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2 AUTO FINANCING AND THE AUCTIONS Why should you care about the auto lending environment?

3 AUTO FINANCING AND THE AUCTIONS Why should you understand vehicle lending? Auctions are in the business of facilitating the wholesale exchange of vehicles The higher the number of retail (and fleet) sales, the more wholesale exchanges Immediately as dealers sell trade-ins Longer term as consumers trade these aging vehicles for new ones Thus, auctions want to see as many retail and fleet sales as possible Q: What percentage of new car sales are retail?

Lending is the lifeblood of vehicle sales and therefore of auctions How many vehicles could dealers buy at auction if 100% cash was required? How many vehicles could consumers buy if 100% cash was required? Lending starts with “Lenders” but only works with other sophisticated parties: – Capital markets – Regulators – Credit bureaus – Loan servicers (and other service vendors, insurance companies, etc.) – Repossession agencies – Auctions

Wholesale Lending How many of you have dealer lending arms? If dealers don’t borrow from you, where do they get funds to purchase at your auction? What do wholesale lenders look for to decide whether and how much to lend to a dealer?

Auto Lending Environment – Economic Environment Unemployment Rate Economic Growth Rate or Contraction Delinquency Rate Repossession and Loss Rate – Automotive Environment New and used car interest rates New car sales Used car sales Captive strength Subprime strength

Unemployment Rate Leading Indicator – Delinquency Rate – Repossession and Loss Rate New and Used Car Sales – Predicts future direction of new and used sales volume – Higher unemployment reduces used car demand, causes falling prices and then lower sale percentages for auctions

Economic Growth Rate Growth/contraction is change in GDP (What is that?) Leading Indicator – Delinquency Rate – Repossession and Loss Rate New and Used Car Sales – Predicts future direction of new and used sales volume – Higher unemployment reduces used car demand, causes falling prices and then lower sale percentages for auctions

Delinquency Rate Delinquencies are tracked very closely by lenders (and auto analysts): 30-, 60- and 90-day Rising delinquencies lead to higher losses What do lenders do when they see rising delinquencies?

Repossession and Loss Rates Trailing indicators of rising unemployment and delinquency rates Repossessions (“frequency”) create credit losses “Severity” depends on: – Initial advance (measured as % of wholesale value) – Length of term – Lease vs. Finance – Depreciation rate

Automotive Environment Automotive Variables – New and used vehicle interest rates – Higher rates increase payments – Used car buyers are particularly sensitive to higher rates – New car buyers often turn to longer terms (84 months) or leasing to get affordable payment – All these create longer trade-in times and/or cheaper vehicles so... – Fewer auction sales and lower average sales price

New and Used Vehicle Sales Used cars for wholesale redistribution are created by new car sales Both new and used cars typically involve a trade-in that may go to auction Fleet sales cycle into wholesale/auction resale faster than retail sales Consumers are holding on to new cars longer before trading – now more than 5 yrs

Captive Strength What is the primary purpose of manufacturer captive finance companies? Where do they get the money they lend? What happens if the manufacturer parent is very weak or headed toward bankruptcy? What is the average manufacturer new car incentive? What is the most popular form of incentive?

Subprime Strength Under rated in importance 27% of New Car Buyers are SUBPRIME – much higher for used cars Who negotiates price harder? – “A” credit new car buyer? – “D” credit use car buyer? If New Car Buyer doesn’t qualify for credit he/she wants, what do they do? If Subprime buyer doesn’t qualify, what does he/she do?

CONTINUING EDUCATION PROGRAM DEVELOPED BY: 15 Contact Us Randall McCathren COO, Auction Academy (615) Jiles Wanna Administrator, Auction Academy (615)