CarMax ups F&I chargeback reserves, reflecting subprime growth

CarMax: An increasing share of subprime business has contributed to an expected increase in cancellations. Photo credit: REUTERS

Public used-car specialist CarMax Inc. increased its reserves for chargebacks on extended service contracts and guaranteed asset protection policies in its latest fiscal quarter.

When customers cancel purchases of those contracts or if a loan goes bad and the vehicle is repossessed, retailers often have to repay administrators part of what they earned from the sale of F&I products. CarMax and other auto retailers routinely set reserves aside to cover such chargebacks based on past experience.

CarMax said an increasing share of subprime business has contributed to an expected increase in cancellations. Therefore the company more than doubled its cancellation reserve to $76.7 million for the fiscal year just ended, from $31.7 million a year earlier.

New approach

“During the fourth [fiscal] quarter, we developed a new approach to projecting cancellations for ESP and GAP,” said CarMax CFO Tom Reedy, in an April 4 conference call for investors.

For CarMax, of Richmond, Va., the 2014 fiscal year and its fourth fiscal quarter ended Feb. 28. CarMax sold 526,929 used vehicles in fiscal 2014, up about 18 percent from a year earlier. New-vehicle sales were 7,761, down about 1 percent.

“Our previous method works well historically when trends were relatively stable,” Reedy said. “However, we learned it was too slow to identify changes in underlying cancellation trends. Over time, modifications to the products and our administration of them along with an evolution in our business, meaning a greater percentage of our sales coming from subprime financing, caused changes in the overall cancellation profile of these products.”

Subprime business

CarMax Auto Finance, the company’s captive finance company, mostly relies on its preferred third-party lenders, Drive Financial Services, of Dallas, and American Credit Acceptance, of Spartanburg, S.C., to provide loans for buyers with subprime credit.

In December, CarMax said it was launching a pilot program to originate its own subprime loans, too. CarMax Auto Finance originated about $9 million in subprime loans for the fourth fiscal quarter, out of a total of just over $1 billion in originations, the company said.

In the quarter, the company reported its third-party providers accounted for about 17 percent of total sales volume. That was flat vs. the same quarter a year earlier, but in the fiscal year, year-over-year comparisons for subprime penetration were up by 3 to 5 percentage points, the company said.

CarMax CEO Tom Folliard said in the conference call that if the company theoretically were to pass along to customers the entire increase in cancellation reserves, it would work out to about $30 per contract. That’s a number the company could “easily” pass along to consumers, if the company chose to do so, he said, “without much impact on penetration.”

You can reach Jim Henry at

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