Leaders in Lending
Leaders in Lending

Episode 57 · 6 months ago

Tapping into the Unsecured Personal Lending and Auto Refinance Opportunities

ABOUT THIS EPISODE

There are two lending spaces that tend to be underappreciated by many financial institutions: unsecured consumer lending and auto refinancing.

Jay Fee, Vice President of Consumer Banking at PenFed Credit Union, has considerable experience with both. He joins the show to discuss the mechanics of unsecured consumer lending and auto refinancing, and why financial institutions should make the most of these opportunities.

We discuss:

  • The history of the unsecured consumer lending and auto refi space
  • How lenders and fintechs can create symbiotic relationships
  • Why auto refi is an excellent untapped opportunity
  • How fintechs can help lenders seize the opportunity 

To hear more from Leaders in Lending, check us out on Apple Podcasts, Spotify, or on our website.

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You are listening to leaders and lending from upstart, a podcast dedicated to helping consumer lenders grow their programs and improve their product offerings. Each week here, decision makers in the finance industry offer insights into the future of the lending industry best practices around digital transformation. In one let's get into the show. Welcome to leaders and lending. I'm your host, Jeff Keltner. This week's episode features my conversation with Jfee, the vice president of consumer banking at pen Fed Credit Union, one of the nation's largest credit unions, and Jay spent time not only in consumer banking, the Credit Union space, but also in auto lending and automotive space in general, and those are areas that I think are both very topical in terms of opportunities for credit unions and banks and also near and dear to my heart as things we really focus on a lot here I've started. So I really enjoyed this conversation with Jay. He talks a lot about fintech partnerships, talks a lot about automotive and where the opportunities are there and how credit unions can can more effectively work with fintext and what those opportunities look like. Think it's a fascinating discussion for anybody interested in this kind of edge of Fintech and in traditional financial institutions and maybe what we can do to cross those boundaries and work together. So please enjoy this conversation with jfee Jay. Thanks for joining the podcast to day. I really appreciate it. Thanks, Jeff. It's good to be here. So I've started asking all my that's the same first question and I think your answer will be quite interesting. But I always has our like most of us, don't grow up dreaming of being bankers and yet here we are. Tell me a little about your career path into this industry and I think you've kind of been on the banking side in the fintech sites. You've had a little bit of an interesting journey to where you're at today. Yeah, I'd like to say it. I like to say that I've committed a career suicide about five times and here, here you are, here I am, but fortunately I've been able to continually reinvent myself. But had the the the great opportunity back in the S, which is dating myself, to spend my first ten years at navy photo crazy ultimately I ended up in a position there where I was basically running the originations for auto and unscared. So, which is a bit odd because it's Deja Vu all over again now for me here at pain Fed. But in between leaving there in two thousand and joining pain Fed in two thousand and nineteen, I had great opportunity to work at the nation's largest distributor of auto automotive accessories. So I was able to kind of take my auto financing background and then get to see kind of the aftermarket in auto. Ultimately, I ended up a Volkswagen for about seven years up where I ran dealer relations so that I got to see the dealer side of what goes on in addition to auto financing, in addition to car production. That the world's largest store, second largest manufacture. And then I got plucked out of there to go start company at the time that we called Motor Refi and from get plucked out of there by a gunny, Nigel worse, who helped to start capital one and we built that into now it's one of the largest refly shops in the country. Hey, you took that to to all the way to prior to a series a and then joined pen fit. In my golden years here here it's been. It's being a great, great opportunity to take a at the time, which is a very small portfolio. We've been able to just in three years x the the total portfolio originations to where this year we'll probably do will we're at a run rate right now of of fifteen billion in terms of originations, up from to so not not too shabby. In the last fifteen billion up from too. ...

What's that? What's the magic that you for that? Some of it is was just, like I said, I had the just blessed opportunity to work in a lot of different places and see best practices. Don't profess to have started really kind of anything new. I've just taken. I've been less to be around a lot of really smart people and see what they do and then and then mimic that. And so just everything from building highly efficient male campaigns and the stuff that we did in the s. There was stuff that we just brought over here, risk based lending, you know, basically trying to take it, trying to make sure you get every opportunity, which can mean, you know, doing making sure that if you're going to decline alone, that somehow you monetize those those decline and then you know, understanding the the the back end market is very helpful. Nobody grows up wanting to be a banker, but if you understand bank is more than just originating loans, it's it's managing your balance sheet, it's making profitable loans, it's managing risk, but it's also, in some cases, selling those loans that you don't want to hold on your balance sheet for whatever reason. Sometimes you're selling them because you can make money, sometimes you're selling them because you need to clear your balance so you can make more. So's I like that second part. I Love Your answer to it reminds me this quote from, I think Patrick Lynsee only, where he said, you know, success is not a matter of mastering subtle, sophisticated theory, but embracing common sense with uncommon levels of discipline and persistence. And I feel like there's so much of that in the in the lending space today, where it's it's not rocket science to do this better than average. It's just taking the things we all know to be true and actually, like deploying them successfully on an ongoing basis, effectively and that's like that sounds easy, but it turns out that it's harder to do than it is to say. But it's not all like you have to reinvent the wheel. You've gotta, you know, just take the things we know how to do it do them. Well, you just said a much, but it would take me like twenty minutes to explain that. So I read. I just was it was all saying good writers borrow, great writers deal. All Right, I think you know. I just I still people stuff and it makes me sound smarter. So I want to ask you know, there's kind of two categories of letting I wanted to talk about today that you either are have been involved in historically, which is kind of the unsecured consumer space, and the auto refi space, which are, I feel like, underappreciated opportunities by many flies. When they're they're relatively small parts of bigger parts of Credit Union balance sheets for community banks and large banks are almost rounding errors. When combined, credit unions are a little bit more, but they're still, I feel like, not appreciated for their potential. So I'm curious what you think of maybe will just start with unsecured. What you think of that and in why they do you agree that it's an underappreciated, underleveraged opportunity and if so, why? And if not, then you can just tell me I'm crazy. No, no, I would say that, you know, at any given point in the credit life cycle you find certain programs being the Dar Darlings one minute and that as the credit life cycle changes, they can become the villains very quickly. And it seemed like unsecured gout. Yeah, it was really kind of in the early s was really kind of really beginning to gain a lot of the tension and attraction, especially for, you know, buil consolidation, credit cards consolidation. I think the the crash of two thousand and eight, two thousand and nine, it's scared everybody. Yeah, really stopped. I mean I had not known the history as much before, but it was like a thing before hundred eight and then like and then it was not, at least among traditional financial institutions, and I think the space was only growing so fast and you had a lot of players coming into it and they a lot of players got really big really fast and you got lending clubs and stuff like that. And and then what it ended up happening was a lot of people really got the beat down, because it's like any other market.

As as the players grow faster than the demand grows faster than the actual supply, then when it's a happening to people get greedy, they start moving further down. They made the credit the credit spectrum to try and make loans that they weren't making six months ago to continue to increase their volumes. So that that's that's you know, certainly that's that's the history. Now the question is is, are we heading into the downward turn of another credorcycle coming up? So right now, personal loans have become an unsecured lens have become, you know, the darling again. Why? Because you know, you can even as long as you can originate them with with, you know, wax that outpace the losses, you know, by seven hundred, eight hundred basis points, which you can do, then you can even sell these two hedge funds. So, and that's not that way with auto. So whereas you know, auto is certainly lost a little bit of the luster over the last last few years because people are making so much money on on on the unsecured and point of sale is now really taking off and becoming such a huge, huge source for for unsecured originations. And then people are begetting much more wise about just reflying their credit cards and putting on a on a and fixed installment loan. And then you have these new instruments that are coming out, like cards, that they can easily be convertible to to fixed right loans if you're not using it for like large individual transactions, so you're not paying the the high credit card balance of a revolving line that's open. So that's it's been interesting to watch the cycle and I would say right now personal loans and that secure loans have become quite appreciated compared to where they were. Do you see, I mean more more institutions investing and making that possible and anything that you think they're doing well or should be doing better in terms of actually growing and investing in that, in that capability? I know you talked about a couple interesting ones. It was. So banks are good banking, they're not always good at marketing and and they're not always good at product creation. So that's generally where the Finn text come in, right. So fintext are good at creating products and then and then marketing those products. But they're also traditionally not very good at things like balance sheet management and banking. So that's where kind of the marriage has really happened, and I would say the banks and credit unions have really kind of lagged and kind of their technology. They got married, you know, usually a long time ago, and the S and s too, these legacy mainframe beck ends and they're they there's just not a nimble and and they built their their it structures around all of that. And and so they became that they lost their ability to really create good front ends, things that would work well for the member experience and their solution usually is to throw money at it to do that, whereas if you work in a Fintech and you did, you come in, you decide you want to change the the application flow. Yeah, I worked in one when we did that every day. So with the with the with the bank, you're generally you're in six months of compliance sign offs before you can even go out and see you start start those types of things. So that's limiting in terms of product expansion, product product change. Do you see that as a reason that there's I feel like there's an evolving fintac plus bank partnership. That where banks are able to leverage that in a and I think like some of our increat I should...

...say credit unions to I don't want to explain that, but I think sometimes banks and creditings think of like you know, their originations need to be to their current members in their current branches, through their current channels, and this idea of a Fintech partnership that can bring volume feels different. But it feels like a strategy that can really solve bring the best of both worlds together to me in terms of what you're talking about from user experience and Nimbleness on the Fintex side with the balance sheet management and in safety and soundness on the on the Credit Union bank side. The banks get it. The big ones now get it and they they're trying to change as fast as I can be of a. The rest of those guys, they're throwing billions of dollars at, you know, at making themselves better in those areas and they're making good progress, but they're never going to be able to be as Nimble, as innovative as a FENTEX. So what they've done now is they basically form relationships with these fentext they try and, you know, boat race which one is going to be kind of their best, the best of the best, and then they buy them. So they require them and think and they and the interest or acquiring the technology. And so, Yep, in some cases it's worked. Some cases it ends up being what actually kills what was good about the Fentech. So but yeah, it's interesting to watch and depending on how the rest of this year goes, it will be be interesting to see, you know, if the fintext now you with with you know, money's getting tighter, their ability to raise cappin. It'll be interesting to see if that continues. A lot of the the fin text are like one trick ponies that are keep trying to to find other kind of origination tools, ideas products. They're struggling a little bit because they realize if they don't get more core service offerings, that, you know, the ability to to the barriers to entry, the other people are going to come and just do what they do, but do it cheaper. Is is that's that's the product life cycle and I you just seen it just in the last three or four years of who were the fintech darlings in loan origination, you know, three or four years ago, and look where they are now. So Yeah, interesting. I wanted to dive down to autorefining. You you spend a bunch of time and autorefin. Let's just start with the core like it's always interesting you talk about, you know, personal ons, as credit card refine. That's really the interesting move from a revolving product to an installment product that has a different risk profile and, understandably, can be priced differently. But autorefine a certain level feels like unless rates are going down a lot. Why is there an opportunity to talk to about why you think there's a space for a refinancing automobile loans and also why it's I'm always shocked that in the mortgage space there's like a pretty good refin market and yet in the autospace a very small portion of originations actually end up as refinance opportunities, and it's always a prized me that that's true and I'm curious your thoughts as to, you know, why it's a good opportunity and why it's not a bigger part of the overall auto ending space. Yeah, so that's great. I think the being in Volkswagon was for a number of years running dealer relations. There was a big eye opener to me because I never before going to there. I never realized how important the FNI and finance department is to the lifeblood of dealership. You know, dealers make money, you know, through new cars, through sales, through you use car sales, flipping and turning those vehicles, and through the FNI and through the service base. They Service Bays. Warranties down, way down, based on you have electric cars, which don't really need holdout servicing their the they're the minority, certainly, of the cars that are being sold, but you have just the dramatic improvements and quality that have happened and how long cars last now.

And so you know they, the dealers, are taken a hit in the service bay, they dealers, and they take a hit with new car sales, obviously, who can even find a new car these days, and then with use cars that they've had a recent boom. But now I think you're starting to see the horizon on that with you use car prices coming down now. So they're going to be really reliant on on the F and I shop as as the bread winner. You probably increasingly in the coming years and and doing that for them to make money. They generally are getting incentives from the manufacture, but those incentives are way down now because there's fewer cards for the the the manufacture to even provides. So they've got to make money where they can make money, which generally means it affects the overall price of the vehicle. So even though, with rising rates, it would be intuitive to say, okay, well, you have the isn't a autorefin market going to dry up because these people, you know, they originated it at, you know, five percent lat you know, then rates are going to be six percent. You know. Well, then that will happen to some degree. It'll have some effect. But you can't most of these a lot of these refly shops are targeting people thirty days after origination and as as as the refly shops have gotten more numerous, you have to get to the consumer earlier and earlier, because otherwise they're getting hit, you know, by a ton of people, you know, within the first thirty days to refly their their vehicle. So the rates aren't going to move that much in thirty days. And if you can, if you're paying basically more than three hundred basis points, or you can save a hun more than a hundred dollars on your or auto loan payment monthly payment, then you are highly likely to respond to those opportunities that are going out. So as long as dealers have to to to to make that, you know, extra three hundred basis points, you'll have a market there, just as long as long as the reefly shops can get to you in the first few thirty to sixty days before. If, if we end up with interest rates of nineteen percent our car loans, then I'm proven wrong on that because that just means we go up fifty basis points every month. But that's it's looking like they'll be some flattening of that, certainly by the of the year. Interesting. What do you think? You know, FIS need to do to think about taking advantage of the opportunity that represents it. You know, the second part of my question is, why isn't that a bigger thing for most shops today, the autorefly opportunity that sits there and looks like that? What? Why don't we see more of it being done or more focus on it as an opportunity? Well, if I's are dependent upon the fintext to do it. Generally, for the most case, the flies that do it themselves don't really do it the right way. You know. They usually get into mail. Mail. Mailings used to be the big driver. Yes, you know, now it's much more digital methods. So until the FIS society focus on it and they get better at their digital methods for origination, they understand it. You know, they hire people out of places like Credit Card Mon and stuff like that that can you kind of teach them. Then there it's not not a big thing. I mean we estimated, you know, the full time market to be we are a motory five of you know. It's truly not a market, right, and pretty good mascumated that. Okay. Well, fundamentally, at a certain point, if everything were were out there functioning with a lot of really hardcore folks in the business and you were reaching all the people that you should be reaching, it would be probably somewhere around a hundred billion would be refinanced every month. Hundred...

...billion a month is a it's not where we're at. Yeah, exactly. So obviously there's still some room to grow in the market, I think, and even though there's a lot of folks fintext doing the the the refi busits. Only a couple of them. They're really doing well. Yeah, IT'S A it's a challenging space to do well. I mean just the diversity at particularly to have a large geographical footprint, the electronically and title transfer, the wet signatures, the the you know, perfecting a lean in a seamless way without breaking the bank and making a it's not easy, right. It's you have to be smart of underwriting and that digital process is hard. So it feels like a good opportunity, but it's going to take a lot of persistence and execution to actually do it well. Well, most of the refly shops don't actually make money on the the F the flies origination fee. So they make money on the ancillary products. Yep. So that that's probably an under underappreciated fact by many as that how much of that money actually comes from? What you mean by Ans Flier products, just so people are clear what we're talking about. Yep. So the gap insurance. There's all sorts of different types of insurance products that are usually sold by these these shops and some of them are, you know, are actually good deals and you should do them. If you're if you're at a hundred and thirty percent loan to value on your loan, it makes makes sense to go out and go out and pay for something like gap insurance in case your car ends up being t boned and your hand left with that thirty percent balance there or more after the insurance claim. So usually those products are priced modestly, so their price less than if you got them at the dealer show. And so it. You know, it's not the it's not an initial turnoff usually to the consumer. And you have hot very high option rates by the consumers. said, that's how they generally the reefly shops, make money, because they can't. You can't put the money, you can't put the the cost on the on the consumer. The consumers there to save money, yeah, and get a lower rate, but yet the FI, the the financial institution, also has to has to make money on it too. So you can't put too much of it on there. So so you got to find a way to to square the circle, so to speak, and then, yes, thence layer products help. Well, Jay, this has been a fascinating conversation. I have the same three questions and I'm really curious giants. I ask every guess at the end of these sessions, so I'd like to throw them out to you now and see what you was what you say. My first one is what is the best piece of career advice you've ever gotten? Wow, well, it's probably a bit more up to here, Rot not relevant here, but it was always treat the people who work work for you that treat them the way you want to be treated. Make sure you take care of their pay, care about what they do and always pay attention to their family. So that's actually helped me, I think, a great deal, because I'm blessed to you know what I got here at pented it was very ad a team of free and we've been able to build it to over forty five people, and a lot of those people followed me from from other places where they've worked for me. So I guess I'm doing something right in that respect. So I'd like to think that that that piece of advice is helped me out a lot. The other thing that you talked about was, hey, you know what you call it, stealing, mimicking, whatever the case is, it's it's okay if you didn't come up with the idea and you want to use it. So that's a you know, there are some original ideas. I don't know...

...if I've ever come up with one, but I think I've been a good borrow guy. is a kind of A. I love that because doing silicon valley there's occasionally a I think people think get obsessed with the idea of the great idea, and I'm like, you know, the ideas a little bit of it, but so much the success is the execution of that idea and it's not. You know, you should be willing to find a good idea and then success. And obviously who had at first, but who can actually go and take what may not even be you know, take that concept and execute it? Well, all right. Second Question. What's the best advice you've gotten about the consumer lending space? That was from Nigel. So just, you know, create your origination lovers that you can. You can't have too many levers, I'm sure that you can, but but the more levers you have, the more flexibility you have, and more channels you have, the more flexibility you have. And if you even if you're going to move forward in the space and you're not really sure, you know if it's going to be a big deal or a small deal. If you don't move forward with it and sign the deal and get it set up, you miss a hundred percent of the shot you don't take. So lots of lovers like it. Lots of levers, lots of levers. We love different I think of those knobs things like a different, different, different ways you can drive things. And My last question for you, what's one bold prediction for the future? Bold prediction, Boll you know, bold is in the eye of the beholder. I yeah, here again not not having a lot of great original ideas. I'd probably just borrow US some from from other folks. That just I don't see a way that we don't have some type of correction here in the next next six months. When when I think you're going to see a rush of rates going up, you know, with a fifty basis point change probably happening on my third all of a sudden everybody's going to be raising rates, and I don't know if everybody's fully understands that. All of a sudden, when all the banks start raising rates and then credit becomes harder to get and then the shock impact to to what's going to happen out of this. I understand they need to slow things down, but I think you'll see some type of pullback. That's going to happen, some type of pull back, and then a's COT by. It's a I don't know, there's a I've always I've felt recently that I've never experienced a time where the range of seemingly possible outcomes from a MAC economic point of view over the nine month horizon was wider. Like there's some sense of like things could correct and be good and supply chain could constraight now and flashing could and then there's a sense of like could go the other way. Feel fast and it's all right, and it's usually feel like it's a roughly narrow window where you might be in six months, and right now it feels wider than normal. We live in times of pandemics and murder horns and all sorts of other crazy stuff going on. So I've been proven wrong already. That you know, and the first saw the first inverted yield curve and thought that we were heading into recession after that. But it seems with a revisitation of that and and now all of the other things that are all kind of coming together at this point. It seems could be we're going to be really hard to avoid correction. So, yeah, I think that's that's a fair prediction. Will let we'll let bold stay in the ID beholder. I don't think it's bold. Well, mass predictions are accurate. They don't have to be bold anyway. Jay, I appreciate your make the time. This was really interesting and I appreciate you sharing your thoughts. Thanks, Jeff. I really appreciate upstart partners with banks and credit unions to help grow their consumer loan port folios and deliver a modern, all digital lending experience. As the average consumer becomes more digitally savvy, it only makes sense that their bank does too. UPSTARTS AI landing platform uses sophisticated machine learning models to more accurately identify risk and approve more applicants than traditional credit models.

With fraud rates near zero. Upstarts all digital experience reduces manual processing for banks and offers a simple and convenient experience for consumers. Whether you're looking to grow and enhance your existing personal and auto lending programs or you're just getting started, upstart can help. Upstart offers an into in solution that can help you find more credit worthy borrowers within your risk profile, with all digital underwriting, onboarding, loan closing and servicing. It's all possible with upstart in your corner. Learn more about finding new borrowers, enhancing your credit decisioning process and growing your business by visiting UPSTARTCOM Ford Banks. That's upstartcom Ford Banks. You've been listening to leaders and lending from upstart. Make sure you never miss an episode. Subscribe to leaders and lending in your favorite podcast player using apple podcast. Leave us a quick rating by tapping the number of stars you think the show deserves. Thanks for listening. Until next time. The views and opinions expressed by the host and guests on the leaders and lending podcast are their own and their participation in this podcast does not imply an endorsement of such views by their organization or themselves. The content provided is for informational purposes only and the discussion between the host and guests should not be taken as financial advice by companies or individuals.

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