SOUTHFIELD, Mich., and IRVINE, Calif. — Depending on who is
responding, the subprime auto financing market is either growing at a
sustainable pace or is leading back to poor practices such as underwriting that's
too loose.

As Fitch Ratings approached its assessment cautiously,
high-level executives from Credit Acceptance and Consumer Portfolio Services
both shared upbeat assessments of their opportunity to grow at a pace similar
to what they enjoyed in 2012.

"It seems most of the competitors seem to be status quo.
There's no one particularly new. Nobody's doing anything particularly
aggressive, which is very good. So we don't really see anything happening there
in terms of credit quality. I think most of the companies' credit quality is
pretty good," said Charles Bradley Jr., president and chief executive officer
of CPS.

Bradley made that assessment during a conference call with investment
analysts when CPS revealed its 2012 performance, which included $69.4 million in
net income. A year earlier, the company suffered a net loss of $14.5 million.

CPS originated $150.8 million of new contracts in the fourth
quarter alone, approaching a pace it enjoyed back six years ago.

"The excellent capital markets environment we're now in, I
think everyone is taking advantage of that," Bradley said.

Credit Acceptance certainly could fall into that category.
The company finished 2012 with $219.7 million in consolidated net income up
from $188.0 million. Credit Acceptance's loan unit and dollar volumes grew 2.4
percent and 6.0 percent, respectively, during the fourth quarter of as its
number of active dealers jumped 24.9 percent.

"The environment that we're in today is very competitive," Doug
Busk, senior vice president, treasurer and head of investor relations at Credit
Acceptance.

"There are hundreds of companies that serve the subprime
auto space across the country," Busk told analysts. "We have historically found
that the primary factor that impacts how competitive the environment is, is the
availability of capital to the industry. At the current time, capital is
readily available and due to the low interest rate environment, capital is very
cheap. That has led to an increase in competition.

"We're responding in much the same way that we did in 2006
and 2007, which was the last competitive period in our industry," Busk
continued. "We are letting our loans per active dealer decline as the competition
heats up and continue to grow our business by adding new dealers to the
program."

Meanwhile, Fitch believes the recent success in the U.S.
subprime auto ABS market is leading to increased competition among lenders,
which its analysts contend could result in looser underwriting practices.

"We also believe the recent improvement in the stability of
asset performance may suggest future loss performance is more closely tied to
new jobless claims than overall unemployment," Fitch said.

The firm explained the recent positive subprime auto ABS
market has been driven by strong 2009, 2010, and 2011 vintages, which have
benefitted from comparatively strong credit quality and loan terms during a
solid market for used vehicles. During this time, Fitch indicated the financial
condition of the borrowers in the pool has improved as the less credit worthy
ones defaulted.

"We believe these changes have contributed to a continued
decoupling of subprime auto ABS from the overall employment rate beginning in
2010," analysts said. "In our view, trends in new jobless claims may provide a
better leading indicator going forward because it more closely tracks the
financial condition of borrowers remaining in the pools.

Fitch projected that performance in subprime auto ABS will
likely to tail off for 2012 and 2013 vintages.

"We expect 2013 securitizations to include weaker collateral
quality than prior years, including extended loan terms and weaker credit tier
distributions," analysts said. "Over the longer term, this factor is viewed as
a potential risk to the market.

"Should the positive performance in the market continue and
attract more participants to it, the subsequent increase in competition could
result in looser underwriting standards and exaggerate expectations," Fitch
continued. "And if another recession or downdraft in the market coincides with
this expansion, we would expect a significant challenge to many vintages."

So which perspective is more accurate — the view of executives
from Credit Acceptance and CPS or analysts from Fitch? Perhaps, Manheim
economist Tom Webb offered a neutral assessment.

"I fully expect that we will go through a cycle on the
retail lending side, and as we go through these cycles we tend to get a little
better each time," Webb said. "We don't completely learn, but we learn. The
lender themselves have tremendous access to funds, which they are pushing on to
dealers who are pushing on to retail customers."

Webb reiterated points made by all three major bureaus, Equifax,
Experian and TransUnion — consumers are placing more priority on keeping up
their vehicle loan payments over other monthly obligations.

And sometimes those loan holders who are considered to be
subprime have more financial resources than borrowers in that category previously
possessed.

"A lot of that subprime lending that has gone our recently,
those borrowers are subprime simply because they have low FICO scores," Webb
said. "That's how we define them. They are not subprime to the extent in the
past they don't have the great ability to pay. These are people who had their
credit hurt during the recession. There were many of them who walked away from
debt through foreclosures. Many of them didn't have a significant decline in
their income so their ability to pay is there. They just don't have the credit
score.

Webb mentioned one other factor about recent activity, one
touched on by Bradley.

"Even though some lenders have gotten a little more
aggressive, I don't think the loan-to-value ratios are ridiculous," Webb said. "To
that extent, certainly every borrower who drives the vehicle off the lot is
upside down the minute they drive it off the lot. But I think they'll be upside
down for shorter periods of time because of the loan-to-value ratios are good
and used values are high."

Nick Zulovich can be reached at nzulovich@subprimenews.com. Continue the conversation with SubPrime Auto Finance News on LinkedIn and Twitter.