Commercial banks and credit unions typically work with customers in the prime space, but recent analysis shared by Equifax and Moody’s Analytics was geared to give executives and managers with those institutions some evidence in order to consider borrowers who might fall in the non-prime or even subprime tiers.

Before going into a series of charts and graphs during a recent webinar hosted by the Consumer Bankers Association, Equifax auto finance leader Lou Loquasto emphasized how a healthy mix is important for any part of the credit market, especially automotive.

“If our industry makes all of the loans at 800 credit, losses are going to be super low. But if they make them all at 500 credit, losses are going to be super high,” Loquasto said.

“If you look at the mix over the past five years, we have been really steady since 2011,” he continued. “What that tells us — because auto loans are short term and losses, when they come, may come sooner rather than later in the loan term — we at Equifax expect the future performance of the recent pools of business to look very similar to what happened in 2014 and 2015. That’s one of the reasons we’re very optimistic about where we’re going.”

Loquasto highlighted how much banks and credit unions have grown their auto portfolios already, noting how these institutions had about 32 percent of the entire market back in 2006. But thanks to the overall auto industry surge between 2010 and 2015, Equifax pinpointed that share at nearly 46 percent.

“The segments that know their customers most intimately — banks and credit unions; segments that most people consider to be the most conservative — they’ve held a very steady market share since 2010. We view that as a very healthy sign,” Loquasto said.

The Equifax expert acknowledged concerns banks and credit unions in particular might have about the additional risk now baked into auto finance nowadays since terms are lengthening and outstanding balances are growing.

“When things are getting written about subprime, loan size or terms, that can trigger concerns that our lenders have to respond to — whether it’s concerns from senior management, regulators or others,” Loquasto said. “As it relates to loan size, cars are more expensive now. The loan sizes are going to be higher. But they’re being built much better than in the past so there’s less risk of a vehicle breaking down and causing very expense repairs or a customer to walk away. There’s also less need to trade up or upgrade quickly. Ten years ago a customer might be in a vehicle thinking in a year or two I’ll go ahead and get the car I really wanted. With the loan sizes going up, those cars have more features.

“We expect the duration of those loans to continue to increase. That’s a good thing for lenders and lender profitability,” he continued.

“At Equifax, we do believe that there is a great opportunity for banks and credit unions in particular to better serve their near-prime and non-prime customers. For subprime, there’s not a ton of lending being done by the banks and credit unions, but the lending that is being done has very low losses, representing a great opportunity going forward,” Loquasto went on to say.

Part of why Loquasto emphasized why banks and credit unions should consider being prudent when buying deeper down the credit spectrum is something both he and fellow webinar presenter Cristian deRitis touched on: Vehicle sales are about to slow. It’s what deRitis, the senior director at Moody’s Analytics, described as the difference between “pent-up demand” and “spent-up demand.”

Because of an anticipation that interest rates will rise later this year and into next year, deRitis said, “that will slow volume somewhat as buyers who may be taking advantage of the cheap financing today decide in the future either to pay cash or to use other financing vehicles such as home equity to finance their transactions. There are some other factors that are going to drive demand as well: pent-up demand, or really the exhaustion of pent-up demand.

“Prior to the recession, we had sales volume in excess of what the trend would say,” he continued. “From a period of around 2000 until 2008, we would have classified this excess as a period of spent-up demand; essentially, consumers were buying too many vehicles or more vehicles that needed to keep up with equilibrium and pulling sales forward.

“Then we had the recession, which certainly created a collapse in new-vehicle sales,” deRitis went on to say. “It gave us some time to work off some of that spent-up demand, so from about 2008 until 2011, we worked off much of that excess spending, those pulled forward type of vehicle sales. At that point we started to accumulate pent-up demand, we were still well below the equilibrium level of sales.

“Based on the analysis, even today, we’re in a period of pent-up demand. There’s still buyers out there that put off purchase of a vehicle during the recession and recovery period that still want a vehicle. They’re still going to fuel vehicle sales in the short term,” he added.

Closing the thought, deRitis shared that Moody’s projects that level of equilibrium sales to be about 16.5 million to 17 million new vehicles, a figure the firm expects the market to generate through 2018.

Later during his portion of the webinar, Loquasto added, “If lenders want to continue healthy growth rates, lenders are not going to be able to rely on increasing car sales and pent-up demand. They’re going to have to look to tweak their strategies — banks in particular.”