Yes, subprime auto lending has grown in recent years. However, don’t sound the alarm bells.
This is not mortgage crisis 2.0. It’s probably not even subprime auto lending crisis 2.0.
The level of subprime auto lending is not even close to where it was in the mid-2000s, just before the financial crisis and automotive tumble at the end of the decade, according to TD Economics, an affiliate of TD Auto Finance and TD Bank.
Federal Reserve Board statistics in a TD Economics special report released Thursday show that subprime’s share of the total auto loan originations climbed as high as approximately 33 percent before the recession.
By the end of the decade, they had plummeted to the high teens, the data shows.
Subprime’s share has since climbed, but the 2015 reading shows it still a couple handfuls of percentage points where it was before the 2008 financial crisis, according to the report.
These types of loans are “well below where they were prior to the financial crisis” says TD Economics economist Dina Ignjatovic.
And the comparison to the mortgage crisis in not an apt one, she says.
“The level of subprime loans in the auto market right now is a lot lower than it was in the run-up leading up to that financial crisis, No. 1. And No. 2, the mortgage market and the auto market are completely different,” Ignjatovic said in a phone interview.
“In the mortgage market, leading up to the recession … people were getting a mortgage without having to show their proof of employment,” she continued. “It just wasn’t very prudent lending practices that were happening. There were teaser loans out there where you had a low interest rate for the first year or two, and then it jumped up. And I guess people didn’t realize their mortgage payments would go up by so much.”
Ignjatovic added: “A lot of loans, especially on new cars, you have the same payment over the life of the loan term.”
Furthermore, she points out that delinquency rates are low, and they’re also low compared to the rates from the mortgage crisis.
TD Auto Finance president and chief executive officer Andrew Stuart said in the same interview: “I think it’s also important to note that during the financial crisis, there were no auto securitizations that went bad, when compared to the mortgage space, where they were collapsing left and right.”
And even when borrowers are having difficulty paying other bills, they typically don’t miss the car payment, Ignjatovic said.
Additionally, measures have been taken to curtail financial fallout, according to the TD report.
“While riskier loans have increased — with the average credit score for new vehicles falling back to 2007 levels in the final quarter of 2015 — regulations that have been put in place since the financial crisis have likely resulted in more prudent lending practices,” the report said.
Numbers from Experian
According to Experian Automotive, the percentage of loans 30 days past due in the fourth quarter (all credit tiers, all auto lending) was 2.57 percent, compared to 2.62 percent in Q4 of 2014.
Meanwhile, 60-day delinquencies climbed from 0.72 percent to 0.77 percent, the company said in its State of the Automotive Finance Market Report released in February.
However, this is still below the percentage in Q4 2007 when it was 0.8 percent, Experian pointed out.
“It’s a matter of degree,” said Stuart, the TD Auto Finance CEO.
“The delinquency rates have not been approaching historic highs. They have gone up a little bit, but it’s a very small amount,” he said, pointing to Experian’s numbers.
In dollar terms, Experian said 60-day delinquent balances reached $6.764 billion in Q4, up from $5.417 billion a year earlier. And 30-day delinquent balances were at $23.776 billion for Q4, up from $21.095 billion.
Those figures may seem daunting, but consider them as a percentage of the total market.
The percentage of loan balances 30 days past due was 2.41 percent in Q4, compared to 2.38 percent a year earlier. Loan balances 60 days past due represented just 0.68 percent of the market, compared to 0.61 percent in Q4 2014.
“While rates in the more severe delinquency category are up, it’s important to note that the increases are modest and relatively low from a historical perspective,” Experian senior director of automotive finance Melinda Zabritski said in a news release at the time of the quarterly report.
“Also, given that we’ve seen an increase in loans to subprime and deep-subprime consumers, it’s natural to see a slight uptick,” she added. “Although not yet a cause for concern, the industry should keep an eye on this metric to see how it trends in the quarters to come.”
Perhaps stable is the best adjective to describe the auto loan default readings included in the latest S&P/Experian Consumer Credit Default Indices.
The March reading released this week by S&P Dow Jones Indices and Experian came in at 1.02 percent, which is 1 basis point lower than the same month last year and 3 basis points lower than what analysts noted for February.
The auto loan component for this monthly default analysis has stayed at or no more than 5 basis points above the 1.00 percent mark for 14 of the past 20 months going back to August 2014.
And the other six months contained within that span, the auto default reading was below that 1.00 percent threshold.
S&P and Experian also reported this week that the March composite rate — a comprehensive measure of changes in consumer credit defaults — settled at 0.93 percent, down 4 basis points from the previous month.
The firm noticed a first mortgage default rate at 0.77 percent for March, down 7 basis points from the prior month.
The bank card default rate increased 36 basis points in March, recording a default rate of 2.92 percent.
Four of the five major cities that analysts watch for the monthly update saw their default rates increase during the month of March.
Miami reported a default rate of 1.15 percent, up 8 basis points from February.
Los Angeles posted a default rate of 0.81 percent in March, up 5 basis points from the prior month.
New York had a default rate of 0.99 percent, a 2-basis-point increase from the previous month.
Chicago generated a default-rate increase of 1 basis point, posting a 1.03 percent default rate for March.
Dallas was the only city to report a default rate decrease with a 0.75 percent default rate, representing a 28-basis-point drop from February.
“The continuing low rates of consumer credit defaults in mortgages, auto, and bank card loans are positive signs for the economy,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.
“Large mortgage debts followed by rapidly rising defaults in all kinds of consumer credit were key causes of the financial crisis,” Blitzer continued. “Conditions today are much improved; not only are defaults down, but outstanding mortgage balances were about 12 percent below the peak seen in the first quarter of 2008.
“Debt service ratios are close to the record lows set in the last two years as well. This all suggests that consumer spending should continue to support modest economic growth,” he went on to say.
With the auto finance sector showing stability, Blitzer elaborated more about the segment that posted more movements. He pointed out the rate of bank card defaults is both greater and more volatile than mortgage defaults.
Blitzer explained that behind the figures are further differences in these borrowing patterns. He mentioned outstanding balances for bank cards, as measured by the Federal Reserve's figures on revolving credit, were up 5.2 percent in 2015 compared to an increase of 1.0 percent for mortgages on one-to-four family residences.
“Bank card balances, which surged in the first half of 2014, leveled off somewhat until the start of 2015, and then accelerated again through the end of last year,” Blitzer said. “They are down slightly for the first two months of 2016.
“Mortgage balances are quite different,” he continued. “Until the last quarter of 2014, outstanding mortgage balances declined and then saw a small increase in 2015. These tell different stories about consumer behavior.
“While bank card balances and defaults saw increases, consumer prices were flat, indicating that the growth in balances reflects increased spending,” Blitzer went on to say. “Mortgage balances barely grew even though home prices, as measured by the S&P/Case-Shiller Home Price Index, are rising 5 percent to 6 percent annually.
“The substantial majority of home sales are of existing homes, which means mortgages are being paid off at the same time new mortgages are being written,” he added.
Fitch Ratings insisted that March’s drop in delinquencies connected with U.S. subprime auto ABS — after hitting a 20-year high in February — represents a “reprieve” that is “not likely to last.”
According to in the firm’s latest monthly index results, delinquencies on U.S. subprime auto ABS decreased to 4.15 percent in March reporting from the 20-year high of 5.16 percent analysts spotted in the February data. Fitch then explained why the one-month reduction isn’t likely to continue.
“Driving the decline was borrowers taking advantage of tax returns to pay off debts,” analysts said. “The decline in delinquencies, while still 16.5 percent greater than the same period in 2015, follows seasonal trends observed in Fitch's Auto ABS Indices.
“Performance metrics will improve as 2016 shifts into the spring months, though to what extent remains to be seen,” they went on to say.
Fitch also reported that subprime annualized net losses improved in March, declining to 8.58 percent from 9.74 percent. Despite the positive shifts downward, the firm’s report pointed out that net losses last month still came in 30.4 percent higher over same period a year earlier.
“Pressure from weaker underwriting standards in 2013 to 2015 transactions will continue to negatively affect the indices in 2016 irrespective of seasonal trends,” analysts said.
“Increased lending to borrowers with weak or limited credit history will move delinquency and loss frequency levels higher, while negative shifts in (loan-to-value) and extended term loans will drive loss severity up,” they went on to say.
Fitch reiterated a point mentioned in its previous update — that weaker underwriting is largely coming from newer nonprime lenders who have entered the market since 2010 and now account for a larger portion of the index.
In 2010, Santander Consumer USA and GM Financial (formerly operating as AmeriCredit) accounted for 93.5 percent of the notes issued into the market. Today, Fitch calculated that the two finance companies account for 49.5 percent of the market, highlighting the significant growth of new operations.
“To gain market share, many lenders have weakened underwriting standards in the past few years due to the intense competition in the sector,” Fitch said.
Moving over to the prime sector, Fitch noticed lower delinquencies in March as the reading came in at 0.63 percent. That level was down from 0.69 percent spotted in February. Fitch added that losses in the prime space also fell to 8.58 percent from 9.74 percent.
“Consistent with the subprime sector, delinquencies and losses for the prime sector are higher versus the same period a year earlier, with delinquencies 5 percent higher and losses up notably by 55.6 percent. However, both metrics remain historically low and well below recessionary levels,” Fitch said.
The latest Fitch report also mentioned the Manheim Used Vehicle Index – which has been historically high over the past five years — declined again in March to 122.5 from 123.5 in February.
“The supply of used vehicles on the wholesale market is expected to balloon to historically high levels over the next three years, as a result of the large increase in the volume of off-lease vehicles and higher vehicle trade-in volumes,” Fitch said.
“If used-vehicle values decline, so too will recovery rates on repossessed vehicles, which will only confound issues and drive up loss rates, particularly in the subprime sector,” the firm went on to say.
Fitch’s prime auto loan ABS index currently includes 126 transactions with $62.9 billion in collateral outstanding while the subprime index includes 134 transactions with $38.1 billion outstanding.
“Fitch includes transactions in each index based on both historical platform cumulative net loss levels as well as collateral attributes. Certain platforms which do not fit the criteria for either index due to their unique nature are not included,” analysts said.
We’ve all heard the news on rising auto loan delinquencies. Since February, auto delinquencies in the subprime market are at their highest rate since 1996. This presents a significant issue since increased delinquencies usually indicate that more defaults will happen down the road. So what are auto finance professionals to do in times like these?
While it may be irresponsible to approve loan applications at higher velocities to borrowers with little or no credit, some auto lending businesses cannot afford to decelerate their loan application approval process, especially during an intensely competitive auto lending climate.
So by all means, step up your loan application evaluations, and accept those subprime deals. But times like these necessitate a smart strategy that cuts costs and mitigates risk as much as possible. Don’t let unexpected losses drive your business bankrupt.
What I often say to finance companies and buy-here, pay-here dealers is this: While you can’t control external forces at hand, you can always shape the battlefield first by mitigating as much risk as possible when it comes to vehicle depreciation and loss. Using GPS vehicle tracking technology as a collateral management solution (CMS) and vehicle recovery tool is really one of the most effective and simple ways to do so today.
GPS technology enabled on your asset is literally the lock on the door — it will allow you to mitigate risk and control the value of your assets as much as you possibly can. It saves lenders money in the long run (collections and guaranteed vehicle recovery if necessary) and reduces the amount of bad debt on the books.
GPS vehicle tracking as a better collections strategy
With a collateral management solution, lenders are able to be more effective in their collection efforts. As auto payments become delinquent, auto finance professionals encounter the loss of loan payment in addition to the cost of collections labor used to recoup debt owed. Accounts are often passed around from one collector to the next, in hopes that one collector will gain some sort of rapport with the borrower or their family.
Some borrowers just may need help with making on-time payments, and this is where CMS can be used to actively coach borrowers on payment. With the device embedded in the vehicle, you can sound a payment reminder to the borrower when a payment is either almost due, due or past due.
While some borrowers are just bad payers and need some coaching to become better, others need a more hands-on approach. The GPS device in the vehicle can shut off the starter when a borrower is consistently delinquent on car payments. Or if a borrower drops or reduces full car insurance coverage to liability only, a lender can disable the starter to limit the risk of the vehicle becoming damaged with no insurance coverage on it.
Shortening the time and eliminating the costs associated with vehicle recovery
Recovering the vehicle asset is the last thing that any auto finance professional wants to do, but it is necessary on occasion. Time is of the essence when it comes to vehicle recovery. The quicker you can recover the depreciating vehicle means less money spent on collection labor, reconditioning and auctioning, and the higher the value of the vehicle assets. Having a GPS device embedded within a vehicle enables you to locate a car within seconds, not hours or days.
Repossessing an asset sooner rather than later will produce an asset with the most amount of value and reduce the deficiency owed by the borrower, with a much smaller delinquent balance that a lender is more likely to recover. Having to recover less money reduces the amount of bad debt, and less bad debt is what most lender businesses need.
GPS vehicle tracking as a solution, not a one-off commodity
I recommend partnering up with a GPS tech provider that takes a solution-based, CMS approach to how GPS technology and software can solve many finance company and BHPH dealer issues — rather than just giving the ability to show a vehicle on a map. Here are some points that you want to evaluate a GPS tech provider on:
1. A trusted, proven provider with years of history and innovation under their belt.
2. Rigorous privacy controls that keep your customer data safe and you in compliance.
3. Powerful software that allows you to easily track and locate vehicles for recovery.
4. An intuitive user interface that lets you to track, manage and get on with your day.
5. A provider that listens to its lenders and dealers, adding new features according to their needs.
6. Reports and alerts that can be easily customized to fit how you run your lender business or BHPH dealership.
7. A national network of GPS experts who can install at any location in 24 to 48 hours.
8. Guaranteed vehicle locates at any hour from any mobile device.
Paul Rosenthal is the vice president of automotive telematics solution at Spireon, and has more than 20 years of management in customer service and sales. Previously, Rosenthal managed regional accounts for both CalAmp and LoJack. For more information on GPS vehicle tracking and collateral management, visit www.spireon.com or call at (855) 360-9427.
Digital Recognition Network (DRN) enhanced its workforce in a move to expand the company’s auto finance channels. DRN hired Mike Villanova as director of channel sales, adding a new position and enabling the company to provide the dedicated support needed for this growing market
The company highlighted Villanova brings more than 15 years of channel sales experience to his role at DRN as well as in-depth knowledge of the financial services industry. Previously, Villanova was vice president of partner sales development at SilverCloud.
At DRN, Villanova will be responsible for working with DRN’s auto finance channel partners to deliver DRN’s vehicle location data solutions to their customers.
“Over the last year, DRN expanded relationships with several channel partners including Allied Solutions and Shaw Systems Associates,” DRN vice president of financial services Jeremiah Wheeler said. “We are seeing increased demand from these partners and their customers as they realize the value of DRN’s vehicle location data and analytics to drive results including improved collections outcomes, reduced charge-offs and increased recoveries.
“Mike’s channel management and financial services expertise aligns with our needs and we seem him as key to our channel growth and support strategy for the auto finance market,” Wheeler went on to say.
The personnel move comes on the heels of DRN reaching a settlement with a trio of former affiliates.
The volume of auto-financing discussion — especially in the subprime space — Cox Automotive chief economist Tom Webb entertained at recent industry events and his quarterly conference call prompted him to ask a question.
Recent analyst reports from Fitch Ratings and Moody’s Investors Service highlighted deterioration in performance in the subprime auto ABS market, prompting several of the investment analysts who join Webb’s quarterly call to inquire about whether financing availability, particularly in the subprime space, is about to be reduced.
“The subprime area certainly has gotten a lot of notice as of late. And I’m actually beginning to question myself in that am I missing something? I think the cycle has longer to run simply because for the most part we’re in a low-interest rate environment so there’s a search for yield and auto loans provide that yield with very low risk actually,” said Webb, who hosted the call last week on the heels of being in Las Vegas for conferences orchestrated by the American Financial Services Association and the National Automobile Dealers Association.
“There’s certainly been some reports now of some smaller players in the subprime and new players in the subprime area; players that are doing something that really hasn’t been done before in terms of alternative measures in order to provide credit to people who have absolutely no credit history,” he continued.
“You would expect that there would be a little volatility,” Webb went on to say. “Whether it crops back up into the bigger subprime market, you have to be concerned when you get a lot of reports along those lines. However I do believe it will remain favorable for the used-vehicle environment. It’s extremely important for the used-vehicle environment.”
Some of those smaller finance companies were pinpointed by Moody’s in its report, which Webb acknowledged, “was a little more troubling for me; although these numbers really have not been a secret.” He then explained what can happen when ratings agencies such as Fitch and Moody’s push out a series of negative assessments about what’s happening in the space.
“To a certain extent as the ratings agencies get nervous, they can make their own predictions come true if you start dialing back on availability or changing the amount of enhancement that has to go into the ABS,” Webb said.
“Again, the overall financial market remains relatively flush with liquidity,” he continued. “Generally speaking, most delinquencies have not spiked in term of the overall numbers, and people do make their payments except when they have the shock of a job loss, illness or divorce; those three prime reasons.
“If the underwriting standards weren’t completely off the mark then you would think that the loans would continue to perform well. Again, the problems we’ve seen are from some very small players,” he added.
While the latest assessment about delinquency from the American Bankers Association’s Consumer Credit Delinquency Bulletin doesn’t carve out subprime financing specifically, the organization noticed only a slight uptick in auto finance delinquencies in the fourth quarter.
ABA indicated direct auto loan delinquencies — contracts arranged directly through a bank — rose from 0.74 percent to 0.75 percent. The association added that indirect auto loan delinquencies — financing arranged through a third party such as a dealer — climbed from 1.51 percent to 1.54 percent.
The composite ratio, which tracks delinquencies in eight closed-end installment loan categories, remained at 1.41 percent of all accounts in the fourth quarter, according to the bulletin. ABA pointed out that what fueled the overall reading was home-related delinquencies were down significantly in two out of three categories, with home equity loan and line delinquencies continuing a downward trend and approaching their 15-year averages for the first time since the recession.
“It’s been a long, rocky road, but home equity delinquencies have finally worked their way back to historical norms,” ABA chief economist James Chessen said. “The strong and consistent rise in home prices over the last three years has restored equity, which makes keeping loans current even more of a top priority for homeowners. With rising home equity and shrinking delinquencies becoming the status quo, banks are more willing to extend new home equity loans and lines to qualified borrowers.”
Chessen is anticipating that continued consumer discipline and steady economic conditions will help keep delinquencies near historically low levels for the foreseeable future.
“The national savings rate is at one of its healthiest points since the recession and trending upward, which means people are well-positioned to repay their debts,” Chessen said. “Disciplined saving, along with steady job growth and climbing household wealth, signal that delinquency levels are likely stay near these historic lows for some time.”
But in the auto finance world, a metric to watch might be softening vehicle prices as the Manheim Used Vehicle Value Index is now on a streak of three consecutive months of declines. Should vehicle wholesale prices tumble significantly, Webb recognized that the trend could magnify what’s happening in the auto ABS space.
“We sometimes call it that there is a virtuous circle that can sometimes can turn into a vicious circle,” Webb said. “The virtuous circle is what we have had so far in this recovery where the recovery rates on any repossessions are extremely high, which gives the lenders more confidence to lend and make credit available.
“Of course, each one of those repossessions has to go back out and be re-retailed usually with a subprime loan attached to it. That just keep the cycle going,” he continued.
“Once recovery rates become poor, then the credit availability starts to dial back in and with credit availability dialing back in, your recovery rates fall further,” Webb went on to say. “A significant fall-off in used-vehicle values would hurt those recovery rates. But certainly as they say, the frequency of the loss is much more important than the severity of the loss.
“It can become a self-fulfilling vicious circle,” he added. “I don’t think we’re there yet in terms of wholesale pricing. But if credit availability were to dial back substantially then yes, you’re going to hurt used-vehicle values by that factor.”
When Fitch Ratings reported recently that U.S. subprime auto ABS delinquencies ballooned to levels not seen in almost 20 years, the development sparked plenty of industry reaction.
To clarify whether or not this market segment is in a profound tailspin, SubPrime Auto Finance News reached out to Equifax chief economist Amy Crews Cutts, who refuted many of the assertions the report made and offered some perspective on what finance company executives might be seeing next.
At the start of a conversation this past Friday, Cutts stressed that, “What I want to make totally clear here is I’m looking at the total market portfolio of America. Fitch is narrowly looking at ABS securities. They’re different populations and theirs is a subset of ours.
“This is important because the mixture of who is issuing securities, what those investors are looking for, what will the market bear on those securities, can influence the performance of those differently than we might see in the broader market,” she continued. “In particular what I found disturbing with the Fitch report was the concept that this is the highest delinquency rate that we’ve seen.”
Cutts explained that she combed through Equifax’s data, looking through vehicle installment contracts held by commercial banks as well as finance companies, the sector that often underwrites the most subprime paper.
“In the total market view, we’re not seeing this sort of record level of delinquency,” Cutts told SubPrime Auto Finance News. “We’re seeing a small increase in delinquency, but it’s still from very low levels.
“Historically we had much higher delinquency rates in 2009 when the Great Recession really got rolling and lots of people lost their jobs. That had a profound effect on auto-loan performance,” she continued.
Last Monday, Fitch analysts indicated subprime delinquencies of 60 days or more hit 5.16 percent for February reporting, marking the highest level observed since October 1996 (5.96 percent). During the most recent recession, the firm indicated delinquencies peaked at 5.04 percent in January 1999.
Fitch also determined February’s delinquencies represented increasing of 11.63 percent year-over-year and 3.63 percent on sequential basis.
So why are the conclusions so different between Equifax and Fitch?
“Within that narrow context of what Fitch is looking at, I dug a little deeper and I think part of it is are new entrants who came into particularly subprime lending since the Great Recession. Some of these are new issuers and I think they’re going through some growing pains. Those issuers were not in the Fitch index prior,” Cutts said.
Cutts elaborated about why she spent a significant amount of time reviewing Equifax’s data before sharing these asserts with SubPrime Auto Finance News.
“I wanted to be very cautious in this, but I feel there was a tremendous overreaction to what happened in the Fitch report as opposed to the bigger picture,” she said. “Part of the bigger picture is that I do believe that there is an appropriate amount of lending that should happen in the marketplace. The trick is knowing when you are doing it right, given the business cycle, given the technology that’s available.
“My experience has been after something like the Great Recession and any time there is tremendous credit losses, lenders get very, very conservative, too much so. Basically the only people who can get credit are those who don’t need it,” Cutts continued.
“As we’ve come out of this financial crisis, which really caused lenders of all kinds to really rethink their models, we’ve seen tremendous change brought about not only by the investors demanding much more prudent use of their money but also regulators stepping in the court of public opinion which has made subprime a dirty word,” she went on to say.
Cutts also mentioned that she’s not noticing a tremendous erosion in credit quality in the auto space with respect to consumer credit scores. She pointed out this deterioration happened when subprime mortgages grew tremendously 10 years ago.
“I was looking at these and saying I should be able to see this and pinpoint where this is happening and I can’t see it in our data,” Cutts said. “The credit score for the 10th percentile — so 90 percent of credit scores are better than this — and we’re seeing no change at all overall.
“I looked at banks. I looked at finance companies. These guys are doing the same things they’ve been doing for four years,” she continued. “I don’t know why the recent ABS that Fitch pointed out is performing so poorly relative to those that came before because at least on the face of it I’m not seeing in our data.
“With mortgages, there was a tremendous erosion of the quality of those loans as people bet on you can’t lose in real estate. There’s not that speculative piece here with cars,” Cutts went on to say.
SubPrime Auto Finance News then questioned whether this reaction would spook the market and finance companies would find difficulties finding capital to keep underwriting volume moving higher. Cutts replied by stating, “Do you want the rational or the emotional answer?”
First, Cutts gave what she called the rational perspective.
“The rational answer is that just as in any financial market dealing, whether we’re talking about equities or bonds or whatever, there are those that perform very, very well and those that don’t,” she said. “They perform very well meaning meeting expectations.
“The rational response would be to look at those issuers who have issued this ABS that are not performing relative to expectations and to find out what it is about these lenders and those ABS. Then you can figure out as an investor if you want to pursue that or not. Maybe I want to go to different one but I’m still happy with ABS,” she continued.
Then came what Cutts called the emotional response.
“‘Oh wow as a group, which is the Fitch numbers, these things are suddenly looking really bad.’ So the emotional answer is I’m just not going to invest there,” Cutts said. “We see these kinds of emotional moves in the markets, which creates tremendous volatility.”
In the final analysis and considering current data and past precedents, Cutts offered a hopeful forecast — or at least one that might benefit finance companies most.
“My hope is that investors will do the right thing, which is to be very vigilant about who they do their business with and how they place their money and hold these companies accountable for answers to these questions before they’re willing to extend capital,” she said.
“I think it would be a shame certainly for investors to pull out of this market because I think there is a tremendous amount of good lending that’s happening by finance companies that are the primary issuers of these kinds of ABS right now,” Cutts went on to say. “As a blanket statement I think that would be both unfair and losing out on a tremendous opportunity.”
TransUnion named its newest suite of solutions Prama, which in Sanskrit means the source for accurate and valid knowledge about the world.
No matter if they speak English, Spanish, French or even Sanskrit, TransUnion’s Steve Chaouki insisted that finance company executives — especially ones that delve deep into the subprime space — will be able to comprehend the data and insights Prama can deliver through a cloud-based solution portable enough to be taken into the board room, the underwriting department or even a gathering with state and federal regulators.
“That’s really what Prama is,” said Chaouki, who is executive vice president of TransUnion's financial services business unit. “We’re trying to build it up as a knowledge and delivery hub. It’s a place where our customers can go to tap into knowledge and information and work with that knowledge and information to further their understanding of their business and act on their business.”
The Prama portfolio will start with two flagship solutions in 2016 — Prama Insights and Prama Studio.
TransUnion explained Prama Insights includes anonymized information on virtually every credit active consumer in the U.S. The data set leverages the power of CreditVision and a seven-year historical view of data, providing finance companies with what TransUnion calls “dynamic” insights that can translate into “clear” benefits at every touchpoint.
During a conversation with SubPrime Auto Finance News in advance of Thursday’s initial launch, Chaouki explained why players in the subprime space are often “heavy” users of analytics.
“They want the resources and capabilities of Prama but don’t want to build it all out themselves. Now it will be all available to them in a turn-key kind of way,” he said.
Chaouki touched on why the release of Prama is so timely since “fear” is starting to bubble up in the industry as delinquencies are starting to rise. In fact earlier this week, Fitch Ratings discussed how analysts are seeing delinquencies and their impact at levels not spotted in almost 20 years.
“If I were a subprime auto lender, I would want to know how I stack up and look by different regions to understand my exposure so I can manage it,” Chaouki said. “What Prama will allow you to do is to go into specific states, look at your risk ranges, the kind of loans you’re underwriting by score and dig into that.
“Then you can see how your loans are performing versus the other loans in that space within that state by vintage,” he continued. “How are the loans you made last month doing versus those from a month before and going back in time up to 84 months? You can look at the trends of how your originations are flowing. You can look at it by region and compare it to the benchmarks and begin to understand if you have something to worry about or if your portfolio is holding up well.”
“It’s a really timely for subprime lenders as we’re talking about these things,” Chaouki went on to say. “You can dig in and ask if there’s a problem in the oil states — North Dakota, South Dakota, Oklahoma, Texas. You can drill into those states and look at how your vintages are performing versus other states. You can begin to segment your population and understand your risk.
“Then as you engage with your regulators, with your board, as you think about your strategy, you can begin to inform them based on how you’re performing relative to the market and relative to your own expectations,” he added.
What’s going to be available soon
The first two modules of Prama Insights are Vintage Analysis and Market Insights.
The Vintage Analysis module leverages TransUnion’s detailed anonymized tradeline history of more than 200 million consumers, allowing users to view seven years of performance data on a cohort basis so they can:
— Monitor underwriting policy: View delinquency trends across various timeframes and origination cohorts, which can help risk managers adjust application scorecards and underwriting strategy to acquire accounts of acceptable risk.
— Forecast losses: Use vintage curves to project charge-offs and estimate loan loss reserves; this is valuable in general business as well as when engaging with regulators or investors.
— Calculate loan profitability: Leverage vintage performance insights to help calculate loan profitability by risk tier, determine the most appropriate credit terms and determine pricing strategy.
— Define marketing strategy: Influence market segmentation, acquisition channel definition and more via vintage performance analysis.
The Market Insights module can provide quarterly views of key lending metrics at a state, regional and national level — enabling customers to access relevant benchmark trends in seconds.
The module includes nine quarters of anonymized data and a more granular understanding of delinquency rate changes by credit tier, geography, line of business and product. Customers using this information can better measure their own performance against their competition in the industry.
“Prama Insights allows lenders to gain real and timely market intelligence that can be used for a wide variety of purposes, such as adapting risk and product strategies,” Chaouki said in TransUnion's release about the suite. “Studio, the second phase of Prama, will allow users to upload their own data, conduct detailed analyses and test strategy changes across a number of dimensions.
“The next phases of Prama will actually allow customers to seamlessly execute new strategies, or changes to existing strategies, in an automated manner that minimizes manual intervention,” he continued. “In short, Prama will fundamentally change the way lenders develop and deploy their strategies, with enormous benefits for them and their customers alike.”
The first Prama Studio modules will be offered to TransUnion customers in mid-2016.
“The tool is only possible because we have spent a better part of three years now upgrading the entire systems of TransUnion,” Chaouki told SubPrime Auto Finance News. “It’s a huge investment for us in bringing our systems up to the most modern systems available at this time. … It’s one of the largest databases that’s out there at this point.
“One of the things we really wanted to do with this software is make it user friendly and easy to integrate,” he went on to say. “You don’t want to create something like this and have it be a huge technological job to allow the customers to access it. We built it as a portal for the customers to come in and engage with TransUnion. The modules are all sitting on the portal and they can select what they want to use and engage with it.”
A video further highlighting Prama can be seen at the top of this page.
Fitch Ratings pointed to three reasons why delinquencies on U.S. subprime auto ABS have eclipsed 2009 recessionary levels and are now at a level not seen in nearly two decades.
On Monday, analysts indicated subprime delinquencies of 60 days or more hit 5.16 percent for February reporting, marking the highest level observed since October 1996 (5.96 percent). During the most recent recession, delinquencies peaked at 5.04 percent in January 1999.
Fitch determined February’s delinquencies represented increasing of 11.63 percent year-over-year and 3.63 percent on sequential basis.
Analysts also noticed subprime annualized net losses have followed the rise in delinquencies, reaching 9.74 percent as of February, an increase of 34.10 percent year-over-year and 11.59 percent from January reporting. Despite the increase, Fitch noted annualized net losses remain below the recessionary peak of 13.14 percent experienced in February of 2009.
“Sharp origination growth, increased competition and weaker underwriting standards over the past three years have all contributed to the weaker performance of the past year,” Fitch Ratings said.
The firm recapped that subprime ABS issuance averaged a little more than $20 billion in 2013 and 2014 before ballooning to more than $25 billion a year ago, marking the highest level since 2005 and 2006.
Fitch also mentioned the number of finance companies issuing ABS also increased to 19 last year compared to the previous high of 14 in 2005 and 2006.
“Increased competition has led to increases in loan-to-value ratios and extended term lending,” analysts said. “Additionally, lenders have marginally weakened credit standards, with particular increases in originations to borrowers with no FICO scores.”
Fitch reiterated that it only rates ABS platforms sponsored by two of the larger finance companies in the subprime sector, General Motors Financial and Santander Consumer USA. Analysts mentioned cumulative net losses on their recent ABS transactions from 2013 to 2015 are rising marginally but remain well within Fitch's initial expectations.
“Enhancement growth has been strong despite slightly weakening performance and, as such, Fitch consistently upgraded subordinate bonds in 2015 and has continued to do so in 2016, thus far,” analysts said.
In contrast, Fitch highlighted performance within the prime sector remains stable, albeit slightly weaker.
Analysts indicated 60-day delinquencies stood at 0.46 percent for February reporting, up 9.27 percent on a sequential basis but flat compared to the same period a year earlier.
Fitch reported that Prime annualized net losses has increased slightly in 2016, reaching 0.69 percent for February representing an increase of 32.17 percent year-over-year.
While representing the highest level since February 2011 (0.90 percent), analysts explained losses are still “well below” the historical average of 0.92 percent and the recessionary peak of 2.23 percent in January 2009.
“Fitch considers the slight increases in losses to be more of a normalization trend within the prime sector as performance trends move away from historical lows experienced over the past five years,” analysts said.
“However, loss levels could rise further if loan-to-value ratios and extended-term lending are not adequately managed and continue to increase,” they continued.
Fitch expects both prime and subprime auto loan ABS asset performance to improve over the spring months with the onset of tax refunds.
“That said, typical seasonal benefits are likely to be more muted this year versus recent years given rising pressures on the aforementioned asset performance as well as anticipated weakness in the wholesale market,” analysts said. “Both the prime and subprime sectors have been buoyed by strong used vehicle values over the past five years, contributing to lower loss severity on defaults.”
With new-vehicle sales and expected off-lease vehicle supply levels at historical highs entering 2016, Fitch anticipates “weakness” in the wholesale market as reflected by the Manheim Used Vehicle Value Index. Manheim recently noticed the index dipped 1.4 percent in February.
“Any future declines in the Manheim Index, as well as other market indicators, will likely contribute to higher loss severity for defaults and drive losses higher,” analysts said.
Despite further weakness anticipated, Fitch continues to have a stable outlook for prime and subprime auto ABS asset and ratings performance in 2016. Analysts pointed out that annualized net losses are expected to rise at or near the 1 percent and 10 percent area for prime and subprime, respectively, “both well within peak recessionary levels.”
Fitch’s indices track the performance of $99.5 billion of outstanding auto loan ABS transactions, of which 61.68 percent is prime and the remaining 38.32 percent is subprime ABS as of February reporting.
For the first time according to the data that goes back to the first quarter of 2011 provided by the Federal Deposit Insurance Corp. (FDIC), commercial banks that participate in auto financing saw their quarterly charge-off amount surpass $1 billion.
While FDIC reported that insured institutions generated an 11.9 percent rise in net income during Q4, the agency also mentioned total auto loan charge-offs came in at $1.114 billion, up from $958 million in the third quarter and $966 million a year earlier.
The Q4 net charge-off rate registered in at a high point, too, ticking up 5 basis points higher year-over-year to land at 0.74 percent.
The total amount of outstanding paper held by commercial banks also is at the highest point in the FDIC’s data set. The 4Q level stood at $414.8 billion, up from $408.4 billion a quarter earlier and $385.2 billion at the close of 2014.
Fueling that charge-off climb is a delinquency rate also at its highest point going back to the outset of 2011. The FDIC pitted the rate for banks at 1.82 percent, 7 basis points higher year-over-year.
While the auto segment of commercial banks’ business might be sustaining some turbulence, institutions’ overall health appears good as the FDIC calculated the group posted $40.8 billion in net income during the fourth quarter.
Of the 6,182 insured institutions reporting fourth quarter financial results, more than half (56.6 percent) reported year-over-year growth in quarterly earnings. The proportion of banks that were unprofitable in the fourth quarter fell from 9.9 percent a year earlier to 9.1 percent, the lowest level for a fourth quarter since 1996.
“Revenue and income were up from the previous year, overall asset quality continued to improve, loan balances increased, and there were fewer banks on the problem list,” FDIC chairman Martin Gruenberg said.
“However, banks are operating in a challenging environment,” Gruenberg continued. “Revenue growth continues to be held back by narrow interest margins. Many institutions are reaching for yield, given the competition for borrowers and low interest rates. And there are signs of growing credit risk, particularly among loans related to energy and agriculture.”
When looking at the overall performance of banks, James Chessen, chief economist at the American Bankers Association, cheered the moves institutions are making.
“Asset quality sustained its five-year trend of improvement as cautious behavior on the part of both banks and borrowers continues to pay off,” Chessen said. “Banks have largely worked through the cycle of assets that were troubled, and the drag from these loans continues to dissipate.
“The conservative approach to underwriting that has characterized banking over the last five years will protect the industry from another down cycle,” he continued. “As assets grow, the industry is setting aside additional provisions for loan losses that may occur down the road. This is prudent management to assure resources are available in a downturn.”
