Ally Auto Finance President Doug Timmerman says the lender is focusing on leveraging data and analytics to make better and faster decisions.
In a Wards Q&A, he talks about the need for speed, what lending segments Ally plays in, competition and what good dealership salespeople do to help customers. (Editor's note: The interview dates to before the coronavirus reached a crisis level in the U.S., which is why it's not mentioned in the Q&A.)
Here’s an edited version.
Wards: When you talk about making better decisions, what would be an example of that? Whether to do a loan or not?
Timmerman: Yes. Whether you say yes, no or maybe.
Wards: When you say better does that include faster? Is there a sweet spot as to how quickly a loan is approved?
Timmerman: Faster is a critical part of it.
Wards: What is best-case there?
Timmerman: Today, we do a lot instantaneously. Our automated-approval rates are up 40% year over year. You are talking about seconds to make a decision. (Timmerman, left)
Wards: What percentage of loan decisions are automated.
Timmerman: About 60% each for approvals and rejects.
Wards: Wasn’t there a time when automated decision-making was just for rejections?
Timmerman: Yes, that’s correct.
Wards: When did that change?
Timmerman: The most significant shift has been over the last five years. It’s been ramping up.
Wards: Is it because of better technology?
Timmerman: That’s been a big part of it. Leveraging the data and analytics as well. It’s also been heavily driven by the dealer’s need to provide the best customer experience.
Not only does a fast decision help our capture rates, it also helps the dealer provide a better consumer experience. The consumer can move through the car-buying experience quicker.
Wards: How many auto loans do you make?
Timmerman: We look at more than a million applications a month. We had 12.6 million total applications last year, up 9%. We did $36.3 billion consumer originations last year.
We are willing to look at all the applications, which is unique. A lot of lenders don’t. We don’t want a dealer deciding, “Is this an Ally deal or not?” We’re willing to look at all of them. Sometimes dealers are surprised what is an Ally deal and how well we compete.
Wards: How competitive is auto lending these days?
Timmerman: You’re seeing more competition on the top end, the super-prime end of the business. We’ve seen more competition from a rate perspective.
Players get in and out and compete on price. We don’t compete heavily in that segment. Our primary position is the bell of the curve; the middle. It’s a bit of a tricky place to play.
Wards: Why is it tricky? It seems like it would be a nice place to be.
Timmerman: It’s tricky in the fact that it is not super-prime credit, right? So, you have credit that isn’t always clean or clear.
Wards: There’s that old loan-industry saying that if you want to avoid incurring any losses, don’t lend money.
Timmerman: That’s the way to avoid all losses. We like (the middle) for a number of reasons. It aligns well to our dealer needs. The returns are better. The performance of that segment has exceeded our expectations.
Wards: That segment would be what credit score?
Timmerman: Call it 620 to 680.
Wards: Which is prime?
Timmerman: Yes, and near-prime at the low end.
Wards: What about subprime? What’s going on there?
Timmerman: We classify the next segment down as non-prime. That’s about 10% to 12% of our booked business. We’ve been consistent there. From a risk appetite, there’s no change going forward.
When we think of subprime – credit scores of 540 or less – we do little in that segment, about 1% of our book.
Wards: Lending, or borrowing really, has imponderables. Nobody takes out an auto loan saying, “I’m not going to pay this back.”
Timmerman: Maybe a few people do.
Wards: Disturbed people might. But most people intend to pay it back, whether they end up doing so.
Timmerman: Stuff happens. People can come upon hard times for whatever reason.
Wards: A lot of lenders have jumped in and out of subprime.
Timmerman: They have. When market conditions change, some lenders change positions.
I don’t see that much today but I’ve seen it over my career (that began with Ally in 1986) many times. You have to know what you are doing. Things can look easy. But if you don’t have the infrastructure and experience to play in that segment, it’s much different. Just because you are good on the credit decisions in the super-prime segment doesn’t mean you’ll be good in non-prime.
Wards: What’s the decision in super-prime? That seems like a safe-bet segment.
Timmerman: You still have to be smart relative to terms and advance. If you advance a lot, you must price for that because severity of loss will be higher. If you have an asset of X and you loan significantly more than that, you have to price that in.
Wards: The advancing more than the vehicle is worth is for add-ons and F&I products?
Timmerman: It could also be negative equity. There are lots of different positions you could be in.
Wards: There are those horror stories about aggressive dealership salespeople talking customers into more vehicle they can afford, and they end up struggling with the payments. How much of a referee role does Ally play in a situation like that?
Timmerman: It’s often different than that. It’s less about the salesperson encouraging the customer to buy something that’s too much, and more about not having a proper interview with the customer.
If you haven’t helped the customer think through on how much they want or can spend, you haven’t done your job. The best salespeople do a good job with the customer interview to understand what they are looking for and what their budget might be and then winding up to good options.
If the customer wanders over to a Cadillac Escalade and says how much they love it, you can say, “I’ll be happy to show it to you, but it is different than what you told me you wanted to spend and what you’re looking for.”
Good salespeople provide a huge value. The vast majority of salespeople do a great job in providing that service.