If you set your automated news alerts or RSS feed to “subprime” or “subprime auto finance,” you’re likely to find news stories that fit in one of two camps:  A) subprime auto financing is heading down a dangerous path akin to the mortgage crisis of the late 2000s, or B) those fears are perhaps unwarranted.

An analysis from Equifax suggests that case B is the more likely outcome; or as the company suggests in a recap of its National Consumer Credit Trends Report, “a bubble is not occurring in that (subprime auto finance) space.”

“Auto sales continue to soar, crossing the 17.4 million mark on an annualized basis for new cars and light trucks in August,” Amy Crews Cutts, senior vice president and chief economist at Equifax, said in the recap.

“The abundance of high-quality vehicles for sale, the attractive financing options available, and the ever-increasing age of cars on the road today have created an environment that makes it easy for consumers to say ‘yes’ when it comes to purchasing a new or used car,” she added. “Importantly, auto loan originations to borrowers with subprime credit scores remain stable, providing additional evidence that a bubble is not occurring in that space.”

Consider these points shared by Equifax, as reported earlier in SubPrime Auto Finance News.

The total balance of newly originated subprime auto loans stood at $70.7 billion in August, a level representing an eight-year high and 27.8 percent of the total balance of new auto loans. That’s a slight increase in share from the previous year.

However, the credit agency determined serious delinquencies represented 1.05 percent of total balances outstanding in August, a decrease of 8 percent from same time a year ago.

And to Crews Cutts’ point on the stability of origination volume to subprime borrowers, there have been 3.9 million new loans so far this year given to subprime borrowers (Equifax Risk Score of 640 or lower). That comprises 31.2 percent of all auto loan originations, a share that is down slightly year-over-year.

So why, then, has there been so much mainstream media coverage suggesting the opposite?

Gary Hughes, general manager of automotive services for Equifax, said that the coverage has been in reaction to consistent year-over-year gains in new-vehicle sales and “natural inclination” by news outlets has often been to compare it to the real-estate, given how recently that occurred.

“However, I think what we’re seeing is that one of the big issues here is you’ve got a situation that’s very different than the real estate market … there are a couple of elements that we feel are very different from the real estate market,” Hughes told us in a recent interview.

“No. 1 is that even though balances continue to increase on number of loans financed, we’ve seen that you’ve got low interest rates and you’ve got serious delinquency rates that are actually holding and not increasing,” he said. “The amount of due diligence that lenders are being required to do as part of their business practices, as well as what regulatory agencies are requiring of them is also being implemented in these (loans). So, you don’t have the case (similar to) the no-doc mortgages that occurred back in the heyday of the real-estate lending.”

Hughes added:  “Also, what you’re finding is that it’s a different type of asset, where the assets — the automobiles — are not depreciating in value or equity at an accelerated rate the way that the real estate market did at the time.”

Given those key differences, Equifax analysts “don’t feel that a bubble or a collapse is imminent,” Hughes said.

More Responsible Lending
 
When asked if he believes lenders or even borrowers have learned from previous crises or become responsible, Equifax auto finance leader Lou Loquasto pointed to the technology that has allowed lenders to conduct more effective due diligence.

For instance, he mentioned Equifax tools that allow for employer and income verification at the time of approval, assuaging worries over whether or not the customer can repay the loan and decreasing the likelihood of inflated or deflated income stated by the consumer  

“They can verify that information upfront, which makes the loan risky at that point,” Loquasto said.

Hughes added: “And there’s more transparency in the process for both the lender and the consumer, which we think is a big difference, as well.”

Vehicle Quality Impact

Going back to one of points of insight from chief economist Crews Cutts, greater volumes of higher-quality vehicles is also playing a role in the credit market.

Hughes noted that vehicles these days go about 11.8 years before they are scrapped. This gives shoppers the chance to find strong-quality cars in various age segments and “degrees of use.”

Brett Collett — strategic account executive for Equifax — pointed out that with the higher volumes of off-lease vehicles amid leasing’s comeback, there are more available cars in the 3-year-old ballpark that are well-maintained.

 “When you have a well-maintained car, lenders are more apt to (agree to) extended terms on those,” he said. “The value of the car, as we know, with supply being depressed, has stayed high relatively speaking versus historical.

“With those coming back in, the values will go down a little bit, but again, you won’t see the tremendous drop that you saw in the mortgage area,” Collett added. “And with delinquencies so low, lenders are more apt to be more aggressive and be more competitive with this market.”

Hughes boiled it down like this: the cars are lasting longer, there are a lot coming off lease and being well-maintained, and interest rates are low.

Plus, Hughes added, “With the cars lasting longer, it allows the lenders to write different terms and potentially more aggressive terms. And they’re very comfortable doing that as long as they can be empowered with the information they need to make those smart lending decisions on the candidates and the vehicles, being able to measure some of that vehicle information with the consumer’s information at the time of lending approval. 

“That’s what we’re seeing a lot of right now: a real drive to move as much of that information on the consumer’s performance up to the point of application, so that the lenders can make a go/no-go decision early on, and if it doesn’t appear to fit, allowing that dealer to go and fit that consumer into a vehicle and/or a financing package that’s more successful for both of them,” Hughes said.

Upgraded Efforts by Regulators

The point Hughes referred to earlier in this story about ramped-up regulatory efforts on due diligence was particularly evident in an exclusive from Reuters on Sunday.

Citing a “person familiar with the matter,” Reuters said that banks are being prompted by U.S. regulators to provide more information on their exposure in auto finance. The news outlet’s source indicated that in addition to requesting information regarding loans within a respective finance company’s consumer auto lending portfolio, regulators are requesting details on loans given by these companies to fellow auto lenders.

Reuters’ report did not indicate which (or how many) regulatory agency is at the center of these requests, but it did note that there are at least one, according to Reuters’ source.

SubPrime Auto Finance Editor Nick Zulovich contributed to this story.