Southern Auto Finance Co. recently appointed Chris Shelley as vice president of collections at the subprime auto finance company’s collections center located in Orlando, Fla.
Shelley has more than 19 years of progressive leadership experience in operations and collections, “and we expect that he will bring a new vision and results-driven focus to our collections department,” SAFCO officials said.
Prior to joining SAFCO, Shelley spent five years at American Credit Acceptance (ACA) as its director of servicing. His role there as an integral member of the executive team included growing the subprime servicing team to 350 members and more than $1.55 billion in receivables.
While at ACA, Shelley also was instrumental in developing new, effective processes and department objectives.
Prior to his post at American Credit Acceptance, Shelley worked at Wells Fargo Auto Finance in roles of increasing authority, leading up to his role of assistant center director of their Lake Mary, Fla., facility.
During his tenure at Wells Fargo, Shelley focused on team development and process improvement, supervising a team of 650 associates. He continually improved the Lake Mary center’s performance, resulting in the location placing first out of six centers, a ranking he maintained until his departure in 2010.
In light of the economy developing what analysts called a “split personality,” the S&P/Experian Consumer Credit Default Indices showed the auto loan rate for January remained stable on a sequential comparison.
According to S&P Dow Jones Indices and Experian, the January auto loan default rate came in at 1.04 percent, just 1 basis point higher than the opening month of 2015.
Meanwhile, the composite rate, a comprehensive measure of changes in consumer credit defaults, stood at 0.96 percent in January, down 1 basis point from the previous month. A year earlier, the composite rate was 1.12 percent.
In other data through January, the bank card default rate increased 3 basis points, recording a default rate of 2.52 percent. The first mortgage rate also remained unchanged for January, reporting in at 0.84 percent.
Looking by geography, analysts noticed three of the five major cities saw their default rates increase during the month of January.
Los Angeles reported a default rate of 0.72 percent, up 7 basis points from the December default rate.
Chicago's default rate increased 2 basis points from December, reporting a 1.02 percent default rate in January.
Dallas reported a default rate of 1.11 percent in January, up 1 basis point from the prior month.
New York recorded a default rate of 1.04 percent for the second consecutive month.
Miami reported a default rate decrease of 27 basis points in January with a default rate of 1.17 percent.
“Nationally, consumer default rates were little changed in January,” said David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices.
“Bank card defaults rose from November to December and again to January, However, the series established a new low point in November and remains quite low compared to its recent history,” Blitzer continued.
“Moreover, the small decline in first mortgage defaults offset any damage in bank cards,” he added. “On a regional basis, the five cities noted in the release bounced around, but none appeared to be warning of future difficulties.”
After commenting about the latest data, Blitzer delved into other areas that could impact defaults.
“The economy is taking on something of a split personality. The financial markets are suffering falling prices and a lot of volatility so far in 2016,” Blitzer said.
“The stock market is down about 1 percent, interest rates remain extremely low despite the Fed’s action in December, and concerns about corporate earnings and credit are widespread,” he continued. “At the same time, home prices continue to climb, new homebuilding is rebounding and auto sales have been quite strong.
“The unemployment rate ticked down to 4.9 percent in January,” Blitzer went on to say. “Consumers do not appear to be overly worried about the stock market; their spending patterns haven't collapsed. Given further modest job growth and continued low inflation, there is no basis for near term worries over consumer spending.”
To borrow a term often used now that it’s election season, the soundbite version of what TransUnion discovered about auto delinquencies might sound ominous. TransUnion determined 2015 closed with the high fourth-quarter delinquency rate since 2010.
But instead of frothing like an overzealous campaign staffer, Jason Laky, senior vice president and TransUnion’s auto and consumer lending business leader, tried to offer some explanation for what happened, discussing the likely “shock” that triggered a 6.9 percent year-over-year rise.
First, the numbers that were released on Wednesday. TransUnion’s Q4 2015 Industry Insights Report indicated the auto loan delinquency rate — the reading of borrowers 60 days or more past due on their vehicle installment contracts — increased from 1.16 percent in Q4 2014 to 1.24 percent in Q4 2015.
As of Q4 2015, analysts acknowledged the auto delinquency rate reached its highest level since Q4 2010 when the reading hit 1.22 percent.
“When we look at trends in the auto market, I think we expected to end the year a little bit lower so this increase came as a bit of surprise,” Laky said during a conversation with SubPrime Auto Finance News in advance of the data being released.
However, when we go back and talk about the rather larger rise in delinquencies we’ve seen in the energy space, that says there’s a shock that happened in certain parts of the U.S. economy — particularly if you’re in oil, gas or coal — that is causing job loss and other displacement and causing delinquencies to rise in those certain places. We believe that’s pulling up the overall U.S. delinquency,” Laky said.
TransUnion noted that states in which energy plays a major role in the economy showed an impact in the delinquency rates for the first time in the fourth quarter. In 2015, both credit card and auto loan delinquency rates experienced double-digit increases in energy-rich states such as Louisiana, Oklahoma, North Dakota, Texas and West Virginia. The year-over-year auto loan delinquency rise during Q4 was a follows in those five states:
— Louisiana: up 14.3 percent
— Oklahoma: up 15.3 percent
— North Dakota: up 42.3 percent
— Texas: up 14.9 percent
— West Virginia: up 14.3 percent
“Clearly if you’re in one of those markets, you want to take a close look at what’s going on there and make sure your account management practices are in line,” Laky said.
“Certainly as a subprime lender whatever is happening in the state of Texas is of concern because you’re likely to have a fair number of accounts there,” he continued. “I wouldn’t be too worried about North Dakota because even though it’s a big increase, it’s coming off of a very low base.”
Also impacting delinquencies is the sheer number of subprime contracts in finance company portfolios.
TransUnion data showed that at the conclusion of 2015 there were 1.26 million more subprime borrowers with credit card accounts showing a balance, and 1.21 million additional subprime consumers with auto loan accounts, compared to the end of 2014. The share of subprime accounts compared to other risk tiers also rose slightly in the last year.
“If you look at the broader U.S. economy, even in in the context of lots of stock market volatility, the overall consumer metrics that matter to auto finance — employment, consumer spending — we’ve had a couple of good reports on job creation and consumer spending in December and January that I think bode well for sales and consequently auto financing,” Laky said.
“When employment remain strong, it means that consumers outside of these energy effected areas are going to stay employed and make payments on their auto loans,” he continued. “This delinquency increase we hope will be short-lived as certain areas of the country work through the changes that have gone on in the oil market and that the rest of the economy will remain strong and pick up some of the slack.”
Laky was hesitant to give any specifics about what level of delinquency would trigger industry-wide concern.
“The challenge is that the alarm part is really a function of each lender’s risk management strategy,” Laky said. “As a subprime lender, you have a different tolerance for overall delinquency than if you’re a prime-focused lender.
“What I will say from our perspective when we look at things that might cause an alarm, we look at the distribution of balances of consumers from the different tiers,” he continued, pointing out that TransUnion data has subprime contract constituting about 19 percent of outstanding balances. That’s down from the recent high point of 24 percent back in 2009.
“That quells my concerns about whether this increase is something that we should really be worried about at this point,” Laky went on to say.
More Q4 auto metrics
In Q4 2015, TransUnion determined 75.6 million consumers had an auto loan, up 7.8 percent from 70.1 million in Q4 2014. This is the largest year-over-year auto loan account growth observed by TransUnion.
New auto loan and lease originations, viewed one quarter in arrears (to ensure all accounts are reported and included in the data), exceeded 7.5 million for the first time in Q3 2015. Originations increased 8 percent from 7.0 million in Q3 2014.
“Loan and lease originations and balance growth are outpacing auto sales, as more consumers choose to finance rather than pay cash for their vehicle,” Laky said. “Growth was observed across all risk tiers, a promising sign for the auto industry as we head into 2016.”
TransUnion also mentioned average auto loan debt per borrower grew to $17,999 by the end of 2015, a 3.1 percent increase from $17,453 spotted at the close of 2014.
Trends in the Auto Market
|
Auto Lending Metric
|
Q4 2015
|
Q4 2014
|
Q4 2013
|
Q4 2012
|
|
Delinquency Rate (60+ DPD) Per Borrower
|
1.24%
|
1.16%
|
1.14%
|
1.09%
|
|
Average Debt Per Borrower
|
$17,999
|
$17,453
|
$16,771
|
$16,064
|
|
Originations*
|
7.54 million
|
6.99 Million
|
6.64 Million
|
5.99 Million
|
*Note: Originations are viewed one quarter in arrears, reflecting data for the prior quarter (Q3).
Overall credit market analysis
As more consumers — and more non-prime consumers — are gaining auto loan and credit card access, TransUnion reiterated delinquency levels for these credit products have only risen slightly and remain at relatively low levels. Both mortgages and personal loans experienced yearly drops in their delinquency levels, with mortgages dropping nearly 30 percent in the last year.
“Overall, the consumer credit markets are performing well. It is a positive sign that delinquency levels have remained relatively low despite more borrowers receiving credit,” said Ezra Becker, vice president of research and consulting in TransUnion’s financial services business unit.
“We have seen a continued rise in the proportion of non-prime borrowers in both the auto loan and credit card industries, and that is a likely driver for the uptick in delinquency among recently originated cohorts in those sectors,” Becker continued.
“We also believe lower energy prices and the resulting job losses in energy-dependent markets have played some role in delinquency rates. Even so, that impact appears at this point to be localized, and mild in terms of national effect,” he went on to say.
Clarity Services’ research division, nonPrime101, published a new report this week based on a unique five-year data set of more than 100 million payday loans representing 20 percent of the storefront payday market.
Because of the unique size and duration of the data set, nonPrime101 set out to replicate statistical analyses used by the Consumer Financial Protection Bureau to build its case to radically regulate the storefront payday sector whose customers often fall into the subprime auto financing market, too.
Clarity’s report suggested that a significant number of consumers are unlikely to be harmed by the bureau’s own test, possibly meaning that more consumers may be actually harmed by the CFPB action that bans the product than will be harmed by continued availability of the product.
Because nonPrime101 noticed that extreme outliers impacting the bureau’s statistics showing CFPB harm, Clarity recommended that the bureau cut off the outliers, but not the entire industry. The company went into more detail in the report titled, Searching for Harm in Storefront Payday Lending.
“This report finds that the CFPB’s one-year snapshot is too short to discern the extent of ‘harms’ caused by the product and roughly 40 percent of storefront consumers are not likely to meet the CFPB’s cost-based definition of ‘harm.’ Independent data suggests many who do incur that cost-based ‘harm’ still benefit from the loan,” said Rick Hackett, former assistant director at the CFPB and current partner at Hudson Cook. Hackett is now part of nonPrime101’s small-dollar markets research team, who conducted the research and wrote the report.
Hackett and his team also found that the data results closely replicate reported CFPB findings such as the number of loan sequences per borrower in a 12-month period. However, when the same questions were applied to a more complete history of borrower behavior, over the entire market life cycle of borrower use, significant differences in outcomes and in the effect of biases of the CFPB testing methods were found.
“With more than half of consumers likely benefitting from the product, regulators’ plan to ban it goes too far, and this report suggests a more tailored intervention that would curtail extreme usage but retain credit access,” Hackett said.
The entire report can be downloaded here. Also on that page, Hackett shares a 40-minute video presentation explaining the report findings.
General Motors Financial president and chief executive officer Dan Berce offered some noteworthy details about the finance company’s subprime business even though more and more of its originations and outstanding portfolio balances are attached to installment contracts and leases associated with prime consumers.
GM Financial closed the year with 18 percent of its originations being considered subprime since the contract holder had a FICO score of 620 and lower. That level is down from the company’s 2014 reading that stood at 37 percent.
However when looking at the value of those originations, Berce pointed out that the origination amount was nearly flat year-over-year as the 2014 figure came in at $1.482 billion and the last year’s stood at $1.479 billion.
Berce delved into the topic of subprime even more when GM Financial hosted its recent conference call with Wall Street observers and shared its fourth-quarter and full-year report.
Here we see on the surface, improving credit trends with losses declining to 3 percent from 3.6 percent a year ago and delinquencies, whether it's 31 to 60 (days) or 61 plus, being fairly flat,” Berce said.
“These metrics are being impacted by the increasing amount of prime and near prime business that we are doing, which tends to have lower losses than our legacy subprime book,” he continued. “And as we continue to grow our prime origination, these metrics should continue to improve.
“I want to point out, though, that 60 percent of our North America retail loan portfolio still would be considered subprime by credit score, and so our metrics are higher than what a purely prime portfolio would look like,” Berce went on to say.
Overall performance
GM Financial reported that its Q4 net income rose to $131 million, up for $59 million. The company’s earnings for the year came in at $646 million, compared to $537 million for 2014.
The company indicated its Q4 retail loan originations dipped a bit on a sequential basis, coming in at $4.4 billion compared to $4.7 billion for the previous quarter. But the Q4 figure was up year-over-year when GM Financial originated $4.0 billion to close 2014.
For all of 2015, the company said its retail loan originations totaled $17.5 billion, compared to $15.1 billion a year earlier.
GM Financial’s outstanding balance of retail finance receivables stood at $29.1 billion as of Dec. 31.
Within the leasing space, GM Financial noted its Q4 originations totaled $5.4 billion, up significantly from a year earlier when the figure came in at $2.1 billion. However the company’s leasing originations did soften a bit on a sequential basis as they dipped from $6.2 billion in Q3.
For the year, GM Financial originated $20.2 billion in leases, up from $6.2 billion a year earlier.
Also of note, the company mentioned its outstanding balance of commercial finance receivables was $8.4 billion as of Dec. 31; a rise from $8.1 billion at the close of 2014.
As fourth quarter outstanding auto loan balances reached the highest level on record since Experian Automotive began publicly tracking the data in 2006, Melinda Zabritski reminded the industry how to view a slight uptick in 60-day delinquencies.
According to its most recent State of the Automotive Finance Market report released on Tuesday, Experian determined 30-day delinquencies dropped across the board during the fourth quarter, pushing the overall rate to 2.57 percent from 2.62 percent a year ago. Conversely, 60-day delinquencies rose from 0.72 percent to 0.77 percent over the same time period.
Experian mentioned all lender types saw increases in the percentage of loans that were 60 days delinquent with the exception of credit unions, which remained flat year-over-year. But Zabritski — the senior director of automotive finance for Experian — pointed out that the percentage of loans that were 60 days delinquent is still below the percentage in Q4 2007 when it was 0.8 percent.
The report found that finance companies make up the largest portion of the $6.8 billion in loan balances that were 60 days delinquent. Finance companies — the category of originators that Experian said book vehicle installment contracts but do not generate commercial deposits — hold nearly 45 percent of these balances with a total dollar volume of $3.04 billion. They are followed by banks ($1.8 billion), captive finance companies ($1.2 billion) and credit unions ($737 million).
“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,” Zabritski said.
“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 continued. “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.”
As Zabritski referenced, Experian reported that subprime and deep subprime contracts accounted for 20.3 percent of all open automotive loans, compared with 20.8 percent in Q4 of 2014.
Total U.S. automotive loan balances climbed 11.5 percent to reach $987 billion in the fourth quarter.
Experian explained the growth in balances was fueled primarily by finance companies and credit unions, which saw increases of 22.5 percent and 15.9 percent over Q4 2014, respectively.
Despite those increases, however, Experian noticed banks maintained the largest share of loan balances at approximately $337 billion, an increase of 7.6 percent over the prior year. Captive finance companies — those owned by manufacturers — experienced modest growth, 6.3 percent, to reach $244 billion.
“The boost in automotive sales has contributed to a strong quarter for all lender types across the industry,” Zabritski said.
“That said, while loan balances continue to rise and funding may be more easily attainable, it is critically important for consumers to stay on top of their monthly payments to keep the automotive market running on all cylinders,” she went on to say.
Ally Financial reported that $14.8 billion of its $41 billion in total auto financing originations in 2015 stemmed from installment contracts for used vehicles. The figure marked a rise of $3.1 billion year-over-year.
Chief executive officer Jeffrey Brown reiterated why the used-vehicle portion of its portfolio is so valuable, especially in light of expectations that charge-offs likely will tick higher as 2016 rolls along. When Ally shared its fourth-quarter and full-year financial statements, investment observers asked Brown about the potential impact if used-vehicle prices soften by 5 percent or more this year.
“Obviously the amount we lend against the car and the (loan to value ratios) are determinant on those used-car prices,” Brown said. “But keep in mind, when we originate a loan for a used car, the predictability of where the value of that car is going over the next few years is pretty consistent. We can predict that pretty well.
“Where you really see the drop off is really on a new car once it rolls off a lot and you see a much bigger drop in the value of that car and it's much harder to predict because it’s a brand new car and you haven't seen it,” he continued.
“So if we're out financing two-year, three-year, four-year old cars, believe me, from a loss perspective, we're very comfortable with that and honestly over the last year as we've gotten more and more into used,” Brown went on to say. “Where we've really exceeded from a loss perspective, where we've done better than expected really has been in the used-car channel. It's been very consistent, so I wouldn't' think that the overall drop in used-car prices that we're expecting is going to be a significant driver really of our loss rate in used cars at this point.”
Earlier in this week’s call, Ally acknowledged that its net charge-offs closed the year at 1.21 percent, a level 56 basis points higher than the 2015 low point that came after the second quarter. The finance company also noted its delinquency rate stood at 2.91 percent after the fourth quarter, a level 18 basis points higher than a year earlier.
“We continue to watch our vintages very closely and overall, we feel very good about credit trends. With stable to improving unemployment, the overall environment continues to show healthy signs and asset quality continues to perform in line or better than expected,” Ally chief financial officer Christopher Halmy said.
Another part of why Ally feels so strongly about its portfolio is it doesn’t contain as much subprime paper as perhaps the finance company originated in the past. Brown noted in his opening comments that contracts connected with customers holding a FICO score at 620 or below constitutes just 8 percent of Ally’s outstanding portfolio. And deep subprime — customers with a FICO score below 540 — comprises just 1 percent of Ally’s auto financing business, according the CEO.
“Subprime players including one that we often get compared to are well over 40 percent,” Brown said. “This is a very different model. This is a high quality balance sheet generated from the business that has been consistently profitable including during the Great Recession.”
Brown described an upward drift of 10 to 15 basis points in Ally’s charge-offs as “normalization of our mix as some of the older vintages roll off and some of the new mix that we're putting on comes on the books.” He pointed out that during the worst parts of the Great Recession, the levels were more than double the most recent readings. And during that span, Brown insisted Ally had only one quarter where its charge-off rate climbed that high.
“When we think about the overall book, where we’re going, the originations we put on, we think this book is going to be very profitable even through a crisis,” Brown said.
Overall performance
Ally indicated that its core pre-tax income for 2015, excluding repositioning items, improved 11 percent year-over-year to $1.8 billion with $446 million of that amount coming during the fourth quarter.
That $41 billion in auto financing originations for the year marked a 35-percent climb. Ally highlighted the improvement came as the result of successfully replacing and exceeding the reduction in General Motors subvented and leasing originations in Q4. The company added origination volume also was driven by year-over-year growth in the non-subvented new-vehicle channel, which was up 33 percent, and in the used-vehicle channel, which was up 27 percent.
“Ally’s performance in 2015 reflected the fundamental strength and adaptability of our operations and the successful execution of the multi-year plan to improve profitability,” Brown said.
“Our auto finance business is more diversified than ever, and our leading presence in the industry enabled us to shift capital from incentivized business toward retail auto contracts and post $41 billion in auto originations last year, which will be a significant contributor toward a consistent earnings stream in the future,” he went on to say.
With observers saying, “the consumer economy looks good,” the auto loan portion of the S&P/Experian Consumer Credit Default Indices remained steady for December.
Analysts from S&P Dow Jones Indices and Experian determined the auto loan default rate was unchanged from November with a 1.04 percent default rate in December.
Compared to a year earlier, the latest reading was just 2 basis points higher than what analysts spotted last December.
Meanwhile, the most recent composite rate — a comprehensive measure of changes in consumer credit defaults — came in at 0.97 percent in December, unchanged from the previous month.
Analysts indicated the bank card default rate decreased 42 basis points in December, recording a default rate of 2.49 percent. The first mortgage default rate increased 2 basis points, registering 0.84 percent for December.
Looking geographically, S&P and Experian noticed three of the five major cities saw their default rates decrease during the month of December.
Los Angeles reported a default rate of 0.65 percent, down 9 basis points from the November default rate.
Miami's default rate dropped 4 basis points from the previous month to 1.44 percent.
Chicago's default rate decreased 3 basis points from November, reporting in at 1.00 percent in December.
New York's default rate rose to 1.04 percent, up 9 basis points from the prior month.
Dallas reported a 22-basis point increase with a default rate of 1.10 percent in December.
After looking at all of the most recent data, David Blitzer, managing director and chairman of the index committee at S&P Dow Jones Indices, said, “The consumer economy looks good.
“Consumer credit default rates are low and stable, and consumer sentiment measures are upbeat,” Blitzer continued. “Personal consumption expenditures rose 2 percent in 2015 (December to December) with spending on durable goods up 4.8 percent for the same period.
“Auto sales continued strong at the end of last year. Real disposable personal income rose 3.7 percent in the year to the third quarter of 2015. There was no response among consumers to the Fed's recent rate increase, no rush to apply for mortgages,” he went on to say.
Blitzer closed his latest analysis by touching on what’s been happening in the stock market.
“While the economic news on Main Street is good, the New Year opened with turmoil on Wall Street as stock prices dropped in the opening week, and the market crossed the 10 percent correction mark in the second week,” Blitzer said.
“The two factors being cited for weakness on Wall Street are the strong dollar and weak oil prices,” he continued. “For consumers, both of these are good stories — cheap gas and lower prices on imports.
Other parts of the economy also favor consumer spending: the unemployment rate is down to 5 percent and the weekly initial unemployment claims reports signal further economic growth,” Blitzer added.
“Inflation remains low, lower than the Federal Reserve would like,” he went on to say. “Consumers aren’t showing any signs of anxiety driven by the stock market.”
Primeritus Financial Services strengthened its recovery management, skip-tracing and remarketing services on Thursday by acquiring Dallas-based Roquemore, a provider of vehicle skip-tracing services to the credit union and collateral protection industries.
Primeritus director Chuck Tapp explained why the company made this move.
“The acquisition of Roquemore represents our continued commitment to be the best and largest service provider in the recovery management, skip tracing and remarketing industry,” Tapp said.
“We look forward to continuing to work to drive innovation, compliance and efficiency for both Primeritus’ and Roquemore’s clients,” Tapp continued.
Primeritus president and chief executive officer Scott Peters elaborated about some of the points Tapp noted.
“Roquemore has an excellent reputation in the market which was built on the foundation of exceptional customer service to its clients,” Peters said.
“Primeritus is excited to have the opportunity to work with the Roquemore team going forward and to continue to provide industry leading services and compliance to our clients,” he went on to say.
“We welcome the entire Roquemore team and their clients into the Primeritus family,” Peters added.
Reacting to the acquisition, Roquemore president Mike Postlethwait stressed, “Primeritus and Roquemore both have a high regard for compliance, great processes, high quality services, and top customer satisfaction.
“We look forward to a bright future together,” Postlethwait said.
TransUnion’s 2016 auto loan forecast — including its projection that delinquency rates are likely to remain unchanged — should allow the subprime auto finance industry to maintain two of its most important positions that can satisfy both consumers and perhaps regulators, too.
Overall economic stability is likely to help finance companies originate more contracts with subprime consumers, who in turn can eventually elevate themselves out of lower credit tiers because of the resources to maintain repayment terms.
Here are the forecast details shared on Monday that helped TransUnion senior vice president and automotive business leader Jason Laky arrive at those assertions.
TransUnion’s forecast projects that delinquencies will remain stable throughout the next year (with normal seasonal variance), with delinquency levels unchanged at 1.11 percent between year-end 2015 and year-end 2016.
While delinquency rates stay flat, TransUnion is forecasting that auto loan balances will continue to rise, with average auto loan debt per borrower expected to increase from $17,985 in Q4 2015 to $18,509 in Q4 2016.
TransUnion forecasts the average balance will surpass $18,000 in Q4 2016, a growth of more than $1,000 over the past two years. By the end of 2016, auto loan debt per borrower will grow more than $3,500 from Q4 2009, when the average balance was $14,956.
And what about the subprime slice of the market?
TransUnion data shows that the number of auto loans has grown every quarter since Q3 2011. In Q3 2015 (the most recent data available), the number of auto accounts grew to 69.4 million, up 8.2 percent from 64.2 million in Q3 2014. The number of auto loan accounts has grown 15 million from Q3 2011 to Q3 2015.
Despite an increase in the number of auto loans, fewer subprime consumers (those with a VantageScore 3.0 credit score lower than 601) had an auto loan in the third quarter of 2015 than in 2009. In Q3 2009, subprime auto loans comprised 23.7 percent, or 14.8 million, of all loans. By Q3 2015, the subprime share of auto loans declined to 18.7 percent of the total, or 13.9 million consumers.
Of those holders who took contract back in 2009, there’s a chance a segment of that population no longer is even considered subprime, reinforcing an industry refrain about how subprime auto financing can help consumers get back on their financial feet.
“It’s a function of how credit scoring works. If credit scores work correctly, they should reward good financial behavior and decisions, which are as most credit scores indicate, paying your obligations on time, not taking on too much credit relative to your outstanding availabilities and prudently seeking out new credit,” Laky said.
“One of the things I think for subprime borrowers taking out an auto loan is to make the payments as expected. That probably more than anything will help move their scores out of subprime,” added Laky, who worked at a subprime auto finance company before joining TransUnion.
And whether or not it’s a consumer in the subprime credit bucket, auto loan holders are paying on their notes at a greater pace, and TransUnion thinks they will continue to do so.
As average auto loan debt levels rise, TransUnion sees minimal changes in the auto delinquency rate in 2016. Aside from quarterly changes as a result of seasonality, TransUnion forecasts auto delinquencies will remain near all-time low levels. Since auto loan delinquency peak levels in Q4 2009 (1.54 percent), delinquency rates have declined 28 percent.
“For the last two years, auto delinquency has remained low as consumers prioritized their auto loan payments,” Laky said. “Through the end of 2016, we expect the auto delinquency rate to remain stable at historic, seasonal norms. We believe we have reached a ‘new normal’ in auto delinquency and see no immediate cause for concern.”
Laky elaborated about that point during a conversation with SubPrime Auto Finance News.
“One of the best indicators of your ability to take on and meet your obligations on a new auto loan is your past auto loan performance,” he said. “If you’re a subprime or non-prime consumer getting into a loan, if you manage to stay up to date and limit the amount of times you’re delinquent on the loan, you put yourself in a great position, not just with your current lender but any other lender as you look for your next auto loan.
“They’re going to say, ‘Here’s a consumer who took out an auto loan obligation, managed to make their payments on time for a year or two or three years.’ Now they’re looking to get something new. They might not have taken a chance before but now that they have a proven track record, (the finance company) might say, ‘I’m going to do it,’” Laky continued.
“Subprime lenders, in effect, perform a very important role in helping consumers establish credit because as good prudent underwriters it is in their best interest, too, to ensure that the consumer gets the right amount of auto loan they need to balance the car want versus their ability to repay the loan,” he went on to say. “Subprime lenders that do that right and do it well with the consumer, help the consumer create a good track record of finance to give them opportunities later.”
TransUnion’s forecast also shed a little light on how those track records might form.
On a state level, auto delinquencies are expected to rise in 27 states from 2015 to 2016 with the locations projected to experience the largest increases in delinquency including:
— Hawaii: up 8.68 percent
— Oklahoma: up 7.06 percent
— Nebraska: up 7.02 percent
States projected to experience the largest declines in auto delinquencies include:
— North Carolina: down 6.05 percent
— Florida: down 5.85 percent
— Kentucky: down 5.15 percent
— Oregon: down 4.16 percent
No matter which states experience delinquency movements, might the industry have to address the term that makes some industry participants cringe? What about the much ballyhooed subprime bubble?
“The data appear to refute the apprehensions about a subprime bubble — and may even point to an opportunity for growth in subprime auto lending,” Laky said.
“While auto lenders are certainly extending loans and leases to consumers who present a higher risk, these consumers have been able to manage their auto loan obligations in line with expectations,” he continued.
“As auto lenders incorporate trended data into their analyses, we may see even more consumers receiving auto loans as lenders more effectively underwrite previously unscorable consumers,” Laky went on to say.
That potential growth — and finance companies taking on more risk — could be the other industry position leaders can tout in 2016. Laky explained the potential stems from overall market indicators that point to job growth and reasonable gas prices.
“With our stable, growing economy and the continued healthy pace of job growth, consumers are feeling confident enough to take on new auto loans, resulting in a healthy equilibrium between growing balances and low delinquency rates,” Laky said.
“Robust consumer loan performance, combined with declining gas prices and low interest rates, will allow lenders to offer slightly larger auto loans to consumers in the coming year without putting their portfolios at risk,” he continued.
“When those things come together, it’s really good for subprime lenders,” Laky went on to say. “It gives them the confidence to reach out and make loans to folks that when you’re worried about the economy, you might pull back and not make those loans. That confidence should lead to expanded lending across the whole credit spectrum.”
