To determine the effectiveness of LEAP’s unique business model, we recently quantified the benefits we provided to lenders and customers during the past twelve months, ending March 31, 2012.  Here are key results: 

Lender Benefits

• Estimated lender benefits from this program were just over $2.3 million.  This reflects an average benefit of approximately $1,900 to the lender for each customer that settled with LEAP.    

• LEAP estimated this number by modeling the lender’s reduction in expenses associated with the repossession process and the increased income earned from selling the vehicle to LEAP instead of selling it at auction. 

Consumer Benefits

• 85% of customers had a lower payment with LEAP than with their prior lender.   
• On average, customers received a $125 reduction in their monthly payment.   
• Consumers chose to do business with LEAP for a variety of reasons, including payment savings and vehicle retention.  

What Do These Numbers Mean? 

These figures illustrate the value LEAP provides. Lenders can decrease losses on their defaulted auto loans while customers can keep their vehicle.  This is an ideal tool for lenders that helps them resolve defaulted auto debt.   

LEAP purchases the vehicles which secure these defaulted auto loans from lenders at a price that is higher than lenders would otherwise receive at auction.  LEAP then leases the vehicle back to the customer with terms they can afford, providing a benefit to everyone involved. 

LEAP’s role in the market is unique. We provide benefits for both lenders and consumers.  In situations when a lender is unable or unwilling to modify the loan, LEAP can provide an alternative that allows the consumer to keep their vehicle.  Our lender partners are an important part of the LEAP transaction, and we encourage consumers to work with their lender throughout the process. 

Analysts estimate that more than 1.3 million consumers filed for bankruptcy during 2011. However, when it comes to their rights during bankruptcy, many consumers may not be aware of the opportunities they have to keep certain assets. For example, the U.S. Bankruptcy Code allows consumers to ‘redeem’ their vehicle by paying fair market value for the vehicle in one lump sum.   

Companies like 722 Redemption and LEAP Financial work closely with debtors and debtor attorneys to offer auto financing options for customers filing for bankruptcy.  This partnership leverages the strengths of both companies to help a larger number of customers maintain their vehicle during their bankruptcy filing.   

 In a Chapter 7 bankruptcy, consumers essentially have three options regarding their auto debt: reaffirm the debt, surrender the vehicle, or redeem the vehicle. If the debtor can afford to make the payment on their auto debt, it makes sense to consider a reaffirmation, paying the current lender the agreed terms of the auto debt.    

Depending on the value of the vehicle, however, a better alternative could be to surrender or redeem the vehicle.  When filing bankruptcy, debtors should work with their attorneys to understand their options and ensure they pursue the right decision for their financial situation and vehicle.   

722 Redemption’s access to consumers and bankruptcy attorneys, combined with LEAP’s ability to finance credit-challenged customers, gives more debtors the ability to pursue their auto options.  This is great news for consumers and their attorneys who are considering alternatives for handling their auto debt during their bankruptcy proceedings. 

A Banner Year for LEAP Financial   

We’re excited to have reached so many company milestones in just one year. 2011 was a banner year with over 600% growth in total revenues year-over-year. This revenue growth was due in large measure to key metrics that included:  

• Application volumes and monthly originations more than quadrupled 
• Number of customers grew over 300% 
• Number of employees grew from 15 in 2010 to 52 in 2011, an increase of 250% 
• New headquarters established with space doubling to accommodate growth 
• LEAP was named one of San Diego Venture Group’s 25 Cool Companies for Innovation 

2012: Keep the Momentum Going 

As 2011 ends, the team is ready with new plans to continue our growth. This potential is being driven by our core talented team who understands what the marketplace needs and knows how to help both lenders and borrowers wrestling with auto loan default or repossession.  

Ongoing demand for our unique products and services is strong because finances for the average consumer are unlikely to improve significantly for the foreseeable future. As such, lenders will need to continue to find ways to work with customers who have a willingness to pay but have limited resources.  

More to Know 

Be sure to also read some of press coverage we have also received this year. Not too long ago, one of LEAP’s articles, ‘Seven Myths about Repossession,’ was published, highlighting opportunities for lenders to think differently about managing their vehicle  portfolios. 

While many industries are either stagnant or contracting, LEAP Financial’s growth in auto finance is rapidly gaining momentum. To guide the company’s ongoing growth, the management team has expanded by adding a number of talented professionals.  Team members include 

•  Brian Bailey, Senior Vice President, Strategy & Originations: Brian is responsible for shaping and executing the strategy for the originations team.  Prior to joining LEAP, Brian served as the General Manager and Vice President of Operations at EquityKey, a real estate investment firm.  He spent four years at HSBC Auto Finance as the Vice President, Operation Strategy & Planning.  Brian earned his BA in Economics, cum laude, from the University of California, Los Angeles. 

•  Tim Chung, Vice President, Product Management and Risk:  Tim Chung is a founding member of LEAP Financial and fulfills numerous roles at LEAP with current responsibility for product management and risk.  Prior to founding LEAP Financial, Mr. Chung spent five years with HSBC Auto Finance and three years with ACC Consumer Finance.  Mr. Chung brings over nine years of experience in the auto finance industry.  Mr. Chung earned a BS in Business Administration from the University of California at Berkeley. 

•  Gary Flowers, Executive Vice President, Business Development: Gary is responsible for managing the company's business development activities.  He joined LEAP from Balboa Insurance Group, a leading provider of lender-focused insurance services and products where he served as Senior Vice President and Business Development Manager.  Gary is a current member of the Board of Directors for the National Auto Finance Association.
  
   
•  Lindy Hood, Chief Marketing Officer: Lindy is responsible for marketing and customer care. She has over 20 years of experience as a marketing executive and strategic consultant for numerous Fortune 100 companies. Prior to joining LEAP, she spent ten years at HSBC North America in the Consumer and Mortgage Lending division where she served as a Senior Vice President.  Lindy holds an MBA from The University of Chicago Booth School of Business and a BS in Mathematics from the University of California, Los Angeles. 

• Kyle Kolsky, Vice President, Business Development:  Kyle joined LEAP earlier this year and is responsible for the growth and development of the consumer channel.   Kyle brings LEAP Auto Loans nearly 10 years of financial services and consumer lending experience in both Prime and Subprime auto finance and direct mortgage banking.  Kyle earned his MBA in Finance from Loyola Marymount University, with Cum Laude honors, and his BA in Economics from Washington State University, with Phi Beta Kappa and Cum Laude honors.
  
   
•  Steve Mark, Chief Financial Officer: Steve is responsible for the company’s finance, accounting and administrative functions. He has more than 19 years of business experience, including ten years in financial services and consumer lending businesses, and is a licensed CPA.  Most recently, he held key financial management roles at HSBC Auto Finance, including VP, Director of Finance and Interim CFO. Steve earned his MBA from the University of Michigan and a BS in Accountancy, Magna Cum Laude, from Arizona State University.  

 Welcome new team members!  Stay tuned to this blog to learn more about LEAP’s ongoing growth initiatives and how they are committed to helping credit-challenged consumers qualify for auto loans.  

The expansion was necessary because we needed more space to support our continued growth in customers, talent, and revenues. The additional square footage will not only accommodate the recent additions to our management team and support staff, but it will also provide scalability that aligns with our growth trajectory. During the current challenging economic environment, we are especially excited to be experiencing such growth.

We believe the recent expansion puts LEAP Financial in an excellent position to attract significant talent and seasoned staff from the strong workforce pool in the San Diego area. It also helps us better serve what is becoming a growing base of auto loan borrower customers who need specialized help with workout solutions during such difficult financial times.

 The last few years have been a watershed time in our economy and industry.  Past recessions have mostly followed a regular pattern of unemployment and inventory reductions, and were followed by strong recoveries as inventories adjusted and job growth ensued.  It is pretty clear that this past recession and recovery were different in important ways, and many of the problems we are facing are structural and long term.  As it relates to auto lending, there are some specific changes in the economy and consumer behavior that should be considered in the way lenders manage auto loan portfolios.

Credit priorities for consumers have changed.  The ongoing wave of mortgage defaults have taught borrowers to think more strategically about how they pay debt and obtain credit.  In the past, consumers were embarrassed to admit falling behind on a mortgage.  Today, strategic defaults are openly discussed and even encouraged in some circles.  Conversely, consumers pay their cell phone and cable bills with alacrity so they won’t be left “off the grid.”  Credit cards were useful in the past not just as a way of managing personal liquidity, but also as a convenient transaction tool.  Debit cards have now become pervasive, so strapped consumers are less worried about the need to obtain a credit card for things like travel and online purchases.

In the auto lending arena, most American communities are set up in a way that people need to drive to work or around town.  There is no alternative.  Although people need cars, there are a variety of ways to obtain them, and families often have two or more cars even if they have credit challenges.  Purchasing a car can often be deferred.   As a result, payment of auto debt often represents a strategic decision for consumers who are facing tradeoffs.

Consumer budgets are being squeezed.  The most widely reported measure of the economic downturn was the unemployment rate.  There are roughly 14 million workers officially unemployed, about 8 million more than a few years ago.  Add to that another 8 million of part-time or underemployed workers.   Disposable household incomes in the middle tiers are sharply lower than a few years ago, and the pressure is compounded as use of home equity to make ends meet is no longer an option.  We hear stories every day underlining the reduced disposable income of the average consumer.  Walmart executives provided a telling example in their most recent earnings call:  More Americans are buying half-gallon containers of milk because they cannot afford a full gallon.

Despite this backdrop of economic malaise, the auto lending sector looks strong, with defaults near record lows, good margins on new originations, and growing profits as car sales expand.  Credit tightening and a shift in consumer credit priorities have proved beneficial for auto lenders.  With such solid portfolio performance and plenty of available capital, most lenders are not facing a need to make radical changes.

Nonetheless, there are many consumers struggling with auto debt.  Repossession activity has declined sharply over the last two years due to tightened underwriting and car sales in 2008 and 2009, but repossessions will still likely exceed 1.3 million units in 2011.  In many cases, repossession is the best solution for the lender, but there is still a great opportunity to lower the number of repossessions, save money and keep people in their cards.  It is apparent that the jobless rate will remain high for an extended period, which will require lenders to find out-of-the-box solutions to managing their auto loan delinquencies.  

At LEAP, we deal with customers facing repossession every day, all day long.  In a changed economy, we believe lenders should carefully reconsider their workout programs to better fit consumer needs.  Here are some repossession myths that should be challenged:

Myth 1: "The customer can’t afford the car, so the best course of action is to repossess and sell it.” 

Typical customers in repossession represent normal, middle income folks.  Based on our data, average annual income is about $36,000 to $40,000 per year.  For large lenders who finance new vehicles the average income is even higher, in the $40,000 to $50,000 range.  About a third of the customers own homes. So why didn’t they pay their auto loan?  Usually there has been either a temporary disruption in the ability to pay (e.g. unemployment followed by a new job), or a significant reduction in total household income (e.g. spouse lost a job).  The customer still has the ability to keep making payments, but cannot afford to catch up on past payments or continue making large payments.   Sometimes a payment adjustment is all that is needed to get them back on track.

Myth 2:  "The customer has no alternatives.” 

A delinquency is usually not a surprise event for the customer.  They have likely thought about alternatives to their current vehicle, and may already have one arranged. Often we speak with people facing repossession who feel they have not been treated fairly in the dealership or by the lender.  Their car is worth far less than they owe on the loan, and it is getting expensive to repair mechanical problems.  If the lender will not work with the customer and the payment is too high, then they often seek other transportation solutions. Once they find a better alternative, the lender gets a voluntary repossession. “You want this stinky old heap?  Come and get it.”  Lenders would be remiss to disregard these customers and think they have no options.   

Myth 3: "If a lender begins settling with customers or reducing payments, it will just encourage others to ask for a payment reduction.” 

Repossession is a humiliating and emotional experience for the vast majority of people.  We have not found anyone who went through the process as a way of getting a payment reduction.

Myth 4: "If a customer is delinquent, a lender should always ask for total amount due.” 

Delinquency should be treated as a red flag.  Reasons for delinquency should be closely tracked.  Even if a collector can coax a customer to send the total amount due, there may be underlying reasons for the delinquency that will persist, and eventually cause repossession.  It is better to understand the issues early so that the loan can be restructured to fit the circumstances.

Myth 5: "All people with a prior repossession represent high risk”. 

Many consumers are coming out of the recession with damaged credit due to unemployment or underemployment.  Although their bureau scores might be low, there are many who behave in a “prime” fashion.  They are knowledgeable about financial products, communicate well, take responsibility and pay on time.  It is sometimes difficult to segment risk in this population with traditional bureau data, but there are good risks nonetheless.   

Myth 6: "All “skips” are very high risks and should never be reinstated.” 

In many areas of the country it is impossible to live without a car.  People cannot realistically get to work, the grocery store or meet daily needs.  When the car is out for repossession, customers sometimes panic and hide the car or switch with someone else until they can figure out a way to get back on track.  The notion that the consumer has ‘skipped town’ just isn’t true these days.  The customer obviously wants the vehicle, and if they have a compelling reason to step forward with a deal they can afford, they often will.  LEAP has very good results with former “skips”.  We lower their payments, and give them a compelling reason to step forward. Subsequent performance has been great.

Myth 7: "The lender should limit settlements to a percentage of outstanding loan balance.” 

Most lenders have policies that limit the amount of principal write down that can occur with a restructuring or settlement.   Instead, lenders should consider the alternative.   Repossessing and selling the car at auction is an expensive solution that almost always results in a large loss for the lender.  If the customer is willing to pay you more than you can get at auction because it is worth more to them, you should strongly consider taking it.  The loan balance is a sunk cost.  If you can find a way to keep the customer in the vehicle, you have a much better chance of collecting more money.  Chasing deficiency balances is generally unproductive and expensive.  Be realistic.

Summary 

A typical sequence in repossession is that the customer loses his vehicle and damages his credit, and the lender loses significant money.  Auctions make a substantial profit, dealers buy the vehicles at wholesale, and the customer gets a different vehicle at a substantial markup.   

When it comes to repossession, we say ‘don’t judge a book by its cover’.  Lenders can sometimes do better, and we believe they have a moral obligation to try.  The customer is under stress, but they most often will make decisions in their rational self- interests, the same as any other consumer.  By changing the tone of the conversation with delinquent customers, accepting that past costs are sunk, and offering the customer a benefit in resuming reasonable payments, lenders will reduce losses and more customers will keep their cars.

In the past few years the credit landscape has changed dramatically, and auto lending is no exception. Prior to the credit crisis that began in 2007, many consumers emerging from bankruptcy were able to obtain financing for another vehicle. The current credit climate makes it much more difficult to get credit approval for an auto loan post-bankruptcy. Therefore, decisions made in bankruptcy regarding auto debt have become increasingly important.

The debtor basically has three options regarding auto debt in a Chapter 7 bankruptcy: reaffirmation of the debt, surrender of the vehicle, or redemption.

• Reaffirmation – Debtor reaffirms the terms of the auto debt to avoid surrender of the vehicle. Although common, it is often not in the borrower’s best financial interest to reaffirm.
• Surrender – Debtor turns the vehicle in to the lender to resolve the auto debt.
• Section 722 Redemption – Debtor pays fair market value for the vehicle and the deficiency balance is waived. This alternative is not usually pursued as the debtor has no money.

Reaffirmation of the auto debt is done about half the time. Almost all of the remaining population is surrendered. Very few debtors redeem the vehicle for the obvious reason that they do not have the money.

If the issue of having the funds can be resolved, however, it very often makes economic sense to redeem the vehicle at fair market value. Most often in the early stages of an auto loan, the vehicle value depreciates faster than the loan amortizes. Therefore, at the time of a bankruptcy filing, the outstanding auto debt is frequently more than 150% of the vehicle value – sometimes much more. In a typical bankruptcy situation, the outstanding loan amount is $17,000 and the vehicle is worth $11,000. If a debtor reaffirms the debt in this example, he would unnecessarily take on an additional $6,000 of debt. So even though the stated interest rate on the loan may be low, the effective rate going forward is extremely high due to the amount that the loan is “underwater” (i.e. amount owed exceeds vehicle value).

Things to consider when evaluating auto debt options:

• What is the vehicle worth relative to the loan amount?
• Is the vehicle in good shape and likely to last while the debtor re-establishes credit?
• What are the debtor’s alternatives in obtaining another vehicle?
• Is there a way to get the funds to redeem the vehicle?
• Is the post-bankruptcy car payment affordable?

The debtor’s alternatives to keeping the vehicle are an important consideration. There are many “buy- here, pay-here” car lots making exorbitant profit in this economy selling vehicles under installment contracts to people emerging from bankruptcy. Because the debtors are unable to get credit from more traditional sources, they are often paying extreme markups on another vehicle, and they are right back in the same situation - far underwater on their car loan.

While sometimes difficult to find and qualify, there are lenders/leasing companies who will provide financing for a 722 Redemption. In our prior example, the outstanding loan amount would be reset from $17,000 to $11,000 (plus some transaction costs), and the debtor would be in a far better situation.

The following table summarizes the debtor’s options, assuming there is an ability to finance the redemption decision and the borrower can get a different car if needed:

A little clear thinking can save debtors thousands of dollars in a difficult situation.