Experts at Experian, Equifax, and TransUnion cleared the subprime auto loan market of a second subprime crisis waiting to happen in the auto industry. The experts, speaking at the American Financial Services Association (ASA)’s Annual Vehicle Finance Conference and Expo, concluded that the subprime auto market is stable and noted no signs that lenders are weakening their underwriting practices.
“We are happy that AFSA is providing the forum for the credit reporting agencies to set the record straight on the health of the subprime auto finance market,” Chris Stinebert, president and CEO of AFSA, said in a statement dated January 24, 2017. He added that this is particularly helpful in the wake of last year’s light vehicle sales.
At the AFSA panel discussion, the experts cited factors like the healthy economy, risk-based analytics tools, and low unemployment as key to their conclusions. Here’s what each has to say about the subprime auto market as lifted from the AFSA statement.
Equifax: Different Lenders Lending to Underserved Consumers
Equifax Senior Vice President and Chief Economist Amy Crews Cutts: “The fact is loan performance is good relative to historical levels and the slight weakening we are seeing cannot be attributed to a change in how lenders are underwriting their loans or call into question the stability of the subprime market as a whole.
“Consumer data tells us that market share is shifting across different lender types and specialty lenders are lending in higher-risk segments that are not otherwise being served.”
In its new research, Equifax examined the dynamics of the auto lending industry and the differences in performance. The research showed a continued strength in what it described as a “segmented sector where different lenders specialize in narrow credit bands.” Equifax also pointed to lenders keeping their conservative lending habits pre-recession vis-a-vis other lenders “meeting the needs of consumers with lower credit scores.”
Experian: Automotive Lending Is Quite Healthy
Relying on data for the third quarter of 2016, Experian found the auto finance market in general as “quite healthy.” Interestingly, its results pointed to a decrease in the subprime auto loans’ share in the overall automotive lending market as lenders originated loans for borrowers with higher than average credit scores.
For Q3 2016, the subprime market was down by 4.3% compared to 2015, taking up 20.39% of the total market for loans originated. In turn, the market for prime loans showed a two-percent uptick during the relevant quarter, resulting in a 59.8% share of the total loan originations. Experian also found that the credit scores of borrowers applying for auto loans increased to 718 from 715.
“The sky is most definitely not falling on automotive lending. While we may have seen growth in subprime or deep-subprime loans in recent years, it is important to keep it in perspective – the entire market has grown from a volume standpoint across all risk tiers,” said Melinda Zabritski who serves as Experian Automotive’s finance director.
TransUnion: Subprime Auto Financing Differs From Subprime Mortgage Lending
TransUnion Senior Vice President and Automotive Business Lender Jason Laky pointed out, “Subprime auto financing today is very different from subprime mortgage lending 10 years ago. Subprime auto lending is much smaller than mortgage in terms of total outstanding loan balance and average loan size, so exposure from loss at a macro and micro level is likely to be less severe. Risk is also broadly distributed among lenders and investors, limiting the systemic risk stemming from one lender’s challenges.”
According to its Industry Insights Report, subprime borrowers held auto loan and lease balances totaling $172 billion in Q3 2016. This represented 16% of the $1.1 trillion in total auto balances for Q3 2016. Compare this to subprime balances comprising 20% of the total loan balances during the end of the recession in Q3 2009.
Some Notes for the Subprime Auto Market
Despite the present clean bill of health that the three credit bureaus have given to the subprime auto lending market, the experts voiced out some issues to watch out for on subprime lending, wrote Nick Zulovich of Auto Remarketing.
According to the report, Mr. Laky of TransUnion said it’s fine if loans extend to 75 months for as long as the borrower has the capacity to keep up with his/her monthly payments. Equifax’s Ms. Crews Cutts suggested that the trend data on a borrower’s payment performance across all his/her monthly obligations should be looked into.
Experian’s Ms. Zabritski brought up the loan-to-value ratios for cars, which is often at 110% and higher because of taxes and fees, even with a 10% down payment, the report added.