The State of the Subprime Market September 2011 Jim Bass, CEO Auto One Acceptance Corporation Jack Tracey, Executive Director National Automotive Finance Association State of the Below Prime Auto Financing Industry Jack Tracey Executive Director National Automotive Finance Association Top Auto Financing Industry Trends and Events • Funding availability issues diminishing -- even non-prime • Innovation abounds • Risk managers analyzing scorecard and FICO predictability • Refinements in underwriting • Collection effectiveness continues to deliver benefits • Direct Internet financing challenging the indirect model • Regulation -- Dodd-Frank requirements; CFPB formation • Outsourcing/offshoring continues • Dealer application portals expand capabilities • Electronic processing picking up speed Property of the National Automotive Finance Association Year-over-Year Summary Metrics Origination FICO NEW Average Amount Financed NEW 3 points $916 3 points $754 USED USED Average Term 30 Day $ Delinquency Unit Repo Rate NEW NEW NEW 1 month 3 month USED Net $ Charge-off Rate NEW 57 bp 95 bp 49 bp 56 bp 209 bp 352 bp USED USED YOY summary data for core respondent group (same 26 companies, 9 Small, 13 Medium, 4 Large) Property of the National Automotive Finance Association USED Non-Prime Industry Trends -- 2011 Update 2010 significant issues: Consolidation and alliances continue High Mortgage Defaults More Regulatory and Compliance Issues Returning Sources of Funding Competitive Opportunities New challenges but some continue…. 2011 significant issues: Predictability of Scoring Models Regulatory Uncertainty Housing Crisis Lingers On High Unemployment Continues Re-engineering for growth Property of the National Automotive Finance Association Trend of Used Extended Terms 2008 – 2010 Booked Contract Distribution 100% 80% 60% 32% 40% 25% 20% 20% 35% 25% 26% 2008 2009 0% 61-72 mo% Used terms continue to extend Property of the National Automotive Finance Association 2010 49-60 mo Trend of Originations by Risk Band 2008 – 2010 Booking Risk Distribution 100% 3% 17% 4% 19% 24% 80% 22% 60% 47% 49% 35% 40% 20% 22% 16% 0% < 500 18% 6% 2% 4% 4% 2% 2% 2008 2009 2010 500-549 550-619 620-679 Property of the National Automotive Finance Association 680-719 720+ Auto Decision Update Year-to-Year Auto-Decision Trend (Percent Using) 17% SMALL 22% 13% MEDIUM 17% 38% LARGE 56% 20% ALL 27% 0% 10% 20% 30% 2009 40% 2010 Substantial increases in auto-decision usage in 2010 Property of the National Automotive Finance Association 50% 60% USED Originations by TERM Origination Distribution 100% 32% 80% Up again from 51% 60% 35% 40% 28% 20% 0% Used <=36 37 - 48 49 - 60 61 - 72 Property of the National Automotive Finance Association 73 - 84 USED Originations by TERM Avg FICO 37 - 48 49 - 60 60 5 54 4 54 53 600 8 0 800 Up substantially from 556 400 200 0 <=36 61 - 72 73 - 84 Property of the National Automotive Finance Association >84 USED Originations by TERM Avg LTV % 0 1 1 1 1 7 % % 0 2 1 1 1 6 % 150% Down substantially from 126% 100% 50% 0% <=36 37 - 48 49 - 60 61 - 72 73 - 84 Property of the National Automotive Finance Association > 84 2010 NAF Survey Trends Originations Increased credit availability spurs growth Look-to-Book rates are up significantly especially for middle-tier applicants Significant decrease in highest risks (<500) Significant increases in auto decisions Longer used contract maturities – mitigated by risk and LTV changes New-vehicle financing continues to expand (18% of booked vs 15% last year) Verification procedures are intensifying Risk models are being refined to account for strategic defaulters Property of the National Automotive Finance Association Summary Profitability Metrics by Class Size Small Medium 30% Large All 25% 20% 15% 10% 5% 0% Interest Income Cost of Funds Pre-Tax Income Pre-tax Income Up 184% -- lower losses and cost of funds offset lower interest income. Property of the National Automotive Finance Association Repossession 15% Small Down from 14.2% 10% Medium Large All 5% Overall average repo rates were down from prior year, particularly in the Small group. 0% Repossession Account Rate $8,000 $7,000 $6,000 $5,000 Overall average net loss per repo was down $1,218 from prior year. $4,000 $3,000 $2,000 $1,000 $0 Repossession Avg Net Loss Per Account Property of the National Automotive Finance Association 2010 NAF Survey Trends Portfolio Results Pre-Tax Income is up 184% Lower losses and funding costs more than offset rate decreases Delinquency improving Repossession and bankruptcy losses beginning to decrease More effective collection operations continuing to pay off Behavioral scoring taking hold Early intervention Vintage delinquency and loss analysis is the norm Property of the National Automotive Finance Association