Clients,
Lots of chatter in the marketplace lately about subprime auto lending. Heading into slower economic times there are concerns about repayment. Is there a bubble?
You may be asking, “What does Don think is going to happen?” Well, here are some facts.
Since 2017 “subprime” auto loan originations have decreased from 19.8% to 15.01% in 2022. The share of the market in the past 5 years has declined. There are a couple factors to consider when looking at this percentage decrease. During the pandemic, lenders tightened up credit quality and skewed toward prime and near prime borrowers. Simultaneously, credit scores (the factor used to categorize these loan types) rose across the population. Remember, the average credit score increased between 2020-2022 because of the government transfers and loan deferments.
There is a very good publication produced by Fitch Ratings titled In the Auto ABS Driver’s Seat. For many years, this report has presented the delinquency and net loss rates of securitized auto loans in prime and subprime (published quarterly). For nearly 25 years, the annualized net loss rate of subprime pools has fluctuated very reliably around 6.5%. In good years, the rate trends down to 4% and in stressed periods it may rise to 8 or 9 percent. This stability was observed during the subprime auto lender shakeout of the late 90’s, the recession of 2001, the Great Recession and the COVID-19 pandemic.
https://nonprimetimes.com/i-hate-to-burst-your-bubble/
What percentage of your auto loans over the past year were originated with a score range of 580-619? It wasn’t 15%. A lot of my credit unions have the appetite for risk, but they don’t have the stomach :). Here are a couple things to consider when working on your strategy to lend in lower tiers.
- You need a pricing strategy that is inclusive of your costs; default, origination, collection, repossession
- The volunteers need to be onboard – trust me
- Your reporting needs to be current, precise and pro-active
- Lenders need to be confident and well trained to recognize real risk factors
- These members need their budgets protected with GAP,Warranty,Debt Protection (sales effort)
While I don’t believe we are headed to a collapse in the subprime auto market, all signs are pointing to a degradation in credit quality and our mission at a credit union is “Wheels to Work”. We need to help our members into cars that take them to their jobs. As credit quality begins to slide, losses will increase. Will you pull back or is it an opportunity for your credit union to rise to the occasion? You can’t grow by shrinking.
We are rolling into fall, it is strategic planning season. How about giving us a call to talk about your plans for next year. We can help you succeed in this changing market.
Maybe you are not ready to jump all the way into the deep end with subprime auto? There are great solutions for you to shift some of the default risk. Many of our clients utilize Open Lending and we have a lot of experience seeing this solution used as part of an overall lending strategy. There is no such thing as a “free lunch”, this solution is worth examining and giving a fair assessment as part of a comprehensive risk strategy. Reach out, we are happy to talk about our opinion on this product.
Don Arkell
Owner
CU Lending Advice