CarMax extends yearlong subprime test

Used-car giant CarMax Inc. says it needs more time to evaluate a subprime lending pilot program at its finance arm.

The pilot is almost a year old, having launched last January. But CarMax CFO Tom Reedy said during a quarterly earnings conference call this month that the test will continue at least long enough to capture results from shoppers purchasing vehicles with their income-tax refunds in 2015.

“What I can say is that we have not seen anything negative and unexpected that would lead us to dial back or not continue the test,” Reedy said.

The test by CarMax Auto Finance is designed to allow the company to learn more about customers that it had typically handed off to its subprime lending partners.

‘Consistent’ lenders

In 2013, many of CarMax’s subprime lenders tightened their lending standards. But over the last several months of the test, Reedy said, many of those lenders have been “relatively consistent” in their credit offers to consumers of new and used vehicles.

Part of that consistency has been a willingness to buy deeper -- that is, to extend financing to consumers with lower credit scores. In effect, that led some subprime customers to be financed by lenders that previously had preferred nonprime, but not subprime, consumers.

Reedy said that some CarMax customers who previously would have qualified for financing with its Tier 3 lenders, described as those that specialize in funding subprime loans, were picked up by its Tier 2 lenders, described as those that specialize in funding nonprime loans.

Because CarMax pays a discount to its Tier 3 lenders, having those consumers picked up by Tier 2 lenders resulted in “a significant shift in profitability” at CarMax, Reedy said. In a December 2013 conference call, Reedy had said the discount was about $1,000 per vehicle to cover the risk associated with those loans.

Fewer subprime loans

In the company’s third quarter that ended Nov. 30, the percentage of CarMax vehicles financed with subprime loans declined to 15 percent from 18 percent a year earlier. That includes both vehicles financed by CarMax Auto Finance under the subprime pilot and those financed by third-party subprime providers.

In the latest quarter, CarMax Auto Finance originated $12.3 million of subprime loans, representing 0.5 percent of the company’s retail unit sales. Through November, $56.7 million in subprime loans had been originated under the program, the company said.

Also in the quarter, CarMax’s revenues from its sales of extended protection plans -- which include extended service plans and guaranteed asset protection -- rose 27 percent to $61.7 million, despite what the company called a somewhat lower extended protection plan penetration rate.

Two factors led to the increase. First was the comparison with a weak year-earlier quarter, when revenues from extended protection plans were reduced by an adjustment to the reserve for estimated cancellations of $8.8 million. Second was the company’s growth in retail unit sales.

Profit gains

Income at CarMax Auto Finance rose 7 percent to $89.7 million in the quarter as a result of an increase in average managed receivables and partly offset by a lower total margin percentage.

Overall, net income at the Richmond, Va., auto retailer rose 22 percent from the year-earlier quarter to $130 million as revenues rose 16 percent to $3.41 billion.

CarMax is the nation’s largest retailer of used vehicles. In its fiscal year ended Feb. 28, 2013, it retailed 447,728 used cars and trucks, more than double the 204,572 retailed by AutoNation Inc., No. 2 in used retail sales, in calendar 2013.

CarMax owns a handful of franchise new-vehicle dealerships, which allow it to attend closed auctions of used vehicles sold by those brands, but its new-vehicle sales were too few for it to qualify for Automotive News’ list of the top 125 dealership groups in the U.S., as ranked by new-vehicle retail sales.

You can reach Arlena Sawyers at asawyers@autonews.com

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