Subprime Approvals Could Jump Nearly 13% in 2015

CARY, N.C. - 

CNW Research is upbeat about how much subprime paper is going to flow into finance company portfolios this year.

In a special projection report released on Tuesday, CNW is expecting subprime approvals to improve in 2015, but not quite to the same level as this past year. President Art Spinella pegged the year-over-year improvement projection at 12.75 percent “driven in large part by automakers’ captive finance companies looking to expand sales.”

The forecast comes on the heels of CNW shared December data that showed encouraging signs for the subprime segment.

Spinella indicated the number of subprime used-vehicle buyers rose 115 percent to more than 1.16 million in December versus 1.08 million reported for the closing month of 2013.

And much of that December figure was associated with deep subprime purchasers — consumers with FICO scores below 550. CNW determined the amount of deep subprime vehicle installment contracts rose 17 percent year-over-year in December. The amount came in at 738,000 or 22.25 percent of total used-vehicle sales for the month.

Spinella also noted about 7.4 percent of used-vehicle buyers in December leveraged a pre-approved auto loan, representing a 2-percent uptick year-over-year.

Furthermore, the trends CNW reported coincide with the dealer sentiment expressed in the most recent dealer survey orchestrated by KeyBanc Capital Markets. A total of 57 percent of dealers surveyed in November for KeyBanc’s December report said financing for subprime borrowers was loosening while the remaining 43 percent didn’t notice any change on a sequential basis.

Factors that could prevent CNW’s forecast from coming to fruition or dealers beginning to spot tighter underwriting are two elements mentioned by Peter Turek, automotive vice president in TransUnion’s financial services business unit.

“When you’re in the subprime space, there are two things you really have to focus on — loss frequency and loss severity,” Turek said. “I think each individual lender will have to pay close attention to that as we continue to grow. Those two things are probably unique to each individual lender.

“I think what will happen as those thresholds and tolerances get to a point to where those subprime lenders are reluctant to lend money, I think that’s when you’ll see changes in the marketplace,” he continued.

TransUnion noted that delinquency levels for subprime borrowers have grown from 4.2 percent in Q3 of 2012 to 4.5 percent in Q3 of 2013 to 5.3 percent in Q3 of 2014.

“Right now, the delinquency in subprime is growing, but it’s off of a really low base,” Turek said. “It’s really not had an impact in the overall delinquency rate. But each lender will have to judge their tolerances for loss frequency and loss severity before we see any kind of significant changes.”

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