Inward and Upward: Driving Member Growth and Financial Health with Auto ReFi

[00:00] Eric Stradley: If you’re in auto lending and you’re not doing refinance, you’re leaving profitability on the table. And if you’re looking to get back into auto lending, it’s a really good place to start because of the risk is just much lower.

[00:13] Narrator: Welcome to 22 Minutes in Lending, your go-to podcast for insights on all things lending. From lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry. Let’s dive in to the latest in lending.

[00:37] Vince Passione: Welcome everyone to 22 Minutes in Lending. I’m your host, Vince Passione, and today we’re exploring the world of auto loan refinancing with Eric Stradley, president of Caribou. Eric’s path to leadership has been anything but traditional from his early days as researcher and statistician to his time at Uber where he spearheaded operations across North America, and later led brand marketing. Now with Caribou, Eric’s been driving the mission to make auto loan refinancing simpler and more accessible. With more than a hundred thousand loans refinanced today, Caribou is empowering borrowers to save money by connecting them with trusted local and community lenders. Eric, welcome to the podcast.

[01:13] Eric Stradley: Thanks for having me, Vince. Really happy to be here.

[01:14] Vince Passione: It’s awesome. So, hey, I always like to start off with tell me the founder’s story of Caribou. Tell me the why.

[01:21] Eric Stradley: Yeah, I think the why is the folks over at QED, a great investment firm in the Fintech space, all came out of the Capital One ecosystem. And I think an observation that they had when they were there is there’s this huge portion of the market in auto that are served by credit unions who are historically not-for-profit lending institutions, don’t have a lot of technology resources, certainly outside the top handful of credit unions don’t have very broad marketing reach, and yet the value they deliver to consumers is so high, the best rates in the market, a set of other products once that member is there with the credit union, that is also very high quality.

[02:01] Eric Stradley: And so how do you take technology of a venture-backed company and find a way to work with credit unions to step outside their traditional marketing channels, to step outside the kind of indirect auto existing dealership business that they have and attract high quality customers with the great product that they offer? And their idea really was to build a marketplace of credit unions and a business that could go directly to consumers and go out and get those indirect auto loans and new members of very high quality for credit unions. And MotoRefi was born in the basement literally of QED and has since rebranded to Caribou, and it’s been I think a pretty spot on hypothesis that they’ve had. We do work with other lenders outside the credit union space, but the core of what we do is really helping credit unions find high quality new members with really high performing loans via a lot of the same muscles that they built with their indirect program, but in just a slightly different way.

[03:04] Vince Passione: Yeah, I’ve been in that basement visiting Nigel and Frank, so it’s a pretty nice basement.

[03:09] Eric Stradley: It is a nicer basement than a lot of startups, which I think was very much appreciated at the time, and we appreciated their hosting us for sure.

[03:19] Vince Passione: So let’s step back. How big is the auto refinance market?

[03:23] Eric Stradley: I think about 1.2 million loans each year are refinanced in the auto space. That’s really a small fraction of the total number of loans. I think more like 10 million customers at any given point in time could benefit from an auto refinance and save at least $50 a month is some of the work that we’ve done on the credit bureau files and looking at what is the opportunity out there. And so certainly the last 18 to 24 months, the market shrunk as it did all refinance products, but that baseline pre-COVID growing at about five-ish percent per year was about 1.2 million a year, and we’re seeing a lot of evidence that we’re getting back to that point.

[04:06] Vince Passione: Now, is there an empirical formula because obviously in any other refinance market, like in the mortgage market, we look at the average, then we look at rates coming down, it takes a while, but is there some empirical formula for you to sort of readjust the TAM as you go out and try to convince credit unions and other lenders to jump into the market?

[04:24] Eric Stradley: Yeah, I think the short answer is not really. It’s a little different than your typical mortgage refinance play because so much of the market is driven by people who got a pretty bad deal when they got their car or they had a worse off credit score when they got their car. And oftentimes for folks with a call it 620 to 650 credit score, you buy your vehicle, it’s your biggest purchase, maybe your credit is just a little thin, you make six to eight payments, and guess what? Your credit score goes up and you deserve and you’ve earned that cheaper loan by virtue of the bureaus effectively recognizing that you no longer pose as much risk as you did when you first bought that car. And so that really creates a big pool of the market for us, and so we look at folks who have bought their car two-ish years ago, sometimes as little as six months ago, and we say, “Who do we think has built credit since that time? Let’s get out there in front of them and say, ‘Hey, you probably didn’t know this, but you can mark that loan to market and your current risk level with the bureaus and lenders will reward you for that progress that you’ve made. And by the way, you can save $130, $140 a month on average on your payment.'” And that’s really meaningful for the vast majority of consumers.

[05:39] Vince Passione: Credit unions are big indirect auto lenders, which means they rely very heavily on the dealer. I spent a lot of time to do a track as part of the founding team and those relationships between the credit unions and the dealers are sort of moralized in an agreement where they get paid. So I step out of the dealer, the credit union got me the loan, and now all of a sudden the dealer sees that it just got refinanced. It might get refinanced before he actually gets his payout. So how do you avoid that?

[06:05] Eric Stradley: It’s a great question and one we get all the time from credit unions. What I would say is 98% plus of the loans that we refinance are not from credit unions. They’re from your typical dealer-centric folks like, to use QED folks, pick on them for a second, Capital One finance, some of the subprime players and the finance companies that really dominate the dealership for these folks who might not have had a prime credit score when they bought their car or maybe were paying a little bit more to the dealership office than a credit union could afford to and saying, “Let’s get that borrower from effectively your competitor and into the four walls of your credit union where they can be a really good member for you.” And so it’s not quite as competitive as many lenders might think going in and in fact helps them compete with the right players, not with themselves.

[06:56] Vince Passione: So credit’s been pretty tight last couple of years and there’s been a strange sort of fluctuation in car values. We saw it during COVID, artificially inflated car value’s matter to you. Like any underwriter, you’re trying to calculate a loan to value and then there’s this infamous piece of the business that we call the backend, that you’ll ask the F&I manager to sell other products and services. How has that changed over the last two years for you if you think about ups and downs?

[07:27] Eric Stradley: It’s a great question. I would say rewind into 2021 and early ’22 when car values were going up into the right, I think people got a little over their skis, LTV thresholds were very loose, 135%, 140%, and very few customers failed for LTV because the car value that they had oftentimes exceeded that of when they bought the car. Very quickly as car values came down 15%, 17% year-on-year last year, and then I think we’re down to about 3% year-on-year right now, the sort of slope has decreased, but values are still sliding a little bit. LTV thresholds from our lender partners is very tight and we help them manage that. We’re talking about 120% on the backend instead of 140%. So that’s really been a challenge for the business candidly, but I think we’re
seeing as that slope of depreciation and decline in vehicle values has flattened out that lenders are saying, ” Okay, now I understand the asset again that
I’m lending against. I’m back to the table. I’ll be a little looser or I’ll expand states or I’ll expand the balance sheet I’m willing to dedicate to lending,” which has been great given some of the challenges we’ve had over the last couple of years. But I think in general what we’re seeing is folks, because particularly of that dynamic in the vehicle market dissipating, are back at the table looking to lend an auto again.

[08:56] Vince Passione: Yeah, so vehicle values, get it, so about consumer credit. So 2020 was a vintage that I think a lot of my credit union clients would like to forget in the auto finance business, but it’s not just auto, I think stimulus, artificially inflated FICO scores, and people went in the auto business. What we saw was the dealers moved all their business to credit unions who were probably slow in repricing that risk and the captives backed away. How did that affect Caribou and your clients?

[09:28] Eric Stradley: I would say it depended on how our clients sort of anticipated what was likely to come based on some of the trends, some breeze through as if nothing happened at all. Many had to take a big step back from lending. I would say at least half the lenders on our platform took a big step back during late 2022, early 2023. I think the one benefit that we have that we harp on a lot is people are looking to get back into lending is that refinance performs about, if you look at all of the vintages from 2019 into back into 2017, just look at refinance performance versus origination through your traditional indirect refinance performs about twice as good on a net charge off basis as a typical indirect loan because you have demonstrated payment history on the asset, you have positive selection, somebody who’s looking to improve their standing on a monthly financial basis, and that really bears itself out the performance. We run a couple studies with a few of our clients and we just are wrapping up one where we’re seeing that for that particular lender, we’ve done
over $700 million worth of origination for them, and they were somebody who has managed their capacity fairly well through the cycle. Our performance is
25%, the net charge off is 25% of their indirect portfolio. And, again, it’s because of that dynamic where you have such positive selections that demonstrated
payment history on the asset that we think is driving the fact that if you’re in auto lending and you’re not doing refinance, you’re leaving profitability on the table. And if you’re looking to get back into auto lending, it’s a really good place to start because the risk is just much lower.

[11:11] Vince Passione: Yeah, look, it’s good timing, as I think about 2025 for you all, given the fact that credit unions need loans and they lost a significant amount of market share in the auto side of the business and the captors have pretty much grabbed most of the new business with subvention being back in place. And the used business, what you said, values are starting to stabilize now, so it’s a good time for them to start stepping back in.

[11:35] Kara Van Wert: This is Kara Van Wert, Chief Lending Officer at Veridian Credit Union. Since 2016, we’ve been working with LendKey and join the Member Student Lending CUSO to help provide student loan solutions to our members. As the current CUSO board chair, I’m proud of the CUSO-LendKey partnership as this has allowed Veridian to help over 12,000 of our credit union members finance their education and improve their financial health. LendKey’s streamlined processes simplifies the lending experience, making it easier for our members to access the financial support they need.

[12:16] Vince Passione: So, Eric, let’s talk about the process. Tell me about what’s the process and the experience for the consumer and then what’s the process and experience for the credit union on Caribou?

[12:25] Eric Stradley: Yeah, great question, Vince. On the consumer side, our core thesis is that consumers need to be able to discover whether or not they can save money very quickly without a hard credit pool. And so we’ve built a digital consumer flow that enables that based on a soft pool and a few pieces of
information we need from the customer, and we show them the best offer in our network that we can find at each term that they might qualify for. And so that
takes 15 seconds at max and then they’re ready to say from a place of, “I didn’t even know if refinancing was right for me, now I can see real pre-qualified
savings, I want to proceed.” And then at that point we pushed them through an LOS in the back end to the credit union for a firm offer of credit.
They’re still interacting with Caribou on our website and we start to gather the stipulations needed for that customer. Again, all digitally, which is our other core tenant. People need to be able to do this 24/7 from their couch when they have the time. It drives the best conversion for our credit union partners and it also drives the best outcome for the consumer. And so we do digitally the contracting, the additional product selection, all of the step fulfillment and document review, and then fund their loan for them and onboard them into the credit union as part of that funding process. On the credit union side, they see nothing about the customer until we do push them into their system for a firm offer of credit. That approval rate is over 90% typically because we’ve already pre-screened the customers that don’t fit their credit box. The only reason that they might get to that point as a customer and end up getting rejected by the lender is because the lender has some sort of manual decision making around the edges of their credit box.

[14:07] Eric Stradley: And then they say, “Yes, it looks good.” We again, intake all the stipulation requirements for that customer from the LOS, we do all the fulfillment on our end, and we send the lender a sort of fully perfected loan packet for QA and funding at the end of the process. So it functions a lot like indirect, but the difference is the conversion rates are three to 4x better in terms of look to book because you don’t have a lot of wheat with the chaff. It’s only the stuff you really want as a lender and the customers that you’re looking sort of to have in your membership pool and loans that you’re looking to grow in terms of your balance sheet.

[14:43] Eric Stradely: The other thing that the customer doesn’t really see, but we do a lot of and have spent most of the last few years really investing in is we do all the retidal work for the credit union. So we pay off the existing lienholder, we place the new lien. We do that within 120 days in 99.9% of the time. And a big part of our value add to credit unions is this is a slightly different title process than what you’re used to with the dealership. Some other competitors in the space have struggled with this aspect and it’s one of the places that we really hang our hat on in terms of being very good at it.

[15:17] Vince Passione: Has the average FICOs shifted for you as the market has changed over the last few years? What was it before 2020 and what’s it now on the platform?

[15:29] Eric Stradley: I would say it’s hard for me to say before 2020 because we barely existed as a company. We did a handful of loans in 2019, we’ve grown very quickly since then, but just to use 2020 as an example, our average credit score is very high, in the 740-750 range in terms of FICO. Today, it’s right around 700. We do a lot of prime business. We’re starting to do more and more near-prime business through direct partnerships that we have, but also through an insured program that we’ve introduced where we’re helping credit unions lend to a customer they might otherwise not take the risk on with an insurance policy that covers the collateral should that loan go under.

[16:10] Eric Stradley: We think that credit unions have the ability to serve a customer that they typically struggle to serve from a risk perspective in that near-prime bucket, folks who might be early on in their credit journey or might it be recovering from a bankruptcy or something like that. Everybody makes mistakes or runs into hard times, but are going to be an incredible future customer or current customer for the business and the credit union, but maybe their credit score isn’t quite caught up yet. And so we have an insured product that we’ve recently introduced, and what it does is it covers the loss at the time of repossession if a vehicle does need to be repossessed and pays out about 80% of the book value at time of repossession if the lender can’t recoup that value themselves.

[17:01] Eric Stradley: It also has a repossession credit and a few other things that we think are enticing to lenders. And what we’ve seen just through some of the early applications that we’re approving is these are folks with 620 FICO scores who have a 27% APR that we can get into an 18% or a 17% APR. The added risk on that loan above and beyond prime is now living with a reinsurance partner who we work with and act as kind of a pass through to, and all of a sudden the lender gets this customer who really had no other options, who’s going to be a customer for life and a member for life, and we’re really excited about it. So that’s where we’re really focused for 2025.

[17:41] Vince Passione: Is that Open Lending’s product or is that your own?

[17:45] Eric Stradley: It is our own product.

[17:47] Vince Passione: Okay, great. So does the credit union have to repo the vehicle or will you do it?

[17:49] Eric Stradley: They do. They do.

[17:51] Vince Passione: Okay. So they do what they normally do in a normal course of action, but you’re there to make sure that depending on the value when the car is repossessed, you’ll make up for some portion of that?

[18:00] Eric Stradley: Exactly right, exactly right. And the biggest thing that I like to say is you get a non-prime customer for prime risk, and most of these folks are on an upward credit trajectory and they’re going to be amazing customers and members of the credit union. And in a place when credit union are really having to compete hard with new entrants in the digital banks or even large banks who are starting to really invest in technology, it can be a unique way to pull folks who might otherwise go to those institutions and to be a member of their local credit union or a credit union that suits their needs.

[18:39] Vince Passione: What about market expansion? Are there geographies you’re trying to expand into? Are there certain credit bands you’re trying to expand into? As our clients are listening, and prospective clients for you are listening, where are the areas of need that you’re trying to fill in as you think about being a national lender and building out this landscape and this network?

[19:00] Eric Stradley: Yeah. For us, we operate today in 46 states plus D.C., so we’re effectively national. There are a handful that we don’t work in, but they’re on the smaller side. The perfect fit for us in terms of our growth goals for next year is, one, we need more capacity in many of the places that we already operate in. We’re anticipating growing the business by over 2x next year, and what that means is that we’re going to have twice as many customers who we’re looking to place with high quality credit unions either in their local area or maybe are far away, but this is a really good way for them to leverage their national or regional field of membership to attract folks outside their branch footprint. For us, we have really solid coverage through some of the super prime bands, but once you get out of super prime, there’s opportunities in nearly every geography.

[19:49] Eric Stradley: In particular, if you are willing to take a little bit more risk and go to the nearprime space, there’s a lot of opportunity there. But more than that, if you have capacity to lend a million dollars-plus a month, you have competitive rates for your customer base, what we’ll do as part of the sales process and sort of guiding us through whether or not we’re a good fit for each other is we actually will take that information and we’ll forecast it on the business, both in terms of what we do now and what we expect to happen in the coming months and say, “Honestly, hey, wow, your target’s one, we can actually do $10 million a month of production with you.” That might be too much. Or, “Hey, you want to get to 10. There’s really only three unless you think about the risk a little bit differently and have a different approach to pricing. And here would be our suggestion.”

[20:35] Eric Stradley: And maybe you take it, maybe you don’t, but as part of our process, we have an analytics team that will work with you on setting expectations and also guiding you if you do have some goals and aren’t quite sure how to get there on how to get there in terms of how to work with us.

[20:49] Vince Passione: Eric, what do you say to the lender that tells you, because I’ve had clients tell me this, “I do this already. I have a standard offer, $300 if a client wants to come in and refinance their loan with me, it’s the way I sort of avoid them being refinanced away.” What’s the answer? Why Caribou and why they stop doing it themselves?

[21:08] Eric Stradley: Oftentimes people don’t stop doing it themselves and we’re not really asking them to do that. My answer is sometimes a little tongue in cheek, but tell me about the size of your marketing budget. We’ll spend $50 million on marketing next year. And so some credit unions are very, very good at marketing, but I can effectively guarantee that it’s really hard for them to reach the same amount of folks that we can reach with that budget. And one of the reasons we can do that is because we’re bringing a really full picture of the market to a national affiliate site, to a very large direct mail program, to social media spend, because we can convert those customers not just through their credit union, but through a handful of others that ultimately maximizes the chance that we find an offer for that customer, which is what you need to happen to have return on that spend.

[21:57] Eric Stradley: And credit unions are great, but they don’t always have these capabilities and they’re oftentimes only have their one offer to offer, and it makes it really hard to get targeted enough to have a very broad reach on a marketing basis. And so it’s not so much, “Stop doing this and work with us.” Instead, it’s, ” I can just do what you’re doing today, but at a much bigger scale to help you grow your lending book.”

[22:19] Vince Passione: That’s awesome. Eric, thanks for joining us today and thanks all listeners for tuning in. Don’t forget to subscribe so you stay tuned for more episodes and we will meet you back here in our next 22 Minutes in Lending. Eric, thanks again.

[22:30] Eric Stradley: Thank you so much, Vince, for having me.

[22:32] Narrator: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode. You’ll find links to any resources mentioned in the show notes. If you’re enjoying our show, be sure to subscribe and leave us a five-star review.