CREDIT: Delinquencies Rise, Lenders Tighten Credit

canstockphoto7315118Subprime 60-plus-day delinquencies declined to 4.28% in February, compared with 5.09% in January, according to S&P Global. Year over year, however, February subprime delinquencies were up 14% over the same month a year prior.

“Generally, delinquencies decline from January to February due to tax refunds and this pattern played out again this past year,” S&P wrote in its March U.S. Auto Loan ABS Tracker.

“I think the year-over-year speaks to what we’ve been calling the credit normalization,” said Amy Martin, senior director of structured finance at S&P Global. Credit performance has been good for a long time and losses have been low, particularly in prime, she added.

Lenders in the subprime market have been tightening a bit, though. For example, some lenders are tightening up with Loan-to-Value (LTV) ratios: United Auto Credit’s average LTV, in particular, came down to 106.52 in its 2016-2 issuance, from 120 in its 2015-1 issuance, Martin said.

She added that some companies have told her they are tightening up in other ways, but nonetheless, “we’re not seeing any sustained or widespread improvement as a result of those tightened efforts,” she said. That is at least in part because recoveries have been trending lower. So the tightening is not having a sustained or material impact on performance, because recovery rates on repossessions are taking it away.

Rises in lease return volume and negative equity are putting downward pressure on recovery values in the subprime sector, said Ben Miller, senior vice president and treasurer at Exeter Finance Corp, at SFIG in early March.

“The recovery issue is real,” Miller said while speaking on a panel. “There’s going to be a lot of vehicles coming back off lease, and the last couple of months we have seen recovery values lower than probably where they were a year ago.”

Overall, the subprime auto industry is going to have to tighten some of its underwriting standards to reflect current market conditions, Miller added.

Subprime Surge

“[Subprime] is the business model for many companies, and they’ve been there for years,” said Martin.  Some have integrated the sales/finance business model, such as DriveTime and JD Byrider. “It’s been a very profitable market for DriveTime,” she added.

Other companies that are focused on indirect financing and not retail sales, are finding it to be a lucrative market for them as well, such as American Credit Acceptance. However, thanks to the need for higher loan loss provisions, as well as higher costs with respect to compliance, subprime is poised to become less profitable, Martin said. “That’s something we’re watching,” she added.

TransUnion is seeing a slight uptick in delinquencies overall, but “when we stratify prime and above from nonprime, you can see the uptick is attributable to subprime,” said Brian Landau ,the company’s senior vice president and automotive business leader.

That is not to say there are signs of bubble is forming, but rather “a re-calibration” of the market is happening now, with lenders “diversifying” their portfolios, Landau said. “Most subprime is being originated by lenders with diverse portfolios, and they have healthy sources of funding,” he said.

However, those that play in the subprime sandbox should gather as much information on consumers as they can, he said.  There is a greater appetite for alternative data, not just simply relying what’s on a credit report and the trade lines, but going beyond that.


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