While some auto finance companies are backing off their originations in the subprime space as TransUnion articulated earlier this week, Black Book is arming managers and underwriting departments with new analysis for institutions still looking to add paper developing in lower credit tiers.

Black Book announced late on Wednesday that the firm released a new educational white paper focused on subprime and deep subprime auto finance companies. The paper is titled, “Subprime & Deep Subprime: How to Remain Competitive and Profitable Despite Growing Risk.”

How subprime & deep subprime spaces have grown

Following the recession, and as the economy has improved, Black Book recognized that an increasing number of finance companies began to offer subprime and deep subprime contracts, and more independent financial institutions saw their way into the market, as well.

At the same time, editors noticed larger banks became full spectrum financing providers that opened up space for subprime paper opportunities. While subprime and deep subprime originations have remained in check, Black Book insisted institutions have had to grapple with ways to remain competitive and profitable in spite of any growing risks.

As origination volumes increased, Black Book recapped that financial institutions began relaxing their underwriting criteria for credit and collateral to remain highly competitive for subprime and deep subprime, resulting in higher loan-to-value ratios (LTV) using inflated values up front, placing even more importance on building the contract off the most accurate collateral value possible. As these LTVs rose, Black Book pointed out that banks took on more risk, exposing themselves to more negative equity in their portfolio combined with longer loan terms, as well.

Various scenarios faced by subprime and deep subprime finance companies

The new Black Book white paper offers specific examples showing finance companies where and how collateral data can pinpoint profitable opportunities in subprime and deep subprime, while minimizing exposure to risk. These data examples include high-term scenarios even with decent credit profiles; higher LTV scenarios; and higher LTV, higher term, higher APR and higher depreciation scenarios.

When a finance company is looking to evaluate the amount of risk tolerance in a long-term loan, Black Book emphasized there are four elements to consider:

• How much initial loan-to-value they want to establish

• The rate of annual depreciation of the collateral

• Credit profile of customer, whether subprime or prime

• Determine if the risk-adjusted return on capital is sufficient.

“Subprime and deep subprime loans have remained a profitable opportunity for lenders, particularly following the recession since the economy is stable, yet there’s still a lack of understanding of layered risks associated with these credit profiles,” said Anil Goyal, executive vice president of operations at Black Book. “This white paper takes an in-depth look at different scenarios lenders face in trying to grow their portfolios profitably to remain competitive while quantifying their associated risks.”

To view Black Book’s new white paper, “Subprime & Deep Subprime: How to Remain Competitive and Profitable Despite Growing Risk,” go to this website.

For a demo of how Black Book collateral data and resources can help amplify portfolio profits, call (800) 554-1026.