CHICAGO -

With subprime paper representing only about 16 percent of the total outstanding auto finance balance figure TransUnion reported for the third quarter, the bureau’s top industry analyst indicated that’s not too much lower-end paper currently in portfolios.

“Overall, it’s probably a good thing,” Jason Laky, senior vice president and automotive and consumer lending business leader for TransUnion, said about the latest subprime balance figure that grew by 11.4 percent year-over-year.

“The reason I say that is we’re in the sixth, almost seventh, year of economic expansion,” Laky continued during a conversation with SubPrime Auto Finance News after TransUnion’s Q3 2016 Industry Insights Report powered by Prama analytics. “As long as we’re in an economic expansion, the longer that goes, the more confident I think lenders feel in lending to subprime and non-prime consumers, so I think you would expect that growth.

“Again, the further you get into an economic cycle, the more people are going to have net gains in employment,” he went on to say. “We saw 161,000 net new jobs last month, with many of those people coming back into the workforce and may have been unemployed for a period of time or are relatively new to credit. As people are getting employed, it’s naturally creating this demand in subprime and non-prime and lenders are there to meet that demand.”

Balances are higher as now almost 80 million consumers hold some kind of auto financing — a Q3 metric Laky noted as being about 6 percent higher than a year earlier. However as the leaders of both Consumer Portfolio Services and Credit Acceptance noted when they reported their third-quarter results, there is a bit of turbulence that finance companies are facing.

“If there is a tightening — and the reason I say if — from a consumer market prospective, we’re still seeing good growth of consumers getting autos,” Laky said. “From a tightening perspective you’re seeing individual lenders maybe tightening their policies or reducing or being more careful in how they’re participating in the market. There’s a tremendous amount of competition out there. What we’ve seen is the competition for most risk tiers is driving down interest rates or APRs, how they’re being compensated for the risk they’re taking. It’s harder to get at.

“But at the same time, we’re starting to see the beginnings of a higher cost of funds for lenders,” he continued. “The Fed talks about raising rates a little bit. Some of the investor concerns around the fintechs in the second quarter of the year may have just flowed through to auto lenders, particularly independent auto lenders that might have had a higher cost of funds.

“Those two things together can probably just squeeze margins enough that are causing some lenders to really think about where they want to play a little more carefully,” Laky went on to say.

And if finance companies choose to be a little less aggressive, Laky explained the two most likely strategic moves they can make.

“From a lender’s perspective, the two levers that are probably the easiest or most straightforward to pull are credit scores — changing FICO cutoffs is a quick way to manage the credit side of the risk — and the other lever is on the asset side usually with the loan-to-value ratio. That’s another good lever you can pull pretty quickly as a lender,” Laky said. “You can reduce your caps on LTVs or your score cuts relatively easily.

“Nowadays, a lender with any sophistication, things are so engrained — policies and scores and LTVs — that simply changing one isn’t always an option. There’s a lot of thought that usually goes into either expanding the buy or contracting them,” he added.

SubPrime Auto Finance News closed its conversation with Laky by asking about what TransUnion will be watching in 2017 in order to spot significant change or continued patterns of origination growth that’s been noticed for several consecutive quarters.

“From an auto lender’s perspective, we’re going to look a three areas,” Laky said. “First is we’re always going to keep a look on credit quality. We look to see not just how credit is growing across traditional tiers, but the characteristics of the consumers within those tiers and how they’re changing. I feel that’s our responsibility as TransUnion to help our lenders keep an eye on that overall.

“Second is used-car values,” he continued. “We’re a long time into a strong used-car market. There’s a lot of talk about off-lease vehicles increasing over the next couple of years. We certainly see it in the credit file so we’ll keep an eye on that.

“Third, I would keep an eye on funding costs,” Laky went on to say. “The Fed talks about raising rates. While it might only be a little bit, it does flow through to the cost of funds and can certainly challenge margins for lenders. As long as the economy is strong and the Fed is raising rates because of a strong economy, I think that’s the least of the things to worry about.”

TransUnion’s complete Q3 report can be viewed here.