MUSA Auto Finance, a Dallas new- and used-vehicle leasing company, has expanded its business in the past year to 29 states and about 400 dealerships. The company also has just launched automated decisioning for leases submitted through Dealertrack, RouteOne and its own online portal.
The company's president, Richard Frunzi, has held leadership positions at AmeriCredit and Exeter Finance Corp., where he was co-founder and COO.
At MUSA Auto Finance, Frunzi said, "We've taken all of the difficult stuff out of leasing, so training is a really short learning curve for the dealer. They really just have to tell us what the sales price is, a down payment and we do the rest of the work."
In a market with rising negative-equity levels and heavy demand for low monthly payments, new- and used-vehicle leasing, especially used, is the answer, said Frunzi, 51. He spoke last month with Staff Reporter Hannah Lutz.
Q: What's the proportion of new-vehicle to used-vehicle leases in your portfolio?
A: It's changing, but right now it's right around 50-50. We think that the big lift for us is going to be in used vehicles. Competing with OEMs on subvented lease rates is obviously difficult, but there are few companies that are leasing used vehicles.
Why did you choose to focus on used leasing?
Just reading the tea leaves, these millennials are really changing the game. We watch the industry and competitors now begin in significant numbers to go to 84-month [loan terms]. I know from 30 years in the business that people don't typically intend to keep a vehicle that long.
Within three years, a good portion of the U.S. population is looking to trade in and get a newer vehicle, even more so with the millennials. And they seem very comfortable with leasing. They're leasing their iPhones. We see it in the numbers that they're certainly willing to consider a lease.
Your average lease, counting all vehicles, is $45,000. But your average lease payment on used vehicles is $552, compared with $716 on new vehicles. How has the payment between new- and used-vehicle leases changed?
There is a big gap. For a good long while, we were seeing these used-car prices that were astronomical. Coming out of the Great Recession, used cars were expensive. Not so much anymore. Used-car prices are dropping and look like they're going to continue to drop over the next two years. So that payment between used-car lease and a new-car lease, that gap is widening.
Of your 400 dealership clients, how many are franchised new- vehicle dealerships and how many are independent stores?
It's a good mix. Right now, we're in the prime and near-prime space, and we're having a tremendous amount of success with high-line independents. But the franchised [dealerships] love it, too. It just gives the customers another option and lower payments on their used-car lot. We're already shooting past 400 or so contracts a month, which puts us right on track with our business plan.
Will you expand to credit tiers beyond prime and near-prime?
We've got a team with a lot of experience even down the credit spectrum. Marketwise, we're where we need to be today, but I see us expanding that as we go forward.
For now, your focus is leasing, but do you plan to expand to retail installment contracts or selling F&I products?
One of the mistakes a lot of companies make is you become a mono-line product. You got one product and that product has competitive issues or economic issues, you've got a problem. It is very much our intention to have multiple product lines. I see us going into retail installment contracts, more traditional financing and then again different areas in the credit spectrum.
Is MUSA Auto Finance using automated decisioning only for prime-risk borrowers?
That's the space we're in today, but when we're ready, we'll start doing a little in subprime and test the concept.
In new-vehicle leasing, how are you able to compete with manufacturers' captive finance companies and their incentives?
If you look at the fine print on some of these advertisements, you're going to sell a Honda Accord at a $199 payment. Typically, these specials in the fine print have a really large down payment of $4,000 or more. When an OEM sells a subvented payment, it's often in lieu of the rebate. If a customer doesn't have that big down payment, we can do a new-car lease for them and use the rebate and it gets us close [to the captive payment]. That's how we've been able to pick up the new-vehicle business that we've been doing.
What skills did you develop at Exeter and AmeriCredit that you're using now?
At Exeter we fully invested in automation and technology, and the biggest learning I've had is that getting a decision to a dealer in 10 seconds, spending the money and automating the process [is important]. Your F&I managers, your dealers are millennials. It's all about speed and efficiency, and you'd be shocked how few companies embrace the technology in automated decisioning. Leasing today across the board is done very much the way it was done in the 1980s. There is a major company out there, one of the biggest, their leasing program is 11 pages long. We say, "Send us the application, tell us what vehicle, auto-find residual value [and] prepopulate the contract." We will do it all for you and really make leasing effortless. We start with ALG, which has been doing this for  years, and then based on our own analytics we can make changes to those values.
Why should the auto retail industry look to leasing to solve some of its issues?
Going to 84 months recently on a retail installment contract, you're taking consumers out of the market for a longer period of time. Leasing allows you to avoid being upside down. When you want to trade in the vehicle and your payoff is $5,000 more than the car is worth, it doesn't make sense. [Consumers] want to keep a car for three or four years, not seven. It's a paradigm shift, and it's happening now. Leasing a used car makes even more sense because when you buy a new car, you are paying the full amount of tax and financing that tax for the full term. When you lease in most states, you're paying a usury tax on just the payments. If you only have the vehicle for three years, you're only paying for three years' worth of tax versus financing all the tax of the car for the entire term. That initial depreciation is already taken out of a used car and you get a lower payment.
Leasing has made up about a third of new-vehicle financing for several quarters. Where is leasing headed in five to 10 years?
We're banking on it increasing. We're putting our eggs in that basket because we believe it makes a whole lot of sense for a consumer who wants to get a new vehicle every four years. Where do you go after 84 months? I guess 96 months? On a retail installment contract? It just doesn't make any sense.