Open Lending Corporation (LPRO) Q4 2021 Earnings Call Transcript

Open Lending Corporation (LPRO)
Q4 2021 Earnings Call
Feb 24, 2022, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Open Lending's fourth quarter 2021 earnings call. As a reminder, today's conference call is being recorded. On the call today are John Flynn, chairman and CEO; and Ross Jessup, president and COO; and Chuck Jehl, CFO. Earlier today, the company posted its fourth quarter 2021 earnings release to its Investor Relations website.

In the release, you will find reconciliations of non-GAAP financial measures to the most comparable GAAP financial measures discussed on this call. Before we begin, I'd like to remind you that this call may contain estimates and other forward-looking statements that represent the company's views as of today, February 24, 2022. Open Lending disclaims any obligation to update these statements to reflect future events or circumstances. Please refer to today's earnings release and our filings with the SEC for more information concerning factors that could cause actual results to differ materially from those expressed or implied by such statements.

And now, I'll pass the call over to you, John, for opening remarks.

John Flynn -- Chairman and Chief Executive Officer

Thank you, operator, and good afternoon, everyone. Thanks again for joining us for Open Lending's fourth quarter 2021 earnings conference call. I'd like to begin today by reviewing our fourth quarter, as well as our full year 2021 highlights and the progress we've made on our growth objectives, then Ross is going to discuss the auto manufacturing and lending landscape. And then, finally, Chuck is going to review our fourth quarter financials and discuss our outlook for full year 2022.

I'd like to start with our high-level financial review of the fourth quarter and full year results. We're very pleased to report another very strong quarter at Open Lending. Q4 '21 certified loans increased 59% to 42,639 as compared to the fourth quarter of '20. We also reported revenue of $51.6 million, which was an increase of 30%, and adjusted EBITDA of $36.6 million, which was an increase of 47% as compared to the fourth quarter of 2020.

We also saw incredible growth in 2021, with an 82% increase in certified loan growth, a 98% increase in revenue, and a 123% increase in adjusted EBITDA for the full year 2021 compared to 2020. We also added 71 new customers in '21, which was up from 55 new accounts in 2020, and the average size of the lenders that signed up in 2021 exceeded $1.2 billion in total assets. I think this demonstrates the value proposition of our platform and our continued momentum as we head into 2022. We're also very encouraged by the continued growth on our credit union and bank lines, where we achieved an 82% year-over-year increase in certs for the fourth quarter of '21.

This was driven in part by the addition of new accounts, including some that are preparing for CECL compliance by year end, further penetrating existing customers through wallet share and continued expansion of our refinance program. First, on the new customer side, we signed 18 new accounts in the fourth quarter, and three of these were tier 1 accounts classified as over $1 billion in assets. Of the 71 new accounts signed in the full year 2021, 19 institutions have total assets over $1 billion. Momentum has also continued into 2022, with seven new contracts signed to date and approximately 15 active implementations underway so far this year.

Many of the inbound calls that we're getting from larger credit unions are related to the fact that they have less than one year to comply with CECL. And for those of you not familiar with CECL, it stands for Current Expected Credit Losses and is a GAAP accounting standard which is applicable to many of our lenders, which will require adoption during 2022. As a reminder, Lenders Protection can provide lenders with a preferential approach to CECL compliance. Earlier this month, we hosted an Executive Steering Committee meeting where we had executives from our largest credit union customers come to Austin to discuss how Open Lending can help them further grow their respective auto portfolios with a real focus on prime decisioning and the importance of CECL.

It became very clear from these discussions that our lending partners are looking for new ideas on how to grow their auto portfolios through expansion of their offerings in the face of chip shortages and depleted new car inventory. We're working on a few initiatives that we plan to roll out this year to assist them in these efforts. We are also in the process of setting up another webinar with KPMG, which is similar to the one we hosted last year, which will discuss CECL compliance and the approach and compliance timeline for credit unions. Now, I'd like to move on to our existing customer side.

Our top 10 customers, excluding OEMs, have increased their certification volume by 193% in 2021 as compared to 2020. During the quarter, we continued to add new credit unions and banks to the refinance program. During Q4, we onboarded four new accounts to the refinance program with our volume reaching nearly 35% of our total certs in the fourth quarter of '21. As a result of our flexible business model, our refinance channel has accommodated consumers by allowing them to modify their existing terms and lower their payments.

This program is one way we've been able to help offset the temporary headwinds that's associated with the affordability due to inflated used car values and inventory shortages. These are continuing to impact auto sales, both new and used. Ross will touch more on this topic in a few minutes. Our credit union funding sources will continue to have the lowest cost of capital, allowing them to offer much lower rates than your typical near and non-prime lender in the marketplace.

We continue to see consumers saving as much as $100 to $150 per month by reducing their interest rates by approximately 400 to 500 basis points. I'd finally like to provide you with an update on our other long-term growth initiatives. First, we're sitting on an unbelievably valuable data asset, which makes us very unique to our clients compared to peers in the marketplace. Secondly, the market we target is massive, and we've only scratched the surface at this point.

Third, we've delivered strong results in 2021, highlighting our resilient business model. Due to all of these points, we're making strategic investments to further capitalize on the market potential once things normalize. Some of these are areas of investments this year will be our go-to-market sales strategy, with new dedicated sales team members to capture more of the TAM and expanding our account management staff to continue focusing on expanding wallet share with existing customers. We're going to dig into the bank space with key hires with core experience in bank auto originations and underwriting.

We're exploring other markets for geographic expansion, like Canada. And then finally, we will be investing in technology, further enhancing Lenders Protection platform for our lenders. And with that, I'd like to go ahead and turn it over to Ross and have him give you his update. 

Ross Jessup -- President and Chief Operating Officer

Thanks, John. Clearly, our powerful industry-leading credit union customers and exclusive insurance carrier partners continue to power performance through temporary bottlenecks and ever-changing financial conditions in the industry, a testament to the strength of our business model since 2000. Today, I will highlight three things, one, the current and near-term U.S. automotive market conditions and outlook; two, commercial activities with our industry-leading OEM customers and prospects; and three, progress with our current insurance partners.

In regards to current and near-term U.S. automotive market conditions and outlook, as we ended the quarter and entered 2022, we began to see signs of incremental improvement in a variety of indicators. Based on our assessment of end-market conditions, we remain optimistic that the toughest headwinds facing the industry are behind us as we began navigating through the upcoming year. More specifically, dealer networks across the country are reporting improving inventory, pricing, presale orders, velocity, and pent-up demand conditions.

In terms of inventory, for illustration, a representative leadership that carries 500 vehicles on hand before the pandemic began, saw their inventory decline almost 80% at their low point, leaving as few as 100 vehicles on the line. In comparison, while still notably below the typical historical average, dealerships of this size are seeing an improved rate of restocking and almost a doubling of vehicles off the bottom that may now have closer to 200 vehicles in their inventory. In terms of pricing, at the peak of the inventory shortage, dealers were reporting that vehicles coming off lease after three years were selling above their original MSRP 36 months later. In comparison, while still very much elevated, we are now seeing a moderation in the rate of increase in pricing.

This is a dynamic that we at Open Lending have witnessed in prior cycles; namely, as inventory rebuilds, pricing will begin to moderate. As for presale orders, over the past 20 months, as showroom stock was depleted, many dealers adjusted to satisfying the buyer behavior with presold orders. In fact, at the inventory trough, presold orders could have made up anywhere from 80% to 90% of all orders. In comparison, our sense that, while presale orders are still well above historic levels, they now make up less than 50% of order flow at the dealerships.

Another item is velocity. It's a metric that we monitor. It's the rate at which the dealers are turning over their inventory monthly as a measure of end-market strength. While, historically, many dealers would drive toward a 50% to 70% range; in comparison, many are currently above 150%, further evidence of the market forecast of over $5 million of pent-up demand.

Now, continuing for pent-up demand, what matters the most to Open Lending is which segments of the consumer auto buying market that were underserved during this period of lean supply. With inventory down 60% year over year, based on our data, it is clear that the limited supply of vehicles available for sale are being sold to cash and prime buyers, as many dealers delivered their highest profit margins in history. This shortage not only affected new vehicles but used as well. The average used vehicle, the sales price is over 40% up year over year.

This results in making even used cars less affordable, particularly impacting the near and non-prime borrower, which our Lenders Protection program traditionally served. In addition, the incentive spending per unit in January was $1,479, much less than the $3,450 it was in January 2021. For Open Lending during this period of unprecedented low incentives, the utilization of our subvention offering can be less impactful until the pricing moderates further. Now, for commercial activities in regards to our industry-leading OEM customers, partners, and prospects.

In terms of industry-leading OEM captive customers, we are very proud to have two of the most powerful automotive brands as our top customers as they are powering through the market challenges globally. Of course, our customers are not immune to the shortage and have seen their loan volumes decrease in 2021. We track our volume as compared to theirs in similar credit tiers. For 2021, our volume as a percentage of theirs has remained at a consistent level.

We look at this as a positive sign that, as the supply continues to ramp toward normal levels, our volumes should increase proportionately. In fact, there should even be more opportunity for us since near and non-prime customers were notably underserved over the past year. We continued to engage weekly with top leadership at our OEM captive customers and their partners on strategic growth, operational issues, and opportunities so that they are well-positioned as the market recovers. Now, for our insurance carrier.

In an effort to improve affordability for borrowers, and after getting feedback from our clients, we are expanding our program offerings for both loan amount and term limits while maintaining our discipline and rigor in underwriting. The increase in loan amount and the new 84-month term should have a positive impact on our funding capture rate. For example, in 2021, we countered twice as many applications asking for a larger loan amount than we did pre-pandemic. Additionally, more than one-third of our applications requested terms in excess of 72 months last year.

The likelihood of capturing an application on a counter is much less than one as requested. The additional term offering will effectively result in lower monthly payments for qualified borrowers, which should also positively impact our capture rates without increasing our exposure. We plan to roll this out in the next 45 days and believe this will help drive continued growth in certs. As you know, expanding our insurance partner relationships has been a key growth opportunity for us.

As reflected in our recent press release, we expanded the term on the AmTrust agreement by adding five years to the existing term, now through 2028. We continue to make solid progress with the fourth insurance carrier and look forward to providing more detail in the near future. As far as loan origination systems, we recently announced an expanded partnership with defi SOLUTIONS, a loan origination software for captive consumer finance companies, banks, and credit unions. The integration is currently available to finance companies on the defi LOS platform, and the expansion includes an integration with our Lenders Protection platform for captives via the defi XLOS originations product, which will become available in the second quarter.

This means that, essentially, one click of a button, any defi client can start using LPRO. We believe this accelerates our opportunities to grow for both our OEM and non-OEM business. Now I'll turn it over to Chuck to discuss our Q4 financials and outlook for 2022. 

Chuck Jehl -- Chief Financial Officer

Thanks, Ross. Despite all the macro headwinds John and Ross mentioned, we are pleased to report 2021 financial results that meet our expectations for the year. For the full year, as compared to 2020, total certified loans increased 82%. Total revenue increased 98%.

Gross profit increased approximately 99%, and adjusted EBITDA increased 123%. In 2021, we signed 71 new contracts with auto lenders, compared to 55 new contracts signed in 2020 with a continued focus on larger institutions in 2021. During the fourth quarter of 2021, we facilitated 42,639 certified loans, compared to 26,822 certified loans in Q4 of '20, a 59% increase year over year. We executed 18 contracts with new customers; and, in addition, we have nearly 15 active implementations with go-live dates in the next 60 to 90 days.

Total revenue for the fourth quarter of 2021 increased 30% to $51.6 million as compared to $39.6 million in fourth quarter of 2020. Profit share revenue represented $31.2 million of total revenue, program fees were $18.5 million, and claims administration fees were approximately $2 million. Now, we'd like to further break down the $31.2 million in profit share revenue in Q4. Profit share associated with new originations in the fourth quarter of 2021 was $24.7 million, or $580 per certified loan as compared to $18.4 million, or $686 per certified loan in the fourth quarter of 2020.

As a reminder, in April of 2021, we transitioned back to pre-COVID normalized underwriting standards that were put in place in 2020. Therefore, our average profit share unit economics in the fourth quarter of 2021 are now comparable to pre-COVID profit share economics. This change in underwriting standard has improved our closure rates, driven record-certified loan volumes, and expanded our competitive positioning in the market. Also included in profit share revenue in the fourth quarter of 2021 was a $6.5 million change in estimated revenues from certified loans originated in previous periods as a result of improved macroeconomic conditions and the continued overall portfolio performing better than expected due to fewer defaults and claims and lower claim severity.

Gross profit was $46.9 million in the fourth quarter of 2021, an increase of 28%, driven primarily by increased certified loans in the fourth quarter of '21 as compared to '20, and gross margin was nearly 91% in the fourth quarter of 2021, compared to 93% in the fourth quarter of 2020. Selling and general and administrative expenses were $11.7 million in the fourth quarter of 2021, compared to $12.4 million in the previous year quarter. Operating income was $35.2 million in the fourth quarter of 2021, compared to $24.3 million in the fourth quarter of 2020. GAAP net income for the fourth quarter of 2021 was $27.8 million, compared to $15.2 million in the fourth quarter of 2020.

Now, finally, adjusted EBITDA for the fourth quarter of 2021 was $36.6 million as compared to $24.8 million in the fourth quarter of 2020, an increase of 47%. There's a reconciliation from GAAP to non-GAAP financial measures that can be found at the back of our earnings press release. We exited the year with $318.8 million in total assets, of which $116.5 million was unrestricted cash and $113 million was in contract assets, with $65.5 million in net deferred tax assets. We had $159.8 million in total liabilities, of which $146.3 million was in outstanding debt.

We had approximately 126.2 million shares outstanding at December 31, 2021, and we posted an updated investor presentation and fourth quarter earnings supplement to our Investor Relations website, which includes a slide that lays out our current share count. Now, moving to our guidance for 2022. Based on fourth quarter results and trends into early 2022, we are setting our guidance ranges for full year 2022 as follows: total certified loans to be between $195,000 and $225,000, total revenue to be between $210 million and $240 million; adjusted EBITDA to be between $135 million and $160 million and adjusted operating cash flow to be between $140 million and $165 million. Despite the near-term headwinds as dealer inventory is restocked, we are confident in the resiliency of our business and the ability to navigate through the supply and affordability constraints.

In our guidance, we took the following factors into consideration: affordability Index for our target credit score of 560 to 680 due to continued inflated used car values, the global semiconductor chip shortage, OEMs that have streamlined their supply chain, having moved toward just-in-time manufacturing processes, disruption in transportation networks and raw material shortages, low levels of dealer inventory, and investments we plan to make into the business, which John referenced earlier. And with that, now I'd like to turn it back over to John to make a few closing comments. 

John Flynn -- Chairman and Chief Executive Officer

Thanks, Chuck. And before we jump into Q&A, I wanted to take a few seconds and highlight a few things. We here at Open Lending have had to navigate through periods of low supply and elevated pricing in prior economic cycles and did so very well. And while the COVID pandemic presented new challenges, we do see signs of incremental improvement.

Specifically, as we've experienced in our history, we've seen the utility and value proposition of our service offering become even more relevant to our customers during inflationary periods and rising rate environments. And the point I wanted to make there is, for instance, many credit unions are still sitting on notable excess cash today. When they evaluate investment alternatives, they are faced with a three-year treasury yield that is currently 170 basis points. In contrast, after taking into consideration their approximate 60 basis points cost of funds, our Lenders Protection program results in a yield as high as 250 basis points, providing a two times return with a much better risk-adjusted profile.

In addition, they are in turn helping their members lower their cost of financing, which is consistent with their core mission. So with that, I'd like to thank everyone for joining us today for our fourth quarter 2021 earnings call, and we'll now take your questions. 

Questions & Answers:

Operator

Thank you. [Operator instructions] Your first question comes from David Scharf with JMP Securities. 

David Scharf -- JMP Securities -- Analyst

Yeah. Good afternoon. Thanks for taking my questions. 

John Flynn -- Chairman and Chief Executive Officer

Hi, David. 

David Scharf -- JMP Securities -- Analyst

Obviously, more than a handful of unique macro and industry headwinds you're battling. It's great to see that you're seeing some evidence that the trough is in the rearview mirror. I'm wondering, a couple of things related to the guidance, hoping you can provide just to give us a sense on where you see a lot of the demand coming from. The first is, obviously, the pivoting to a refi mix has been very helpful and has remediated some of the other weakness.

Are you seeing, with rates moving up now, any impact on refi applications? Is it putting any downward pressure in the last few months? And obviously, we're going to have more fed action going forward. 

John Flynn -- Chairman and Chief Executive Officer

No. Actually, what we have found over time, David, is that you're always going to have -- as rates go up, these consumers are being subjected to higher rates outside relative to what credit unions can continue to offer. And credit unions have such a low cost of capital that they're always going to have the lowest game in town. So when you look at the rates that you see from like an Exeter or Santander, any of these near-prime, nonprime lenders that these consumers have been subjected to, their rates are going to be in the 21%, 19%, 18% range.

And when credit unions are coming back with 11% and 12%, there's always going to be that opportunity. And when you look at that $250 billion TAM that we continue to talk about, and the fact that we've only done $4 billion worth of loans last year, there's still just a huge continual pool of applications flowing through that that I don't see that slowing down, and I don't see the value prop diminishing at all. 

Chuck Jehl -- Chief Financial Officer

And Dave, this is Chuck. I'll jump in. And 150 in prior cycles where we've seen a rising rate environment, a 150-basis-point increase in rates, it just makes, as John said, our program even more appealing to the consumer and to the credit unions.

David Scharf -- JMP Securities -- Analyst

Got it. 

John Flynn -- Chairman and Chief Executive Officer

And the other part, I think that drives that is, occasionally, you'll see credit unions might run up against limits in their lending policies and things like that. And one of the things that all of this excess cash is creating, and I kind of alluded to it in the closing remarks a little bit; when you have credit unions that are huge influx of cash coming in, they're not real risky investors. They're limited by NCUA as to what they can invest in. And you'll find most of those credit unions looking for a three-year treasury.

And when I alluded to that 170 basis points, that's the yield they're going to get on it. But when you back out the 60 basis points they're paying to get money in the door, they're only generating 110 net yield on that. Our program, if priced right, can get them a 250-basis-point net ROA with that same three-year duration. So I think they're always looking at different ways to put that excess cash to work.

And going back to what credit unions were even formed for, which is to help serve the underserved. It's a great way to get more people to work, a better asset class that's a three-year average life, and it just solves that problem of where they're going to put their cash. 

David Scharf -- JMP Securities -- Analyst

Got it. That's helpful perspective. And maybe just a follow-up, just digging into the numbers a little bit. I'm curious, when I look at the midpoint of the EBITDA and revenue guide, I come up with a margin that's in the mid-60s, kind of reverting back to pre-pandemic levels.

And if I were to pinpoint the primary reason, is it more credit normalization, meaning a return to more normalized profit-sharing levels? Or is it attributable more to increased investment spending? 

Chuck Jehl -- Chief Financial Officer

Yeah, David. In our guidance, and you're right on the margin profile, in the guide, it's about a 65% EBITDA margin. Obviously, prior to the pandemic, or in the pandemic, we had the higher profit share, and that was at about $100 per cert in incremental profit share from, call it, 670, 680 down to 580 this quarter. So that's some of it, is just the unit economics in the profit share, as well as the program fee unit economics year over year is down a bit, but that's just based on large customers and the volume discounts that they receive on the program fee for the technology fees.

So that's really what it is. But we feel good about a 65% roughly plus margin profile in 2022. And John mentioned investments in the business in sales and marketing and technology, and that's built in as well. So we feel good about where we're heading into '22 and the opportunity. 

David Scharf -- JMP Securities -- Analyst

Great. Thanks very much.

Chuck Jehl -- Chief Financial Officer

Yeah. Thanks, David. 

Operator

Next question comes from Peter Heckmann with D.A. Davidson.

Peter Heckmann -- D.A. Davidson -- Analyst

Hey, good afternoon. Thanks for taking my question. You may have stated it and I may have missed it, but could you give a little bit of color on each of your two current OEM customers and maybe talk a little bit about how they performed either year over year or sequentially, just so we can think about the relative contribution? 

Ross Jessup -- President and Chief Operating Officer

You bet. Basically, when we track their overall amount of loans that they do and a certain credit score that we kind of simulate, it seemed like back in March, April of '21 was kind of their high watermark. And we are right there with the same percentage of that high watermark that we have seen in the recent months. And so good thing about it is, Pete, is we're doing the same portion of loans.

We have to follow them. We don't generate the applications. We just basically are there taking whatever our percentage that we get of their business, and it's consistent. What we are finding is that credit scores and those kind of trends look very appealing, that we're going to have a pent-up demand.

And whenever their numbers start to increase, we certainly hope and we believe that our percentage of that is actually going to be a larger percentage with that pent-up demand and that underserved consumer that's out there that now we can actually help.

Chuck Jehl -- Chief Financial Officer

And, Pete, the -- just from a performance perspective, just Q4 of '21 over '20, we don't spike out OEM 1 or 2 separately. But the OEMs quarter over quarter were up 3.5%, and then for the year about 129%. And as you'll recall, in 2020, OEM 2 ceased producing there for about five months. So obviously, good results considering the headwinds and the inventory and the supply.

So continue to have great relationships with both OEM 1 and 2. And what we're seeing also on the North American production forecast for this next year is it's going to be up 17% from '22 compared to '21. So it's another positive. 

Peter Heckmann -- D.A. Davidson -- Analyst

That's good. That's good. And then could you give us a little bit of an update on the OEM pipeline? I think last quarter, you had talked about signing a deal with an integration partner for OEM No. 3.

And it seemed like that was certainly making progress. How would you characterize that one at this point? 

Chuck Jehl -- Chief Financial Officer

Yeah. So we did a press release with defi SOLUTIONS about our integration. There's multiple benefits of that integration, not just from a prospects standpoint for the OEM, but some of our other customers as well that use that. We always said that there was a pecking order of priority that had to take place.

And what always was in front of us is a new servicing platform that defi SOLUTIONS is working on, and they have not completed that yet. So we expect that we will follow that once it's actually completed and implemented, and we don't really have anything that we can say when it's going to happen. But it is delayed, but we are encouraged that our conversations are remaining in place. And we still have a pipeline that we're very active in these discussions.

And everybody is focused on the inventory, the effect. They're having small losses a day, but they all recognize that there's a huge need to focus on where those losses are going to be 18 to 36 months out whenever the car values get down to a lower level, and those losses are naturally going to increase. 

Peter Heckmann -- D.A. Davidson -- Analyst

OK. So nothing's fallen out of the qualified pipeline.

Chuck Jehl -- Chief Financial Officer

Nothing is falling out at all.

Peter Heckmann -- D.A. Davidson -- Analyst

OK, great. I'll get back in the queue. Thank you. 

Chuck Jehl -- Chief Financial Officer

All right. Thank you. 

John Flynn -- Chairman and Chief Executive Officer

Thanks, Pete. 

Operator

Next question, Vincent Caintic with Stephens.

Vincent Caintic -- Stephens Inc. -- Analyst

Hey, thanks. Good morning -- or good afternoon, long day. So I appreciate your guidance ranges. And I was just wondering if you could talk about the variables to get you to the different points, the high and then the low end of the range, for example.

Just trying to see how conservative maybe the low end of the range is when you think about OEM production supply chain issues and all of that, if you could talk about the different points of the ranges. Thank you.

Chuck Jehl -- Chief Financial Officer

You bet. Vincent, maybe to start with the guidance inputs. Obviously, as we were building the guidance for '22, affordability for the target buyer and the continued inflated car values obviously went into it, the chip shortage, and the inventory. Also, we believe the inventory levels are recovering.

And from our growth and perspective, we don't give quarterly guidance, but we just point to the midpoint of if you think about Q1, maybe 20% of our overall growth of certs for the year, just to give you a little flavor there. It's a little more back-end loaded on the growth for '22 as things recover and dealers restock, if you will. But a lot of the drivers to the high end, Ross talked about the 84-month term that we're going to on our loans, as well as the expanded loan amounts. And it's really just the inventory and the affordability and how things recover to the high end of the range.

And just more at the faster pace, if you will, how fast the inventory and the restocking happens. So that's just kind of from the low to the high. But the midpoint is 22% growth for certified loans, and both revenue and certified loans. And we feel good about '22 and where we're heading. 

Ross Jessup -- President and Chief Operating Officer

Yeah. I think what we talked about on the underwriting changes we're really excited about. This started back in the end of Q3. Q4, we had an Executive Lending round table.

We had over 100 different credit unions and some banks there. And we listened to them, and we were able to get that approved by our carriers. I mean, just the fact that a third of our applications are asking for over 72 months, and we weren't able to do it before. So you've got to think about now being able to do a full approval for larger loan amounts, higher terms.

And we, of course, are pricing it with the right premium, so we can definitely keep the loss ratios where we have enjoyed and historically landed. So it's really important to us not to impact negatively our underwriting at all for that. 

John Flynn -- Chairman and Chief Executive Officer

And I think that the point that Ross just made, there was extensive studies done on the performance of 84 months versus 72, particularly in the near-prime space that we live in. It showed that the default rates were better in 84- than some 72-month loans. And that these consumers, it's all PTI driven, not score driven and the fact that you can get them into an affordable payment to keep them in the car. So to Ross's point, I don't think we're diminishing whatsoever what the profit share will end up being as a result of this, I think it's only going to help grow that side. 

Chuck Jehl -- Chief Financial Officer

Yeah. And Vincent, I'll jump back in. One of the other inputs that we look at is -- I think I mentioned it when Pete -- previous question about North American production. If you go back to the pandemic, during fiscal '20, there were 13 million units, which was down 20%.

And then if you fast-forward into '21, it was pretty flat at 13 million units. What we're seeing in '22 and the forecast for the North American production is 15.2 million, which is up 17%. And then '23 is forecasted at 17 million production units, so that's another 13%. So if you think about the high to the low range, that's definitely an input and how fast that happens.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. That's very helpful. Thank you. So would it be correct to say that, I guess, the low end of the range is sort of more of the same of what we've seen, but the high end of the range is sort of the actions you're taking, for example, the terms and the size of the loan and all the other things that you're kind of controlling in order to grow?

Chuck Jehl -- Chief Financial Officer

I think that's fair.

Vincent Caintic -- Stephens Inc. -- Analyst

OK. Thank you for that. Second one, the refi channel. So it's exciting to see that actually expand from here, and I think it doesn't get as much attention.

But maybe if you could talk about that when you think about your 2022 expectations, and also the margins on that product, I don't think I'm as close to that one, but if you could talk about the opportunities there when you think about 2022, as well as the profitability of that business. Thank you. 

John Flynn -- Chairman and Chief Executive Officer

Yeah. It's priced exactly as any of our other business. We have our program fee that is the exact same thing as it is for direct or indirect. The premiums are priced based on the performance of that loan.

So the actual unit economics of each one of those transactions are identical to any other part of our business. Will it perform exactly as direct or indirect? We've got a price like their direct loans, but we always have the ability to change premium rates if we see that that's not the way it's trending. To this point, it's been very favorable on that side. So we drive a lot of our funding clients toward these refinance channels because, if you look at the economics to the financial institution, when they go out and do an indirect loan, they're going to pay at least 2 points to a dealer to get that paper in the door.

Well, they're paying a similar fee to refinance channel as they are a dealer, but they're getting a lot more volume without even having to process the loan because it's all processed on their behalf. So the funding sources love it. We get the same unit economics, and the consumer gets a much better deal than they got the first time around when they bought the vehicle. 

Vincent Caintic -- Stephens Inc. -- Analyst

OK. That's helpful. I guess -- that's helpful data. I guess I'm wondering, in terms of the opportunity for refi, as you outlined, is very large.

You get that $250 billion TAM, and it seems like it makes sense for the customer to get it, save that 500 basis points, plus you kind of go around the inventory and supply chain issues since the customer already has the car anyway. So I guess I'm wondering what's the governor to executing more rapidly on that TAM opportunity as you're rolling that out? Thank you. 

John Flynn -- Chairman and Chief Executive Officer

Well, I think you'll see that it's been growing very rapidly over the past year. I don't think that we have any kind of a governor slowing us down. What we're doing is we've got our existing sales force, when they find some time to not be selling new business, to use their account managers to get back into our existing funding sources. The one thing that might be a governor to it, it's really more suited for the larger credit unions that have a national footprint.

Not every credit union can accept a new member from just anywhere in the country. They had to kind of qualify, did they live in a certain country or a certain state. So our main focus is targeting the larger shops that have a bigger footprint that can afford to take in these members, which I think is evidenced by you probably heard us talk about PenFed being one of the bigger funding sources on that side that went from 700 deals early last year to 3,000 deals at the same time this year. So I think it's just targeting the right-sized account that has that field of membership that can accept the consumer.

Vincent Caintic -- Stephens Inc. -- Analyst

OK, great. That's very helpful. I'll get back in the queue. Thank you. 

John Flynn -- Chairman and Chief Executive Officer

Thanks, Vincent. 

Operator

Next question, Joseph Vafi with Canaccord Genuity.

Joseph Vafi -- Canaccord Genuity -- Analyst

Hey, guys. Good afternoon. Congrats on all the good execution, even though it was a tough environment in '21. I was wondering, a couple of questions.

I know, Ross, you were mentioning the dealerships now have more like 200 cars on the lot. Is there a level you think when that dealership number, when that inventory in the lot really starts to help accrue back to your model and less on perhaps the presolds or just prime buyers scooping up the cars for the near-prime guys get a chance? We have to be back at 300 or 400 before you're really kind of back in a good position relative to what you're offering and how your customers fit in the pecking order and the dealership. And then I have a follow-up. 

Ross Jessup -- President and Chief Operating Officer

You bet. Hey, Joseph. Great question. I don't ever think the world of 600 cars on the lot, 500, 600 cars a lot are going to happen again.

And we're not counting on that. But I do think you kind of hit the nail on the head. I think going back to where it's about double where they are today. And I think the just-in-time manufacturing and the presold orders, whenever they make a car today, that's not a new purchaser.

That's typically the presales. So I think that's the first thing. I think that we track the Manheim index and the forecast very carefully. And we do see cars declining in value for several months, two years, but it's not going to be a fast decline, because you got to get the lease market back to where it's in order.

But I think we definitely are encouraged by what we're seeing, and we think the latter part of this year we should see incrementals every quarter, latter part of this year, and going into next year, our growth and our ability to capture is going to be tremendous. I mean just the fact that the two underwriting rule changes that are going in place, some next month, some the following, will help us make full approvals to 25% more of our approvals that we're doing today. I mean, that's just a huge amount. And to be able to say, yes, in a full way to what someone wants and to price it correctly, our capture rate should really be majorly impacted.

Chuck Jehl -- Chief Financial Officer

And, Joseph, this is Chuck. I'll jump in and kind of follow on Ross. Demand is strong. I mean, we talk about this $5 million pent-up demand in units out there.

It's just a function of supply. And as that supply comes on, it's going to get back to our target credit score, as well as in our program. So the SAAR, which we watch the new SAAR, January's new car SAAR was projected at 15 million units, which December was 13 million units. So clearly, the trough was in December, and we feel good about where that new car inventory SAAR is heading.

The used is at 32 million units, which was flat to December. So all those are good facts that as we'll see our business continue to grow with that in the future. So --

Joseph Vafi -- Canaccord Genuity -- Analyst

Sure. Fair enough. And then just kind of circling back to just guidance again, and I'm sorry if I missed it. If you look at the low end, I mean, you seem to be implementing a lot of things, the terms, and the loan amounts, the number of new active implementations going on contracts.

Those are all clearly part of your guidance, I would imagine. Do you have an assumption on the SAAR or on inventory levels at the low end and high end? What would those be?

Chuck Jehl -- Chief Financial Officer

Yeah. I think just what I kind of just went over in what the January SAAR from new and used is and how it's recovered from the trough. And we take all that, and that data, as well as our bottoms-up work in our model, and the new customers added, as well as expanded wallet share from existing. And all that's part of the range, if you will.

Joseph Vafi -- Canaccord Genuity -- Analyst

Sure. All right. Thanks a lot, guys. 

Chuck Jehl -- Chief Financial Officer

Thank you. 

Operator

Next question Michael Grondahl with Northland Securities.

Michael Grondahl -- Northland Capital Markets -- Analyst

Hi, yes. Thanks, guys. Hey, just kind of two questions clarifying things a little bit. With your extended terms going from 72 months to 84 months, I think you said you're expanding the loan amount to roughly how much higher is that going? And then secondly, on OEM No.

3, I thought on the last call, you said that that pilot was going to begin late January. Were you basically saying that that's been delayed because the new servicing platform from that IT vendor is not in place and you don't know how long that delay will be? Just trying to make sure I understand that.

Ross Jessup -- President and Chief Operating Officer

Yeah, Mike. First of all, on the loan amount. The main increases in the loan amount are really in the indirect side, where we had lower loan limits than we did on the direct. But, roughly, whatever we were doing before, we're increasing approximately 30% to 35% larger loan amount.

But on the direct and refi, that increase is about 10% or 12%. But at the end, we're going to have the same loan amounts for all channels in there. And quite frankly, that's why, on the indirect side, the amount of loans that we countered last year compared to pre-pandemic were twice as much. And so it's going to be a huge impact to us for that.

In regards to OEM No. 3, the late January that we talked about was when defi SOLUTIONS are going to begin their integration work, and they had told us it was a 60- to 75-day build, somewhere in there. And so the pilot was supposed to start sometime in April or May. And they have not finished their servicing work as of today, and I don't think they will have that finished for the next few months.

I can't really speak to that, but that was always something that we had to have in place before our project would take place.

Michael Grondahl -- Northland Capital Markets -- Analyst

Got it. OK. Thank you. 

Ross Jessup -- President and Chief Operating Officer

You bet. 

Operator

[Operator instructions] Next question comes from John Davis with Raymond James.

John Davis -- Raymond James -- Analyst

Hey, good afternoon, guys. I just wanted to start, John, maybe quickly on the competitive landscape. I think last quarter you talked about how some of your peers were, at least at the point of sale, being relatively aggressive on price and below rates that your lenders were willing to lend out. So just curious, with rates going up and expectation for forward credit losses likely increasing as well, if you've seen that kind of calm down? Or are people still being super aggressive, some of your peers being super-aggressive on price at the point of sale?

John Flynn -- Chairman and Chief Executive Officer

Oh, yes, I think the last time, I'm not sure it was price. Remember, I think we talked about the flats that they were paying. They were paying as high as 400 basis points to get that money in the door for a full point. I've not seen that stay out there.

I think that was a short-term way to attract some money. But, yes, I think you're still going to have people out there paying rate markup versus a flat. That's never been any different than it is today from what I've seen. Ross is --

John Davis -- Raymond James -- Analyst

Yeah. Cost of funds is increasing, and so we certainly are having to update our client's pricing when we work with them to meet that.

John Flynn -- Chairman and Chief Executive Officer

But it's not as bad on the credit union side as it is on what you might think from these places that, when you have banks that are paying 40% in taxes, or you've got other funding sources that are attracting funds from private equity or other places like that that are a higher cost; I think the credit unions, again, which I think is evidenced by the extreme growth in our refinance channel at our credit union, volumes continuing to grow because of that low cost of capital. I just don't see that slowing down. Some of the credit unions we've talked about signing last quarter and what's implementing into this first quarter are some of the $4 billion and $5 billion shops, not the $600 million credit union. So I think that we're extremely well-positioned to continue to grow in a great direction with just the main core business and the extreme amount of cash sitting under balance sheets.

Chuck Jehl -- Chief Financial Officer

Yeah, John, this is Chuck. I'll jump in and echo what John said is, even on application flow at the company, just from December to January, sequentially we're up 6%, so from an application flow perspective. And also, the originations in 2021 were $4.3 billion that we originated, and our average loan amount was about $25,000 on that. That was over and above $2 billion in originations in 2020.

So obviously, still a great demand in the platform and the program, and 82% cert growth in '21.

John Davis -- Raymond James -- Analyst

OK. No, that's helpful. And maybe a couple of quick follow-ups for you, Chuck. First, I think you said Q1 certs would be about 20% over the full year.

I just want to make sure I heard that right, which would imply kind of certs roughly in line with 4Q levels. And then, I think you said that SAARs for used cars will be roughly flat and up a little bit for new cars. So I just wanted to double-check that the way to think about it is 1Q certs kind of being 20% of the full year, but I just want to double-check that.

Chuck Jehl -- Chief Financial Officer

Yeah, yeah. About 20% for Q1. And if you just think about the forecasting there, obviously, the production is flat. I mean, if you go back to some of the OEMs that just reported, they're basically flat Q1 and growing throughout the rest of the year.

So obviously, that's from the production units and forecasting. But yes, 20% from the midpoint. If you took that number, that's roughly kind of what we're thinking for Q1.

John Davis -- Raymond James -- Analyst

OK, great. And then just want to touch on free cash flow here. Obviously, I think the guide implies free cash flow above 100% this year, which is a step-up from '20 and '21. So I know there's some timing differences.

Accounting here is a little bit funky. But just how should we think about free cash flow conversion, going forward? Is 100% the right way to think about it? Just any other color there on free cash flow would be helpful.

Chuck Jehl -- Chief Financial Officer

Yes. I think the adjusted operating cash flow, which is a proxy for free cash flow that we reported, it's even in our guide, John. I think that's a good proxy to look at. And the difference between that and EBITDA, if you will, as you said, the accounting, the 606 is on the accrual basis, and that profit share comes in on a monthly basis based on cash.

And so obviously, we have taxes and interest on debt as well. But I think adjusted operating cash flow is a good proxy for that for you.

John Davis -- Raymond James -- Analyst

OK. I appreciate it, guys. Thank you. 

Chuck Jehl -- Chief Financial Officer

Thank you. 

Operator

Next question, James Faucette with Morgan Stanley.

James Faucette -- Morgan Stanley -- Analyst

Great. Thanks very much. I wanted to touch on really quickly, I appreciate all your detail that you've given on assumptions around certs, etc. Wondering how you're thinking about the normalization of delinquencies across consumer products in recent months, how that affects the way you're looking at the profit share for the coming year? And it sounds like you're expecting to get some benefit as well, or at least not be hit by extending to longer-term loans, etc.

Can you just give a little more color and detail on how you're thinking about the profit share components and the different pieces that go into that?

Chuck Jehl -- Chief Financial Officer

Yeah. Hi, James. This is Chuck. Yeah.

On the profit share, obviously, defaults and severity of defaults and prepaid speeds are the big drivers of that and our assumptions, and any changes we may have an estimate under ASC 606. But I think we've seen a period of low defaults and low severity. And if the book continues to perform better than our assumptions, it's in the model, we'll have those positive changes in estimate and which we had one in Q4. It was about $6.5 million.

But we did, in the quarter, put some additional stress in accelerating some prepays out into '22. But we think that $550 million to $600 million of cert is a good estimate for profit share as you model and think about the business going forward into '22.

James Faucette -- Morgan Stanley -- Analyst

Great. Appreciate that detail. Great. And then the second question I had is how are you thinking about needs to invest to kind of keep your underwriting model ahead of where competition may be going, or just changes in the market generally, etc.? Is that an area where you feel like you're investing at appropriate levels today? Or what would cause a change in the level of investing you're making in that part of the capability in operations?

Ross Jessup -- President and Chief Operating Officer

Hey, James. This is Ross. Yes. We actually have been working with a couple of different parties to look at our current scorecard to do some progression testing to look at additional underwriting variables, alternative data models that we can basically add to what we currently have been doing, and looking at what the lift would be, what deals that we would kick out that we were doing before and what those results would be.

And then, mainly, a lot of these loans that we're saying no to today, we're able to look and see how they performed over the last three years had we had this scorecard in place, and that's exciting. So we have that teed up and, basically, the first thing we want to do is get with our insurance carriers to make sure that we got our loan limits and terms where we wanted to be. We got that going on. And we've got that being done in the next 45 days.

And the next phase is basically this new LP 2.0 scorecard that we look to have. We've made some investments. We've got some additional refinement, but we will be coming out with that enhancement here midyear. 

James Faucette -- Morgan Stanley -- Analyst

That's awesome. That's great detail and nuanced color, guys. Appreciate it. 

Ross Jessup -- President and Chief Operating Officer

Thanks, James.

John Flynn -- Chairman and Chief Executive Officer

Thanks, James. 

Operator

Thank you. I would like to turn the floor over to John for closing remarks.

John Flynn -- Chairman and Chief Executive Officer

Thank you, operator. Again, we just want to thank everybody for taking the time to listen in and have these great questions. As you can tell, we're extremely excited about what the past year and what we've accomplished and where we think we're taking the company into '22. So stay tuned, and keep the questions coming.

Operator

[Operator signoff]

Duration: 60 minutes

Call participants:

John Flynn -- Chairman and Chief Executive Officer

Ross Jessup -- President and Chief Operating Officer

Chuck Jehl -- Chief Financial Officer

David Scharf -- JMP Securities -- Analyst

Peter Heckmann -- D.A. Davidson -- Analyst

Vincent Caintic -- Stephens Inc. -- Analyst

Joseph Vafi -- Canaccord Genuity -- Analyst

Michael Grondahl -- Northland Capital Markets -- Analyst

John Davis -- Raymond James -- Analyst

James Faucette -- Morgan Stanley -- Analyst

More LPRO analysis

All earnings call transcripts