NEW YORK -

Rising compliance costs could be a blessing in disguise for big, established subprime auto finance companies, said Jason Kulas, chief executive officer of Dallas-based Santander Consumer USA.

That’s because in the long run the cost of meeting tougher regulations could serve as an additional barrier to entry for subprime startups, on top of typical drawbacks for startups like a lack of experience and a higher cost of funds relative to established players, Kulas said.

“Those (compliance) costs are here to stay and they’re going to increase,” he said on Tuesday at the Morgan Stanley U.S. Financials Conference in New York. In addition to its own mostly subprime business, SCUSA provides dealers for FCA US  with private-label, retail and wholesale auto financing under the Chrysler Capital brand name.

“The staffing we have in our compliance, internal control, internal audit, quality assurance-type positions, are now more than we had a year ago, and less than we’re going to have a year from now,” he said. “If you’re a smaller player it makes it much more difficult to think you can compete effectively.”

Passing up volume

For now, though, competition for subprime originations is tough, Kulas said. “We didn’t set out early this year to do a lot less subprime volume,” he said. “You know, in many ways it’s the core of what we’ve always been and what we’ve always done.”

However, SCUSA said when it reported first-quarter results in April that it passed up some subprime volume in order to maintain pricing discipline. Retail installment contracts for customers with FICO credit scores below 600 or with no FICO score accounted for 51 percent of originations in the first quarter of 2016, down from 57 percent a year ago, the company said.

“We are only concerned about volume to the extent that we want to make sure we get volume that will be profitable through cycles — volume that has the right price and the right structure, the right return. And for us, that has to mean as we go through periods when we’re getting less volume, we have to be comfortable with that,” Kulas said at the conference.

Outlook for losses

Santander also generated some questions from analysts at the conference because the finance company increased its reserves for expected loan losses in the first quarter.

Kulas said only a small part of the increase could be attributed to the company’s expectation for higher losses for a given group of loans. In its first-quarter earnings presentation, the company said “performance deterioration” accounted for only about $8 million out of a net increase of $124 million.

Higher volume overall and a higher mix of subprime loans in a prior period were bigger factors, the company said. Kulas also said at the conference lower used-vehicle values related to higher off-lease volumes would probably also contribute to gradually higher losses.

Fewer startups?

In the long run, Kulas said he expects some smaller players, including some that are owned by private equity, to be bought out. In previous business cycles, newer startups always replaced the next-to-last startups, but that could change, he said.

“For the larger players, the market will get more rationalized,” Kulas said. “What happened in the past when a larger player acquires a smaller one is that there’s always another smaller one coming along, and that’s the reason why the market has remained so fragmented despite that consolidation,” he said.

“Maybe there’s less of that” in the future, Kulas added. “I think the future is different from the present.”