbled 34 percent to an estimated 36,800; Audi rounded out the top five with 34,843 sales, down 35 percent from a year earlier.
As economies and dealerships reopen, automakers remain hopeful for the rest of the year.
“Our customers’ interest in buying is high and we have been receiving very positive feedback on the numerous online activities of our global dealers,” Seeger said. “That is giving us grounds for optimism with regard to the sales trend in the third quarter.”

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A frame job: Morgan moves to a new architecture after 84 years

Change comes slowly to some British automakers.
The original Land Rover, for instance, came out in 1948 and soldiered on with minimal changes until 2016. The first-generation Mini Cooper debuted in 1959 and hung around until 2000.
But one British automotive architecture is the granddaddy of them all: the steel ladder frame under the Morgan Plus 4 sports car.
The shape of the car changed a few times since the steel ladder frame was introduced in 1936, but the rugged frame remained true to the original design, featuring a leaf-spring rear suspension and an unusual sliding-pillar front suspension.
The setup ensures the tire tread stays flat on the road as the shocks compress and rebound.
Morgan last week built its last steel-framed sports car and shipped it to one of the company’s most loyal customers.
Morgan has switched to a lighter, stronger bonded-aluminum platform, an architecture introduced last year on the Plus 6.
Morgan says the 84-year production run of its original steel frame is a world record. The total number of cars built using that frame over those 84 years: 35,000.

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VW diesel scandal exec could finish prison term in Germany, report says

DETROIT — Oliver Schmidt, the former Volkswagen engineer who was sentenced to seven years in federal prison for his role in covering up Volkswagen’s diesel emissions scandal, could be extradited to his native Germany up to two years early to face charges there, the Detroit News reported Friday.
Schmidt, 51, who’s been in prison since his arrest at the Miami-Dade County Airport in January 2017 while returning from a Christmas holiday in Florida, filed a request two years ago to finish his sentence in Germany, the newspaper reported.
Citing a notice filed in U.S. District Court in Detroit, the newspaper said a federal magistrate could approve the request next week.
Schmidt has been serving his sentence at a federal penitentiary in Milan, Mich., west of Detroit.
The newspaper said Schmidt’s potential transfer to Germany is part of the Justice Department’s International Prisoner Transfer unit, which oversees the transfer of prisoners between countries, and that under terms of a treaty, Germany would assume responsibility to carry out the rest of Schmidt’s sentence under German law. Schmidt’s request was not unexpected.
Schmidt, the former general manager of Volkswagen’s U.S. Environment and Engineering Office in suburban Detroit, spearheaded VW’s efforts to hide the truth about its diesel emissions cheating from U.S. regulators. In addition to his extended prison sentence, he was fined $400,000 when he was sentenced in Dec. 2017.
Before the scandal, Schmidt was a rising star VW executive and was a featured speaker at the 2013 CAR Management Briefing Seminars in Traverse City, Mich.

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Toyota says it no longer employs staff shown mocking Floyd death

Toyota Motor Corp. said workers who were involved in a video mocking George Floyd, who was killed by Minneapolis police and has become a symbol for the Black Lives Matter movement, are no longer employed by the company.
The Japanese automaker would not provide details, but said in a statement that it takes allegations of workplace racism seriously and that the individuals no longer work at its factory in Princeton, Indiana.
The incident was reported earlier by The Independent, which said that two employees, including a supervisor, were fired after a video surfaced showing the supervisor kneeling on a file binder on June 6 and saying “that will keep them down.” Floyd, an unarmed Black man, died May 25 after a police officer knelt on his neck for almost nine minutes.
Chris Reynolds, Toyota Motor North America’s chief administrative officer, did not address the incident in a video posted this week, but said the company is redoubling efforts to fight racism by targeting the communities near where it has manufacturing facilities.
“Our team members expect action, they expect tangible steps to be taken to show our pre-existing commitment to social justice,” he said.

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FCA to recall 1.2 million older vehicles over faulty airbag covers

Fiat Chrysler Automobiles said Friday it would recall about 925,239 older-model vehicles in the United States to replace airbag covers on their steering wheels after 14 potentially related injuries.
Additional vehicles subject to recall are estimated at 188,249 in Canada, 24,139 in Mexico and 66,120 in certain markets outside North America.
The recall covers 2007-11 Dodge Nitro SUVs and 2008-10 Chrysler Town & Country and Dodge Grand Caravan minivans, the automaker said.
The move follows an FCA investigation that found these vehicles were equipped with certain clips that may loosen and disengage over time, and in case of a driver-side airbag deployment the clips could act as projectiles.
Fiat Chrysler said none of the potential injuries involved occupants of front-passenger or rear seats and that the airbags were not supplied by Takata.
The company will begin mailing recall notices to registered vehicle owners next month. Customers with additional questions or concerns may call (800) 853-1403.
Automotive News contributed to this report.

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DAILY DRIVE PODCAST: July 10, 2020 | Chip Perry: Modernizing the car-buying experience 

Join Automotive News Publisher Jason Stein for a daily podcast series about the coronavirus crisis. He’ll speak with industry experts, insiders and Automotive News reporters about how the virus is impacting and reshaping the automotive industry.

The former TrueCar and AutoTrader boss opens up about his new role as CEO of A2Z Sync and how dealerships and customers can benefit from a one-person sales process.

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Industry veteran Chip Perry to helm A2Z Sync

Improving customers’ car-buying experience is “the biggest opportunity in automotive retail” today, says auto retailing veteran Chip Perry.
And to do that, dealerships need to transform the sales process by eliminating the bottlenecks that lead to long waits at the showroom and frustrate customers, he said.
Perry, who previously led both Autotrader and TrueCar, is now CEO of A2Z Sync, which helps dealerships transition to one-person selling.
That model, also known as single point of contact, is an effort to make the sales process more efficient. In it, a customer works with only one dealership employee throughout the transaction, rather than shuffling among multiple employees on the sales floor and in the finance-and-insurance office.
Natalia Giner, who was CEO of A2Z Sync prior to Perry’s arrival, will stay with the company as its head of product, Perry told Automotive News.
Perry, 66, said he will work to grow A2Z Sync, a company founded by Colorado dealer Aaron Wallace initially to help his seven-store Schomp Automotive Group move away from a full-time F&I office.
A2Z Sync offers dealerships a customer-facing digital menu so both the sales employee and the customer can walk through options together, and provides training and support to help retailers reorganize their sales teams and processes around the single-person concept.
“I wanted to do something that would address the biggest opportunity in this industry,” Perry said last week. “I felt that A2Z is in a great position to have a positive impact over the next few years.”
While digital retailing is increasing, in-person transactions at a dealership are going to remain a significant part of the sales process for years, he predicted. Improving that experience to make it faster and remove friction is a key way to improve customer satisfaction with buying a vehicle, he said.
Including Schomp’s stores, 25 dealerships are using A2Z Sync’s platform. Perry said he would like to have several hundred dealers using the system over the next several years.
He expects the company’s 25-person work force to double by the end of the year, with an emphasis on adding to the training and support team to help dealerships reorganize their job descriptions, pay plans and processes around a single-point-of-contact model.
“It’s the fundamental transformation of the retail process to enable one person to sell the car to create a delightful experience for the customer,” Perry said.
Wallace said that Perry brings experience with software and technology that will allow A2Z Sync to achieve greater scale.
“He brings a lot of credibility,” Wallace said. “He brings a lot of connections, a lot of know-how, much more experience.”

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Rivian raises another $2.5B as EV output nears

DETROIT — Rivian, the EV startup that plans to launch three vehicles next year, said it secured another $2.5 billion in investments led by financier T. Rowe Price Associates Inc.
The company’s latest investors include Soros Fund Management LLC, Coatue, Fidelity Management and Research Company and Baron Capital Group. Existing shareholders Amazon and Blackrock increased their investments, Rivian said in a statement Friday.
Rivian is spending about $750 million to overhaul the plant it bought in Normal, Ill., from Mitsubishi Motors. And it is in the process of relocating most of its product development and engineering teams from Plymouth, Mich., to Irvine, Calif., and to the Illinois plant.
Since last fall, Rivian has raised more than $5 billion. Rivian expects to launch the R1T electric pickup and R1S battery-powered SUV next year, probably in the first quarter. Also, Rivian plans to begin filling an order for 100,000 electric delivery vans from Amazon, with about 10,000 vans scheduled for delivery starting late next year.
“We are focused on the launch of our R1T, R1S and Amazon delivery vehicles. With all three launches occurring in 2021, our teams are working hard to ensure our vehicles, supply chain and production systems are ready for a robust production ramp-up,” CEO RJ Scaringe said in a statement.
Soros Fund Management was founded by George Soros, a billionaire investor and philanthropist who also is known for donating to liberal causes.
Rivian’s other investors include Ford Motor Co., Cox Automotive and several venture capital firms.
The additional investments come as values for electric vehicle companies, such as Tesla Inc., continue to soar on Wall Street.
Scaringe told CNBC on Friday that there are no plans to take Rivian public, but he’s open to additional investments to support the company’s “aggressive growth plans.”
The company said it would not add any board seats and that other details about the transactions are “not being disclosed at this time.”

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