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ConsumerFi Podcast: Market Outlook with TruDecision’s Daniel Parry


September 1, 2022

Episode 8


Joel is with Daniel Parry, President and CEO of TruDecision, to talk about the auto finance market outlook, including why it maybe premature to be worried about a recession, why dealerships might be here to stay and how the pandemic drove innovation.

ConsumerFi is presented by Nortridge Software: Loan Software That Accelerates Change

And special thanks to The National Automotive Finance Association: The only trade association exclusively serving the nonprime auto finance industry.


[00:00:20] Hey, welcome everybody to the consumer five podcast. I am your host, Joel Kennedy here with Daniel Perry. Uh, great man. Fantastic risk mind. I’ve been quoted as I think he’s the best and, uh, nobody’s refuted it. Welcome to the show, Daniel.

[00:00:37] Daniel Parry: [00:00:37] Thank you, Joel. That was a very glowing, and probably undeserved haircare.

[00:00:45] Joel Kennedy: [00:00:45] It’s all downhill from here, but, uh, so Daniel, uh, can you give folks a little bit of a background, uh, about true decision? I’m obviously very familiar with it. Um, tell folks a little bit about true decision and a little bit about yourself, your background.

[00:00:58] Daniel Parry: [00:00:58] Sure. Well, I, you know, I, [00:01:00] I came into the auto finance industry at the, uh, the great America back in the, uh, in the late nineties.

[00:01:06] And a great experience. The company had, uh, went through a couple of economic cycles, had a very rapid growth and you learn quite a few things during events like that. But, um, uh, we built that company up. Uh, actually we very loosely thousands of people that work there, uh, over a fairly short period of time to over 16 billion in receivables.

[00:01:28] Uh, and I left that company with three other partners in Oh six and I thought, you know what? Late 2006. What a great time to start a subprime auto lender, three other partners left a great company with great pay and great people. Uh, Nope, most of which are still there. And we, we set out on our own. And then of course in March Oh seven, the first domino, I think it was new century mortgage.

[00:01:52] And we’re, we’re sitting there. Uh, one of my business partners and I are trying to raise money in the middle of 2007. As the [00:02:00] subprime mortgage crisis is unfolding and people are looking at us like you’re out of your main, you’ll be starting a subprime auto company. Uh, at this point, uh, but I will come back to this point later in the podcast.

[00:02:12] Uh, we still went forward. We got investment. We wrote to over 2 billion. I was chief credit officer there from when we started to here and I live with our CFO. We started a couple of other companies, but one. One of the companies we started, which is a company we’re focused on right now is true decision.

[00:02:28] So there are, um, there there’s 700 billion in autofinance every year. And, uh, uh, about 38% of that volume is tied up in your top 20 lenders. The 20th in that top 10 or top 20 list as less than a percent of the market. So it’s very fragmented. I was very fortunate to work for companies with deep pockets and we built out some incredible analytics, very expensive to do that.

[00:02:55] Uh, those resources aren’t available to most lenders, but they still need those [00:03:00] tools. So the idea behind true decision was to build an analytic platform as a service, rather than having that massive infrastructure spending like we did at my two prior auto companies, uh, or, uh, you can go out to consultants that will charge you well into six figures for models, but it’s up to you to figure out how to deploy it in our operations.

[00:03:20] We said, look, we can stand in the gap. I have a paper use model, uh, make it affordable and accessible to lenders. So we, we have large clients, small clients. It’s kind of interesting. We’ve actually branched out. We have motorcycle lenders. We have a publicly traded companies. Lot of private companies. We have banks.

[00:03:38] Uh, personal loans, legal services, things like that. So the, the, the risk, uh, the process is, uh, very transportable at different types of, uh, lending classes. Uh, but our goal is to meet the lenders where they are able to pay points and use data and analytics to help them solve the problems and make a bottom line impact.

[00:03:58] And, you know, this is, um, [00:04:00] when we started this, we thought we were just surviving until the private equity market would be better for auto lending. Uh, and as it turned out, uh, uh, there’s a huge need, huge response for this and it’s taken off and, and we’re, uh, we’re having a great time doing what we’re doing, helping lenders,

[00:04:17] Joel Kennedy: [00:04:17] tremendous, you know, Daniel, you’re also well known for your market outlook and updates, and you’re an active, uh, writer and speaker.

[00:04:24] Um, let’s, you know, the, the reason why I brought you on was to touch on that. And we’re, you know, I thank you for providing us this update and the time, and, and it couldn’t be even more timely. Um, you know, what we want to get into on this, uh, is going to be, where are we in terms of the market and the recovery.

[00:04:44] And I’m really interested in understanding your outlook on, on where things are going. So that’s going to be the kind of general scope of our conversation. So I’m going to, I’m going to turn it over to you. I’ll I’ll ask questions, but I really, we, we have, uh, [00:05:00] there’s actually a presentation, uh, that, that, that accompanies us Daniel.

[00:05:05] That’s something that people can, can request if you w uh, the listeners of the podcast, is that something they can request.

[00:05:12] Daniel Parry: [00:05:12] Absolutely. Uh, Daniel dot Parry, P a R R True decision is spelled without an E in the true Tru decision or word. Uh, if you could reach out, you can also go to our website through and there’s ways to contact us there.

[00:05:28] Uh, but yeah, happy to happy to send it out to anybody that’s interested in.

[00:05:32] Joel Kennedy: [00:05:32] Great. Great. Well, I’m going to, I’m going to leave it to you to kind of get us started. Um, I think you mentioned as we were doing our prep that, you know, you’re, you were hearing some folks starting to use the R word, you know, that might be a good place to kind of get

[00:05:45] Daniel Parry: [00:05:45] started.

[00:05:47] Well, sure. Yeah. I just, I actually heard it, uh, on, on my way over listened to a news radio, uh, people talking about us being in a recession, uh, people were quoting recession. In [00:06:00] March when there hadn’t been any GDP contraction or the so, but that goes to the typical. Economic forecast or outlook, which is why I think it’s important to have some counterbalances out there.

[00:06:12] People love to be the first one to predict doom and gloom. Uh, and, and it’s, uh, usually your typical economic forecast or lazy. They will say things, things have a strong chance will be really all. Uh, there’s a likely chance. It’s only going to be marginally worse than it is. And at the best case nothing’s going to change.

[00:06:33] So you never really have anybody go out on a limb. Uh, and there’s, you know, there’s never any accounting for these people. And people have been predicting a subprime model blow up for, you know, uh, uh, 20,

[00:06:44] Joel Kennedy: [00:06:44] as long as I’ve been in business in the business. Yeah.

[00:06:48] Daniel Parry: [00:06:48] Never stops. And nobody’s ever held the account.

[00:06:51] In other words, people make these, uh, make these statements. A lot of them are short sellers. A lot of them are investment advisors that are trying to broker deals for [00:07:00] companies, and they want to set themselves up as pundits. It’s very lazy forecasting and it’s also an accurate, so if, if the bad thing doesn’t happen, Then everybody’s happy.

[00:07:10] Right. And if it does happen, then they’re going to say, look, I’m the one who called it. How many radio ads have you heard of the promoting some guy’s book that says this was this, guy’s the first one to call and call. Great recession. It’s always, yeah. Buy gold.

[00:07:24] Joel Kennedy: [00:07:24] Just take everything and just turn it into gold.

[00:07:28] Daniel Parry: [00:07:28] So, uh, you know, as much as I like William, Devane his answer? Uh, think so, but seriously, um, you know, some people may be accused me of being Pollyanna on the outlook. Uh, I’m always bullish on auto it’s a fantastic industry, uh, and, and it’s survived very well throughout recessions. And so when people. When

[00:07:50] Joel Kennedy: [00:07:50] you got the data to back it up, Daniel, you have, you have a more substantial point of view.

[00:07:54] And that’s why I love having your market outlook. Sorry

[00:07:57] Daniel Parry: [00:07:57] to cut you off. Well, here’s the, here’s [00:08:00] the, the, um, uh, the interesting thing is how many times have you seen reports? Uh, where people are commenting on a rating rating agency, data release, or some other news report that says delinquency is the highest for subprime auto.

[00:08:15] Uh, it has been this high since the recession. We say all the time, you know, losses loops here where they were. Uh, right at the outset of the recession. So that must mean we’re all gonna blow up and what nobody mentions is, you know what I did pretty well through the recession. They didn’t blow up. It’s a short-lived asset, nobody except maybe Jay Leno buys a car thinking it’s going to go up in value.

[00:08:36] And so people know that it’s not a speculative investment, it’s basic transportation. And if you look back over the last few recessions, the auto is very robust. So what does it mean when somebody says, you know, delinquency is at the highest level since the downturn, but you got to challenge that and say, is that good or bad?

[00:08:53] And, and, and what would be the reasons for that? And this is something we have to worry about. So when we look at this, that’s kind of the approach. [00:09:00] There are some things that, that concerned me most of the time, because people are out there, uh, with a chicken little mentality. A lot of my posts have to be there, tend to be countering that with positive news.

[00:09:11] And so there may be those that think it’s just always a positive spin or some things that concern me. But for the most part, what happens with these reports of the sky is falling is that, you know, lenders contract people are laying people off. Uh, Congress was interrupted, it scares investment in the sector, uh, which limits access to capital and, and hurts the consumer.

[00:09:32] Or who needs a car. And so those sorts of things I think, need to be dispelled regularly, uh, because it, it hurts the industry and hurts the consumer, uh, particularly in subprime where many consumers are, uh, have been historically disadvantaged, uh, limited access to credit. Maybe immigrants may be young. We were all, we were all thin files at one point in our life.

[00:09:55] And so all people that need to be able to get to work, they’re not buying Lamborghinis. [00:10:00] Yeah, it’s basically transportation. And so, uh, when fear mongers go out there and start at, you know, for the thousands of times in a row predicting blow ups, that don’t happen, you know, but it, it it’s actually has an impact on people.

[00:10:11] Uh, and so, you know, that’s important to me to get to, but for the sake of time, let’s just jump into this. What I want to talk about are, you know, we have people say we’re in a recession. Technically, we’ll get to the point where there are a couple quarters of GDP decline, plus a few other factors that, that, you know, the national Bureau of economic research is the official dating agency of, of recessions.

[00:10:34] And, uh, they have few standards in addition to GDP decline. And so two years from now I’ll come out. So tell us when the dates are. Nobody knows when they’re in the middle of it. Right. But everybody’s throwing it out there. And so that, that word, invokes thoughts of other recessions, what happens. So I want to compare this as just a recession or a shock then I still want to go into is okay.

[00:10:57] If we frame the argument correctly, what have we gone through? [00:11:00] Uh, it gives us a better, more reliable basis to say, okay, if we understand what we’ve really just been through, uh, we have a better way to frame what it looks like going forward. So we’ll look at lender, behavior of Q1 to Q3. And then sort of bring us up to date, where are we now?

[00:11:16] What does the economy look like? Uh, what are the risks? And, you know, what’s going to happen in auto finance from that, you know, we’re now at the outset of Q4 through early 20, 21. Uh, I think beyond 2021, um, uh, it’s kind of silly to speculate so much it can happen, but, uh, we can only really manage the near term.

[00:11:33] So with that, I’m gonna jump right into this. You know, uh, are we in a recession? Are we in a shock? If you look at, uh, if you do a Google search of particularly subprime auto, but broader auto in general, uh, you will see some of the, uh, some of the most, uh, uh, severe headlines related to, uh, the economy and, uh, related to specifically our industry.

[00:11:58] And, and, uh, it’s because of that [00:12:00] reason, we talked about people want to be, uh, uh, the first report, the biggest, the biggest death toll and a tragedy, right? Each news station to be the first report, a higher one. I incidentally UBI, California, uh, years ago when I was working my way through college, I worked on the emergency crew for Greyhound.

[00:12:18] And, uh, so I worked all night in an office where there were disasters or other things that, that, you know, the military, they need equipment to move people or whatever it is. And then we would handle those types of situation. I was working in 1990 on the night of the earthquake and a huge earthquake in 1919 in San Francisco.

[00:12:37] And so we were, they closed the Harbor. They closed the airport into the city, was by bus. And, uh, so w we were, I was busy. Uh, rounding up, uh, equipment from all over the U S wherever I could get it. And we’re very good drivers to send it out there. So that’s one of the things we did and I kept watching the news reports and people covered it 100, 200 at 300 dead, and it got up to something [00:13:00] like 500.

[00:13:00] And then it turns out to be half that number, but everybody would just. Emory to report the bad news. Uh, there’s an old joke that, uh, economists are pessimistic by nature. The, they predicted 10 out of the last two depressions. So, uh, uh, and so, you know, there was a lot of, uh, uh, Bloomberg wrote an article, uh, published an article, uh, back in the summer that said, you listen to the worst.

[00:13:25] The worst, uh, recession in eight decades. Uh, okay. Hold on. You know, we’ve got, we’ve got one at the time they wrote this, we had one quarter of a bad news and granted people really didn’t know where it’s going to be headed, but we certainly didn’t have enough to make that statement back then. Uh, and, uh, so the New York times.

[00:13:44] Uh, also post an article in June that said we went into a recession in February. I don’t know how they could get that number. Right. Yeah. How did, how

[00:13:50] Joel Kennedy: [00:13:50] do you even had even do that? You don’t have the, the classic definition even satisfied.

[00:13:56] Daniel Parry: [00:13:56] Well, you know, it just, uh, there’s sometimes I think that the [00:14:00] major, most respected, uh, news outlets are, uh, just a step above tabloid reporting when it comes to things like this, because, you know, that’s, uh, uh, itself paper, I guess, uh, is reasonable if the journal article and article I a wall street journal article in August about the coming out of collapse.

[00:14:18] And so it was sometimes when I read these things, it’s all I can do to. Stop myself from posting response. But, uh, but it’s more of the same type that we see. But what I found very interesting is Goldman Sachs research had an excellent, uh, re economic review. They published this in may on their website. So I’m always impressed with someone that predicts things, uh, posts them, and then those things happen.

[00:14:43] Uh, and then they’re even posting something positive and it happens. So, uh, you had people out there predicting it 25%, 30% unemployment rate, you know, the worst disaster ever, uh, Goldman called it. They said it’s going to peak at 14, which it did. I think a [00:15:00] 14% and they said, it’ll, it’ll slowly get down to 9% by January of 2021, which it’s already, it’s already got, uh, uh, come in lower than that.

[00:15:09] But, uh, so that’s on their website. I referred there’s really great support for that. Um, but it’s, it’s done substantially better. So we’ll get into the economic news. Toward the end of this, but, uh, I just point people to that because it’s a good resource. So we, the question is, are we in a recession or a shock?

[00:15:24] The difference is recessions. Uh, so for those that have the presentation or viewing it, uh, uh, a graphic up here from the federal reserve on the unemployment rate. So unemployment started to increase. Lado seven. Uh, and you see the rest official dates of the recession on this graph through, uh, late Oh seven through mid 2009.

[00:15:46] You see the unemployment rate went from the high fours of the 10% and it took, it took two years to do that. By the time he got back down to that five-ish percent, it was another six years. And [00:16:00] so these were recessions are very protracted events and it’s because there’s an underlying weakness in the economy or something that has to be corrected and it takes time to correct it.

[00:16:11] And so that’s what you see is on the point where right now there are those who argue that, uh, you know, the president at the time had sort of an FBR. Uh, approach and it made it last longer. And, and, uh, those are the other side that would have been worse. Uh, but regardless of your political outlook, these things, aren’t, it’s a multi-year of that, right?

[00:16:28] It’s it’s uh, and it’s because there’s a fundamental weakness. Now that’s a recession. When we think about a shock, that’s like a hurricane Katrina. So we had three, um, ice, Sandy and Katrina, three hurricanes, Oh five Oh eight and 2012. And, uh, it was just the most recognizable one for everybody that might be listening to be Katrina.

[00:16:49] Uh, and I was an American that day. We’re, we’re looking at. Uh, forecasting losses for any parish in Louisiana that was slightly wet. Uh, and it turned out to [00:17:00] be far less, uh, devastating than we thought, not in terms of damage and human life and things like that, but in terms of our portfolio losses. And so, uh, what happened is the hurricane comes in and wipes out everything in an area it’s just complete destruction, but it bounced back very quickly.

[00:17:16] And so we have as a shop, the eco the economic situation and the decline isn’t. Because there was a problem with the economy. We had this exoticness factor of the virus that came in and shut everything down and interrupted commerce. And so, uh, there aren’t years of repair of some fundamental weakness to get through.

[00:17:36] Now, certainly there’s going to be some damage. Uh, we hear news of, uh, American airlines talking about laying off of. Thousands of people. And we hear, uh, from, uh, you, you look at the, our restaurant industry, you look at, uh, travel hospitality, hotel, business, uh, there’s a lot of damage that’s been done to be sure.

[00:17:52] So I’m not minimizing that, but what I’m talking about in the greater picture, uh, this was predicted to be more of a V-shaped by [00:18:00] what I would consider, the more rational people, a V-shaped recovery, some protracted, uh, uh, recession recovery. So, and I saw a lot of people that I otherwise think aren’t good analysts.

[00:18:11] Talking about five years in six years out to get back to normal. I just, I just think there’s no basis for that. When you look at what we saw in each of these hurricanes in a, in an isolated geographic area, is that things did bounce back very quickly. So, um, there’s a couple things related to this too, is that in, in auto lending, for example, you’re going to have some people that will default because they lost your job.

[00:18:33] Got a question. Um, but you don’t have systemic credit issues. Credit performance was fine before this, uh, you always have, uh, issues maybe with one lender or another, but credit was fine. Recoveries were fine. If anything, the market was a little frothy, so it was a little, um, uh, competitive. And so that means margins are tight, but there weren’t, you know, you, weren’t seeing the link between the losses, uh, you know, off the, off the charts or recoveries network for at Y [00:19:00] um, the debt providers for auto lenders.

[00:19:03] They, they, uh, understand these types of shots. We got cart launch from the rating agencies and the, uh, our, our, our debt providers, uh, to take care of people, give forbearance where it was needed in the event of these hurricanes. And that’s exactly what’s happened with COVID. Uh, they don’t want to, they don’t want an artificial event of the fall.

[00:19:24] No lent, no radiations. She wants to pull the blow up because of an artificial and you know, short-lived event and no, uh, no debt provider. They do, they do not want to take control of your portfolio. They don’t want to do a service transfer. So they know that you have to give deferments out or go repo, have compassionate response.

[00:19:44] Of course, you had to worry about the public too, if you don’t. I mean, so there’s, you’re getting all kinds of leeway to take care of the customer. That’s the challenge. The challenge is that lenders aren’t bringing in money. So if you have increased, if you aren’t recalling it, you’re not getting the money for the [00:20:00] auction when you sell the car and you’re not collecting payments with more, more deferments.

[00:20:05] And so it puts a crash, a cash crunch on, but it’s a temporary setback. And you got to think that these pools are averaging for auto. 66 to 72 months pools. Most of those liquidating two to three years, but the terms are that long. So you have a setback that may be a six month window, uh, and it’s not all evenly distributed.

[00:20:25] So in the grand scheme of things, it’s a blip right now. Yeah. But in a shock you have a, a substantial devastation, but it’s confined to a limited period. And that’s what I think we’re in right now. And there’s really some interesting things that I wouldn’t have thought. Uh, but I’m not surprised at it coming up with, with the effect of all the deferments at their place.

[00:20:47] Oh, interesting. So, um, you know, the key lender choose obvious, like I mentioned, uh, you know, you’re in short cash, um, but the other things are, this is a positive thing for a couple of years. Now, [00:21:00] there have been a lot of reports about auto lenders. Uh, uh, delinquency being very, very high. So it’s a so or 60 days or 90 days is higher than it was even at the onset of the recession.

[00:21:11] Well, there’s reasons for that. Uh, and so we’re, most of those reports come from our, the bond reports. Now there’s probably 200 billion on an annual basis in subprime auto, only 25 billion of that ends up in subprime abs. Do you have it, you know, let’s call it, you know, eight to 10% of it ends up, uh, in the bonds.

[00:21:33] And so of that two thirds of those bonds, two thirds of that 25 billion is three lenders. So a lot of those reports that come out about delinquency, they’re only talking about a couple of, really a couple of lenders that are driving most of that. But what happens with collections is, uh, when things get tight, People will start delaying the repo.

[00:21:53] They’ll delay the assignment. They’ll use more departments. They will keep things in repo inventory longer. [00:22:00] Well, if you’re not charging it off, By definition, your delinquency is going to go up. So if you have a lot more for marriage in your collections, and it’s not always nefarious, it’s not always somebody trying to gain the numbers.

[00:22:11] Any good collections manager wants more time to collect on that debt. They think they can fix it. Give me more time. I’ll turn this one around. And so they want it, they want to be able to do that. And so the more forbearance you show. Your delinquency is going to balloon because it wouldn’t be there. If you charge it off, you would pull it out of it.

[00:22:29] So, uh, you can have the same credit. But it’d be managed different from a collection standpoint and you see the delinquency go up and what you’re doing is you’re pushing the loss out to a later period. Right. So, um, uh, so that’s, you know, that’s, that’s an important, important, important thing to look at here.

[00:22:43] But, uh, as we look at the lender activities to what had happened, you know, January, February, we knew of the virus, but I think nobody. Nobody thought it would pan out like this. Um, but it was really mid-March when things hit the proverbial fan. And you saw contractions of about [00:23:00] 30% from that April,

[00:23:03] Joel Kennedy: [00:23:03] April and may were just devastating.

[00:23:05] Um, in terms of the loan volumes that we saw.

[00:23:10] Daniel Parry: [00:23:10] And Joel, you and I were spent a lot of time with each other in Q1. And when all of this unfolded, I I’m sure you were in a similar spot. Uh, you know, me being ever the optimist, I would see my life flash before my eyes. I’m going to do, I’m talking to my wife about.

[00:23:29] You know, uh, how do we protect our cash? How do we survive a protracted? Yeah. So I was, you know, I was getting the survival was skier and all that. So, um, uh, Daniel,

[00:23:38] Joel Kennedy: [00:23:38] Oh, that’s exactly what consumers did. So in Q1, there was a shift where there was far more cash buyers, um, and more leases. And then that really dropped off in Q2.

[00:23:49] Everybody moved over to financing and believe it or not, the captives are the ones who really picked up the lion’s share of that as well. But, um, but please

[00:23:56] Daniel Parry: [00:23:56] continue. Here’s what’s interesting. Typically, [00:24:00] February, March, and April, everybody’s getting their tax refunds that drives the buying season. And, uh, so that was delayed.

[00:24:08] And, and this was an issue interesting dynamic because, you know, whenever we go to conferences, Joel, and I you’ve been to this, you have been at the same conferences for the last 10, 15 years together. Uh, and, and whenever you go, they always have a visionary. Who’s going to talk about where things are going.

[00:24:22] And the visionary always says, dealerships will be gone. They predict in predicting that for 20 years, we’re not going to have dealerships. We’re not flying cars and everything’s going to be improved. Well, the dealerships aren’t going anywhere. But, but because they are, uh, uh, they’re an inefficient intermediary.

[00:24:38] Um, but people still like going to the dealer, somebody who’s got a service that like driving the car and it was, would have gone anywhere. And so because of that dynamic, they haven’t been really forced to innovate that much. There are welcome Valley tech companies. You’ve got your Carvana’s, you’ve got others out there.

[00:24:57] Um, uh, and so. Uh, that are doing the [00:25:00] online, uh, online lending, online car sales. But by and large, when you look at the vast majority of vehicles through your typical dealerships, 70,000 franchise dealerships in somewhere in the neighborhood of 40 or 50 independents thousand independents. And so that’s a lot.

[00:25:13] And so they aren’t going anywhere. And it goes to the fact that people like going into the dealer, uh, to look at the car, not, not necessarily the car buying experience, but the interesting thing here is that there’s been all this prognostication about. Dealers will one day go away. Uh, but what this has done, so they haven’t really had to innovate, uh, because that hasn’t happened.

[00:25:35] Uh, people still needed the dealer. Um, but what happened at the beginning of COVID when they were got here, people were going into lockdown. I mean, in Texas where I am, I actually got my daughter a car, I think in April. Um, and so, uh, uh, I was very, I never thought I’d be so happy to see car ads on TV and actually be able to go into the dealers.

[00:25:55] We’ve made special appointments. They did all protocols, but online buying [00:26:00] no touch, getting all your docs, getting the car delivered dealers figured out very rapidly, how to stay in business. And, uh, which is good, you know, they’d have to very quickly, and I think it’s never going to go back to weight it.

[00:26:12] So it’s kind of transformed the dealers and forced them to modernize in a lot of ways. I think didn’t have to before. Um, and then you have this massive influx of incentives. So the, the interesting thing, you know, tax filing got moved out to July from April 15th, but what the data shows us is that most people still filed them.

[00:26:31] Good March or before April 15th. And so people are now getting those tax refunds and they’re getting government stimulus. So therefore, and in many cases, some people were getting unemployment, uh, but they were getting more unemployment. They were may at the regular job when people went out and that’s combined with another dynamic.

[00:26:51] Manufacturers are saying we are not w we’ve got metal to move and you saw incredible incentives being pushed through, you know, 90 days. The first [00:27:00] day on, I actually took advantage of some of these 90 days, first payment. You’re seeing people all for credit life insurance, or will make up to. Six seven, eight, nine payments a the Kia.

[00:27:10] And I had had a similar promotion. Uh, but, but, um, so that was, you have all these incentives and the consumer has a bunch of cash in their hands. So that buying that delayed, it probably increased. So we were down 30% and then it went the other way. Yeah.

[00:27:25] Joel Kennedy: [00:27:25] Humor tastes as well. Daniel, you know, we’ve spoken about.

[00:27:28] Carvana and the preference for a lot of prime and upper credits, you know, buying used vehicles that consumer tastes has officially flipped. There’s much more of a preference for the new vehicle. And I know the drivers must be associated with what you just mentioned.

[00:27:46] Daniel Parry: [00:27:46] Sure. So what you saw going on in that, and that is that as everybody knows.

[00:27:51] Uh, would be people were foregoing repossessions. And in some areas geographically, it was politically mandated. Uh, that is that’s kind of [00:28:00] changed. But during this period at increasing deferments and, uh, suspension near, near complete suspension of auto repossessions. And so that was, uh, uh, a big shock to that industry.

[00:28:11] Uh, you know, the repo, the industry, uh, and of course the lenders were without the cash. We also saw a lot at affirmance. And so, um, there’s some data from Fitch that’s included in this, uh, chart, but you typically saw what you typically would see for subprime paper. For example, at any given time, you’d have about 17, 15 to 17%, that would not be amortizing.

[00:28:33] So that means people are making their payment on time that jumped. Took about 25 to 27% as all this COVID activity unfolded. So the way that, the way that I think about that is you had, um, you had your typical 15 to 17% in non-payment that you would normally see, uh, plus another thousand basis points.

[00:28:56] Let’s say not all of that will befall. Uh, so when you think about what’s the [00:29:00] impact of deferments and non-payment, so you had, you had a delinquency and affirmance, it’s not that. It basically was about a 50% increase in people that weren’t paying their bill. Um, so, but it’s not a hundred percent fall rate when some people produce these forecasts devastating default.

[00:29:15] Here’s what you got to look at. There might be a 15 to 17% non-payment rate and subprime, but your annual charge off. Is about half a percent. You’re charging off about half of the portfolio on a monthly basis. So if you have a 15 to 17 delinquency rate that you’re charging off half a percent, so that’s the number you got to put at it.

[00:29:34] So even though there was a 50% increase in nonpayment, You’ve got to take that with a grain of salt. Okay. Now I go from half a percent to 0.7, five, or maybe even 1% charge off if repos and charge us, we’re happy to normal pace. So it’s not, the sky is not falling. It’s not to say it’s pretty, but it’s not as bad as people make it out.

[00:29:53] Wouldn’t you say,

[00:29:54] Joel Kennedy: [00:29:54] wouldn’t you think Daniel, that a lot of those deferments were kind of, uh, they came easy, [00:30:00] so somebody may have had stimulus money. They may have been fine. They were offered a deferment and they went ahead and they took it.

[00:30:08] Daniel Parry: [00:30:08] That. And, uh, people knew that they could get forbearance. I mean, we, we, even as a company that we went to our landlord and our office space and asked for a little bit of a break, uh, we went through other vendors, uh, you know, as a, as a software, a technology company, we use a lot of, uh, high-end software.

[00:30:24] That’s fairly expensive. We were able to push a lot of that out. And so everybody knew they would get away with that. Uh, and so, uh, I don’t want to say get away, but they, they do, they will get the forbearance. So, yeah, but now we look at where we are now we’ve gotten through that. There’s some really interesting effects.

[00:30:40] Um, people were predicting 25, 30% unemployment Goldman predicted 14%. Mid-year. And it would slowly taper down at nine by January, and then we’d start returning to normal and 20, 21. Well, they were spot on, uh, we hit, uh, I think 14.1% in June, but it’s come down every [00:31:00] month. Since then it went down at 13, 12, 10, nine, eight.

[00:31:04] We were at eight and a half last month where at seven, nine as of today, the new one appointment report came now. So that’s, that’s tremendous. That’s a, uh, Uh, when people talk about the great recession and there’s a graphic here that shows unemployment from Oh, uh, Oh nine and 10, and how long it took to come back.

[00:31:21] And we’re more than halfway back from that 14 spikes. So that’s, that’s very, very encouraging, even though we’re hearing, you’re hearing, uh, anecdotal reports of large employers and people having layoffs. Um, a lot of that is also, you have to think about these big industries started announcing these layoffs.

[00:31:39] They’re also sending a message to politicians to say, we need to get a stimulus package or we need an industry bailout. So a lot of that is posturing for that. Um, and, uh, but again, everything that we’re looking at, uh, wages are back on the rise. We’ve got that, uh, uh, we’ve got that on your end. So you had wages were, uh, increasing.

[00:31:59] Uh, [00:32:00] tremendously over the past few years, uh, and it spiked, they were up, uh, uh, 8%, um, average hourly pay, uh, quarter to Euro labor statistics, and then that plummeted. Well, now that’s back. It gets back on the, on the uptick again. And I don’t want to, uh, be, uh, uh, guilty of what I accused people of making something out of one data, point a trend out of it, but it’s just encouraging news.

[00:32:22] So the purchasing managers index is at 55. Anytime that’s above the purchasing managers, index comes out every month and it’s a great leading indicator of economic activity. So anytime it’s above 50, it means the economy is growing. What that means as, as these, you have to purchase things, uh, to make products and these purchasing managers are increasing their purchasing.

[00:32:44] So that, which means they’re depleting inventory, which means buying things. Right. And so you have that combined with consumer confidence rising, uh, the new orders index is at 60.2%, very similar to PMI it’s on the rise. So these are all well, as we go into Q4 early [00:33:00] 2021, there is great news on economic activity.

[00:33:04] And,

[00:33:05] Joel Kennedy: [00:33:05] and for folks real quick, sorry. And for folks, the PMI that 50 is, is 50. That kind of key pivot point where if it’s under 50 we’re we’re contracting and over 50, we’re expanding. Right.

[00:33:17] Daniel Parry: [00:33:17] Yeah. And it’s been a role metric for, for many years. And so, uh, and now people will make a lot out of, up or down noise within a narrow range, but you really want to look at where the trend is.

[00:33:28] And so, um, so that you know that these are some good news, people are seeing, we’re getting back to work. And then when you look at the jobs report, huge increases in parks and restaurants. And so that was one of the industries that was hit last month. Uh, unemployment. What prevented it from dropping even more, uh, was you had increased unemployment in the areas of, uh, of, uh, education and school.

[00:33:55] So a lot of, uh, universities, a lot of, uh, schools are shifted, uh, A substantial amount [00:34:00] of online learning, uh, and then government editing. So government and education employment, uh, took a hit because they’re adapting to the new normal. And so, uh, and that it will that come back, I think on the education side, it certainly will.

[00:34:13] Um, and so, but that was otherwise it would have been even lower. So, you know, these are, these are good, uh, good things as we look into coming here. Uh, and so we look at, um, you know, what, what the outlook is. Hey, Dana, can I pause

[00:34:26] Joel Kennedy: [00:34:26] you right there? Sorry to cut you off. So, absolutely as opposed to when you compare this cause, cause I don’t want to take the analogy too far and I think this is what you’re saying.

[00:34:35] Uh, you know, uh, hurricane Katrina or something like that is more analogous to a shock versus an actual recession, which shows that there’s there’s things going on and there’s a recovery and there’s, uh, you know, you have a longer time window. But with this particular event, what you’re saying is. You know, the recovery will be more simple.

[00:34:55] You know, the recovery doesn’t have to be, uh, take into account that there was [00:35:00] these, um, you know, with loosening credit and all these other sins of the past that we were doing, we had this shock as we go back to real life, there are going to be some structural impacts. Education may be different. How you.

[00:35:13] Uh, go to a salad bar is probably permanently different. Um, food service is probably permanently different and those are structural pieces. That really what you’re saying is, Hey, those pieces, you know, we’re going to want to keep an eye on them because as we come back, those may be the pieces that represent that structural more kind of similar to a recession type, you know, needing to be addressed.

[00:35:37] Daniel Parry: [00:35:37] You know? Yeah. There’s, there will be shifts. Uh, the thing I think that’s interesting. So just for the sake of time on and get through a couple of things, there are some things to be concerned about, but I think it’s overwhelmingly positive. But there are some of these structural shifts, like you’re talking about what I think we have yet to see is, uh, what’s going to happen to office space.

[00:35:59] So you and I have [00:36:00] a mutual friend who has a software company, uh, that, uh, uh, this individual pays 25,000 a month in rent. And they’ve all been working remotely since March and the company has been better than ever. So I think, uh, many companies are looking at. Uh, and there was a fear of that productivity to go down.

[00:36:20] You know, nobody’s going to do any work and throw in an office and it’s sort of a difficult to get out of the traditional mentality. Uh, so I think people are really looking at that and companies are going to say, look, uh, if we don’t know what’s going to happen with the election, of course, that creates a lot of volatility and, you know, there’s.

[00:36:37] Half the country thinks the sky is falling. If one person got elected and it’s the same for the other side, uh, if it doesn’t go their way, but the bottom line is that people find, uh, find ways to adapt. There are going to be structural changes. Uh, if, uh, you know, Biden gets elected, uh, it it’s, uh, you’re likely going to see increased business taxes.

[00:36:57] And what companies will do is companies will say, well, [00:37:00] that’s got to come from somewhere. Yeah, I can pass it onto the consumer. So the consumer is always a loser in that situation or usually, but they may look for it in other ways, which is, do I need to be paying for all this massive corporate campus?

[00:37:13] Can we do a lot remotely? Right. So they’re going to business will whoever gets elected, uh, and we see this, it’s a pendulum that swing, uh, Uh, uh, justice Ginsburg said that that swings left of right. Um, but, um, you know, the commerce still happens. I remember all of my conservative friends thought we’re all going to die when Obama got elected.

[00:37:33] But guess what? I was at a company where, you know, the four of us started out and we grew the thing we’re at about 15 million in the middle of extra was at about 50 million in the middle of 2008. And a few years later, we’re over 2 billion battery. So, you know, uh, and there are similar stories that have gone on over the last four years.

[00:37:54] So people will find a way to engage in commerce. I think the government can, uh, accelerator to get [00:38:00] in the way, but people are gonna figure it out, but whoever gets elected. So that’s the good news since that, uh, you know, uh, if any administration that comes in, even if they decide to have very draconian policies, It’s going to take them a year or more to get it through, uh, a gridlock Congress.

[00:38:15] And so for the next year, we can look at great economic news coming into the beginning of the year. Hopefully we’re all looking at a big vaccine and we can get back to whatever the new normal will be. Uh, but, uh, there’s good. Economic news lenders are growing. There are a few risks. Uh, and so this is positive.

[00:38:32] Anything a new administration is going to do. It’s going to take a year or more to really have an impact. So we look at what we can control, which is the near future. Whoever gets in, uh, it’s it’s, uh, it’s not going to have much impact on our industry, in my opinion. Uh, and so, uh, there’s, there’s reason to be very positive and encouraged.

[00:38:50] You wouldn’t know that when you watch the news. Uh, yeah. I don’t know anybody to either party who watches the news and is happy, uh, uh, both days. And so, [00:39:00] uh, but for our industry, what it means for our business, I think the economy’s growing employment is getting better. Uh, wages are going up, uh, that people are buying and selling things.

[00:39:08] This is good news. Um, what we have to watch out for is, um, there are reposts that should have happened. Uh, in Q1 through three that didn’t, uh, and they’re from, and so it happened, so there’s the normal repos you would have taken to Q2, but you know, let’s say you do 10,000 repos a month and you’re putting them through auction.

[00:39:28] You have, you know, 30, 40, 50,000 requests, you would have taken in the normal course of business that you, right. So those are going to be coming through and you only have so much time that lender is usually. Have agreements with their debt providers. You can only hold onto that inventory so long. And then you have any incremental repos that will come from who lost her job, all that stuff’s going to be good.

[00:39:49] That’s that could be a glut of inventory going through the auctions and Q4 and Q1 and two. So lenders are going to have to be strategic about, um, what, when and what they put through. [00:40:00] Um, and so we w what has been going on in the past few months is. Recovery values have been high because there’s not much inventory there.

[00:40:07] So those that are putting them through are getting premium dollars and it’s very expensive for car dealers to acquire the majority of the auctions. So that’s going to shift, it’s going to go back to where the car dealer does have an advantage again. Uh, but for lenders, I don’t mean a larger charge. Also there’ll be a worst recoveries and higher net losses for a period of time.

[00:40:26] Most shocks that we see in inventory, uh, that affect the auctions. It’s about a three, maybe a four month period where, you know, your recoveries might normally be 45%. They’re probably gonna drop 38% in a couple months. And then a few months after that, it’ll be back to normal. So we do have that bubble coming through.

[00:40:43] I hope it’s not, I hope you’re putting me on this podcast in a few months and tell me I was wrong. I’d love to, I’d love to be wrong, Daniel.

[00:40:50] Joel Kennedy: [00:40:50] You know, you’re, you’re in good company. There’s a guy, uh, I think, I think you met Joe Cioffi, he’s a partner with Davidson Gilbert. He does a report called credit chronometer and, [00:41:00] uh, he interviews all the different contingencies that, that operate in an abs environment.

[00:41:06] So the originators, the servicers, uh, the funders, and then this other group, like lawyers and other people that evaluate the industry. They’re, they’re seeing things. And these are the people who live and breathe by the, I mean, this is their daily existence and they’re really the bottom. No, that is it. It’s like moderate pessimism, which, which Joe actually would describe as modest pessimism because he would have expected a lot more of a, a profound point of view.

[00:41:38] But these guys are relatively, you know, at an 80% level across all those cohorts. They’re relatively agreed. They think there’s going to be some disruptions. There’s going to be some, you know, uh, some issues from coming off of all the deferments and, and the government stimulus. But in large part, they feel that there’s enough, uh, juice there within the, the loss [00:42:00] provisions of these ABS’s to cover.

[00:42:02] They’re not concerned that we’re going to, we’re going to trip beyond that and have to, you go to extreme measures. So, um, Daniel. I will say you’re in, you’re in you’re in some pretty decent company with that point

[00:42:12] Daniel Parry: [00:42:12] of view. Interesting thing. As well that I’d like to talk to you, people are resuming repo, they’re charging things off.

[00:42:20] They’re putting things through auction, deferments are going back to normal levels. Right? So, uh, but there’s an interesting thing that happened here. People were predicting, uh, you know, it goes to 40%. The you’re going to all of those, uh, People are also going to automatically default. Well, that doesn’t happen.

[00:42:37] It’s a, it’s a portion of that number. That’s an incremental default. Uh, and so people tend to overestimate that. Um, and so people have feared in the industry that lenders abused. Affirmance, they’re just covering up losses. They’re just trying to hide the numbers. So there’s a skepticism and that’s caused by a couple of companies that did that.

[00:42:56] A couple of large companies in the nineties blew up and there was fraud and [00:43:00] jail time and other things that happened. And so, uh, uh, there are, there, there are, there’s a legitimate concern. Are you just using your repost to cover up defaults? I’m sorry. Usually your performance cover-up default. And so, uh, most lenders use them responsibly.

[00:43:14] They’re typically between three to 5% of the portfolio on a monthly basis, at least, uh, on the lower end of the credit spectrum. And what we find out is that if they’re used properly, you know, they’re used in the, let’s say 45 to 60 day range. These deferments make the customer current. You take the two payments.

[00:43:32] They owe you and you stick it on the end of the loan. And you do that because the customer says, well, I’m unemployed. I lost my job. Well, they’ll find one in a couple of months, they’re usually typically, uh, more easily replaceable, particularly in subprime where the, the incidents of unemployment is higher, but the duration is much shorter than those in price.

[00:43:51] And so they find a job. And so what you get is it’s not profitable. Regardless of what the age of Massachusetts thinks, uh, it’s not profitable to [00:44:00] repo car. Um, you, uh, the lender has about half of that or more that they’re going to end up charging off. So it’s a loser for the company and it’s a loser for the customer who needs a vehicle to get to work.

[00:44:10] The better thing would be to rehabilitate the situation, keep the person in the car. It’s better for the company as well to have that, that loan not charge off. And so the dose deferments, what we’ve shown. So I’ve been, uh, Senior risk manager. I’ve been the top risk manager at two large companies, and we would always track post, post affirmative charge offs.

[00:44:30] And we would see, uh, and my last company. So it was in the low 20%. So that means these are people that would have gone to repossession and charge off and 75 80 beds, sorry, uh, 70 to 75% of them ended up paying off the note. That’s a huge, and then those that default. You typically get nine to 12 months of payments before we can charge off.

[00:44:53] And so my toilets as well, when they’re properly used, they’re great. And so, uh, and [00:45:00] I, I know lenders that are adamantly against doing, uh, doing deferments. And I think they’re out of their mind because there are losses that wouldn’t happen if they got a little bit of, a little bit of forbearance. And so lenders that use that at this one way.

[00:45:12] It’s very good. Well, what we’re seeing now, when we see this from rating games, Sera reports, there’s not a glut of incremental losses beyond what we thought would happen. So we’re not seeing these COVID losses happen. Maybe they’re delayed. Maybe they will happen at some point, but we’re not seeing it right now.

[00:45:29] And what we might see is that lender’s got cart launched to give forbearance. And so a lender that may have had 20,000 defaults. They got to take a lot of those people and defer them. And a lot of those people may cure. So at the end of the day, instead of the 20 that they should have, they might have 15.

[00:45:47] So that’s a really interesting thing we’re seeing right now. I hope it plays out like that. Again, it’s good for the consumer. It’s good for, for the lender. And so, uh, you know, that is yet to be seen, but that’s pretty interesting. So, uh, what I would encourage [00:46:00] everybody, uh, is, uh, you know, election years always cause volatility.

[00:46:03] It’s very toxic. Uh, you have, uh, friends and family relationships that are disrupted by this, uh, and people hang on, uh, every bit of news and, and causing them wild, emotional swings, uh, that if you’re always seeing that in election year is I’d encourage everybody, regardless of, uh, where you come down on, on those types of issues, that business will continue.

[00:46:26] The sun’s going to rise. People are going to go to work and, uh, they’re going to find a way to engage in commerce that’s so I think there’s a lot of good news, uh, for lending going forward. Uh, and, uh, I think it’s just going to be, I’m looking forward to a fantastic 20, 21, particularly when we’re all able to go to conferences again.

[00:46:43] Yeah. Yeah.

[00:46:44] Joel Kennedy: [00:46:44] I’m definitely looking forward to it. Well, everybody that we we’ve had Daniel Perry, he’s the president and CEO of, of true decision Daniel, uh, a good friend to dear friend of mine. Thank you so much for joining us today and providing your outlook on the market. [00:47:00] It’s something that so many people in our space rely on.

[00:47:03] We need you to keep bringing us this, this information, this perspective.

[00:47:08] Daniel Parry: [00:47:08] Thanks, Joel. I appreciate you having me on

[00:47:12] Joel Kennedy: [00:47:12] the consumer five podcast has been brought to you by Northbridge loan software. That accelerates change. We’d also like to thank the national automotive finance association. The only trade association, exclusively serving the non-prime auto financing industry. .

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