IRVING, Texas — The subprime auto finance market certainly
changed in the past 12 months. A host of factors such as pent-up demand and
significant capital injections created a situation of companies reentering the
subprime sector after shying away from it during the recession as well as new operations
looking to grab some market share.

"I think everyone would tell you it's been hyper-competitive
with a lot of capital coming into the subprime auto finance space. The large,
well-established lenders have a lot of capital to deploy. It's just been a very
competitive year," Exeter Finance chief executive officer Mark Floyd said. "But
at the same time, it's been a good year for the industry because there is so
much capital available in the space.

"Some lenders probably would prefer that there wasn't so
much capital available because it's created so much competition," Floyd
continued. "But personally, I think that's healthy for the industry. The good
news from where I sit is that lenders have been competing on price and
structure and not chased credit, not looked for volume by being too aggressive
on credit."

As lending executives and dealers know, capital to fuel
industry wasn't always readily available. Melinda Zabritski, director of
automotive credit at Experian Automotive, remembers the doldrums market leaders
faced not so long ago.

At the beginning of 2012, Zabritski took an unofficial poll
of executives from about 50 different lenders at an industry event in an
attempt to gauge their sense of where the market was going. Zabritski had done
a similar query during the height of the recession — 2009 and 2010 — when
F&I managers struggled to put deals together unless the potential buyer had
a sterling credit report.

"Previously, the mood was frustration. It was more so from
the standpoint of you didn't have customers out there shopping. Of what you
had, subprime was very challenged to get financing, mostly because lenders
didn't have a lot funds, especially from the finance companies that relied on
the secondary markets," Zabritski said. "For those lenders that did rely on the
second markets, it was more lack of funds. I think there was definite
frustrations, definite concerns because of the rise in delinquencies.

"It was also very telling right after the recession when we
were beginning to recover, there the mood was interesting because the lenders
had money," she continued. "They just didn't have the customers out there
coming into the marketplace. It cycled from frustrations and challenges and
lack of funds to uncertainty.

"Now, it seems like we've got the optimism in the
marketplace; we've got customers out there shopping again. We've got banks with
money. We've got open lending programs and really the ability and willingness
to fund," Zabritski went on to say.

As franchised and independent dealers turned more vehicles
throughout this year, analysts from Edmunds.com said a key driver of the
resurgence was the revival of the subprime market, which accounted for a
quarter of all new auto loans in the second quarter of 2012, up from a
second-quarter low of 17.6 percent in 2009.

And Edmunds.com chief economist Lacey Plache thinks there is
even more good news: the market holds even more room to grow.

"Pent-up demand from consumers unable to obtain financing
during the recession has not been fully released and will continue to
contribute to auto sales growth as these consumers get access to credit,"
Plache said.

"As a result, the auto industry can continue to count on
expanding credit — a key driver of auto sales growth during the recovery to
date – to boost sales for the foreseeable future," she went on to say.

More Competition in
the Subprime Space

As Floyd mentioned, lenders who conduct business with
subprime buyers are finding more companies are willing to make a deal with
these customers.

When recapping the company's second quarter performance,
Credit Acceptance CEO Brett Roberts referenced competition as the lender's unit,
and dollar volumes grew 7.3 percent and 7.9 percent, respectively, while its
number of active dealers climbed 27.0 percent.

However, the average volume per active dealer with Credit
Acceptance declined 15.3 percent during the span.

"We believe the decline in volume per dealer is the result
of increased competition," Roberts said. "I think we're continuing to see more
competition. Obviously, the growth rate for the quarter reflects that. We did
make a pricing change on April 1. That was intended to increase unit volume
growth. We got some response from that, but certainly there is more competition
out there today than there was a year ago.

"As we disclosed, July results were better, but we are
probably in the middle of the competitive cycle that will last until something
happens to change that. It's hard to predict when that will occur," Roberts
continued.

While companies such as Exeter and Credit Acceptance have
some subprime market history, new operations such as Global Lending Services
came on the scene this year.

Global Lending Services, an auto finance company founded by
industry veteran Douglas Duncan, acquired the business of Resurgent Auto
Finance, an established subprime auto loan originator.

Duncan said the acquisition included a $38 million loan
portfolio as well as a funding and servicing platform.

Global Lending Services also entered into a partnership with
New York-based investment firm BlueMountain Capital Management. Several
BlueMountain managed funds and Duncan invested $100 million in capital. BlueMountain
will have a majority interest in the company, and Duncan will serve as
chairman.

"The opportunity to partner with BlueMountain was strategic
given the significant amount of capital required in the auto finance business,"
Duncan said.

Global Lending Services CEO Gary Lorenz added, "With $100
million in committed capital, we are well positioned to secure additional debt,
as needed, to support our growth. BlueMountain also has a deep understanding of
the subprime auto finance sector and an experienced team of professionals that
will add significant value to our business."

The foundation assembled by Global Lending Service is an
example what Pete Radike described as "the second coming of subprime," recapping
how the market is on the way to a strong rebound after having been subdued
during the recession. Radike is the director of product management at Fiserv and
has more than 20 years of industry experience.

"Once we've gotten past the end of 2010 and early 2011,
there was a couple of interesting phenomena that took place in the market,"
Radike said. "One that's no big secret for anyone who reads the newspaper or
online news, there were literally thousands of displaced bankers or bank
employees, which included lending savvy individuals, who suddenly found
themselves looking from the outside in to the lending arena.

"The second was that based on stagnant existing markets, and
probably some level of uncertainty based on everything from regulatory changes
to the economy as a whole, there was a number of executives at existing
organizations that have looked to evolve their careers into new endeavors," he
continued.

"When you put those two things together, what you end up
with is a plethora of experienced, talented, knowledgeable lending talent from
various sources, both competitors as well as collaborators, who seek the
ability to reinvent themselves into new businesses," Radike went on to say.

Evolution of the
Subprime Borrower

The customers both lenders and dealers are now competing to
gain might not be the same as the ones seen earlier this year and certainly not
the potential buyers of 2010 and 2011. Manheim chief economist Tom Webb said,
"I suspect that what is being called subprime today is nothing like the
subprime of old."

Webb elaborated on his comment in light of making a
projection of the possibility of 75,000 more repossessed vehicles making their
way to remarketing channels next year.

"I'm sure that today's borrowers that are subprime still
have low FICO scores," Webb said. "That's how we define subprime. But I bet you
that many of them have pretty low payment-to-income ratios. These are people
who had their credit racked during the recession. Think foreclosures. But they
have now walked away from that debt. They're now dealing with a rent payment that
is much smaller than their previous mortgage payment, and they're actual income
has not changed. It may have even gone up."

To back up his claim, Webb pointed to the Federal Reserve
Financial Obligation Ratio, a quarterly measurement he explained is "the sum of
mortgages, rent payments, car payments, vehicle lease payments, homeowner's
insurance and personal property taxes, all expressed as a percent of personal
disposable income."

The Fed placed this ratio at 15.78 percent as of the second
quarter. It was below 16 percent in the first quarter, too, and the reading
hasn't been that low for two consecutive quarters since the middle two quarters
of 1984.

"How can that be in such a weak economy? Households have
walked away from more than $1 trillion in mortgage debt," Webb said.

Radike also offered his assessment of what a subprime
consumer is nowadays.

"Clearly, there is both an established and a newly defined
what I'll call a below-prime market. My choice of those words is strategic,"
Radike said. "One of the things I see in the real world field in meeting and
speaking with people is that there is subprime, less-than prime, nonprime, all
of these similar defined markets which really have a common denominator: the
risk involved to their portfolios.

"In other words, a less-than prime might down to B and C+
paper; a subprime might go C and D paper, etc. Those are the traditional
definitions. But because of the depth of risk for those organizations in their
portfolios that tends to alter their own definition of what market they're
going after," he continued.

"The entire demographic makeup of consumers  outside of the prime definition includes
former prime individuals that have been adversely effected by the economic
happenings of the last five years," Radike went on to say. "Experienced lenders
are probably some of the appropriate resources to both relate to and understand
that a less than prime customer today was probably prime three years ago."

Compliance Vital to
Recovery Department

With subprime originations on the rise, so, too, are
defaults.

The upward bounce from the reading's historic low continued
in September as the S&P/Experian Consumer Credit Default Indices showed
auto loan defaults climbed for the second month in a row.

Analysts from S&P Dow Jones Indices and Experian
determined the auto loan default rate increased to 1.11 percent in September.
In August, it was 1.09 percent. That record low rate came in July when it was
1.01 percent.

Despite the two-month rise, the September auto loan default
level remained below the year-ago reading. Last September, the index mark was
1.29 percent.

Furthermore, two of the market's largest lenders noticed an
uptick in 30-day delinquencies during the third quarter.

Chase's 30-day delinquency rate connected with auto loans continued
on an upward track that's been going on for the last three quarters. The
third-quarter rate was 1.11 percent after it settled at 0.90 percent at the
close of the second quarter and 0.79 percent after this year's opening quarter.

A year ago, Chase's 30-day delinquency rate stood at 1.01
percent.

And over at Wells Fargo, the company indicated its
third-quarter net charge-offs rose $33 million from the previous quarter,
"reflecting seasonality and higher delinquencies."

In fact, Wells Fargo's 30-day delinquency rate came in at
1.40 percent in the third quarter, up from the year-ago reading of 1.22
percent.

As those delinquency and default rates tick higher, Alex
Price maintained that lenders, collectors, repossession agents and other
related personnel must keep tabs on what rules and regulations come from the
Consumer Financial Protection Bureau and other federal agencies. Price — the
national sales and training manager with MasterFiles who rolled out a
skip-tracers national certification program earlier this year — has been a
trainer to the American Recovery Association, a former advisory board member to
Time Finance Adjusters and the Society of Certified Recovery Agents.

"Once it's all said and done, the bottom line won't be any
longer just the price. It won't be how much do you charge and the lowest guy
gets the work. Because of the compliance, the certification, the training, the
contracts for business is going to go to the more prepared, the more trained,
the more certified individual, in my opinion," Price said.

"It's critical for everybody and anybody in the industry
from the major lenders to the small lenders to the recovery agents to the mom
and pop shops to keep a very close eye on that. The ignorance of the law is no
defense. If you're not keeping an eye on the new regulations that oversee your
industry and you violate one of those regulations, you can't say I didn't know,"
he continued.

"The person who is the most prepared for the future that has
gotten their organization in compliance and their staff trained and certified,
those are the individuals that are going to be at the top tier of their
profession in order to make the greatest impact for their clients, mitigating losses,
reducing liability etc.," Price went on to say. "As we move forward into the
coming year, mitigating losses and reducing liability in the entire process is
what's going to be at the forefront of the entire lending, collection and
recovery industries."

Subprime Market
Outlook for 2013

Floyd summarized what other top lender executives might be
thinking as the calendar turns to another year.

"We think there is still pent-up demand. It varies depending
on who you talk to. There is data that will say that consumers are coming back
into the market. At what rate, we don't know. The ground is fertile for growth.
I don't think it's going to be explosive growth," Floyd said.

"In 2013, we're just going to see significant growth where
everyone can fill their appetitive. It's still going to be very competitive for
the foreseeable future because there is so much capital available and everybody
is being very prudent about their underwriting standards that growth I think
will be methodical," he continued. "As long as everyone maintains underwriting
discipline in the market, then it's good for us and the entire industry. If any
one lender gets sideways on credit, then it tends to have a negative impact on
all of us because the assumption is if this company is getting more lending,
then others may be doing that.

"The big unknown for the industry right now is the impact of
the CFPB," Floyd went on to say. "We're keeping our eye on that, making sure
we're ready from a compliance standpoint. At this point, no one really knows
how it's going to impact the subprime auto finance industry, but it's something
we have to pay attention to. We'll adapt to any changes that come along and
move on."