MIAMI — Rising competition is prompting pricing pressure among subprime lenders in particular, Amy Martin, senior director of structured finance at S&P Global Ratings, told Auto Finance News during a meetup at IMN ABS East 2016 yesterday.
The current competitive environment is reminiscent of the 1995-1996, 2001-2002, and 2006-2007 time periods, Martin said, because companies are responding to stiffened competition just as they did pre-recession. For example, issuing lenders are offering lower discounts, higher dealer reserve or rate participation, and accepting higher loan-to-value, according to S&P’s Subprime Auto Loan ABS Tracker, released Thursday.
“We are also seeing loosening of credit standards,” Martin said, and many issuers have made a “strategic decision” to buy deep-subprime paper. Companies are “deliberately moving down the credit spectrum, where they can buy loans at a discount and presumably maintain profit margins,” she added.
However, this strategy has caused many subprime lenders to have a less creditworthy applicant pool to choose from, S&P said in the report. Further, moving down the credit spectrum has led to higher collateral losses for certain subprime auto loan issuers, higher LTVs, and longer loan terms, according to the report. For example, some companies that offered a maximum loan term of 72 months now offer a maximum term of 78 months.
“These are smaller companies that don’t have the scale where they can price competitively and buy loans at 100 cents on the dollar,” Martin said. “It’s harder for them to compete in that space, because they don’t have the same efficiencies, their operating costs are higher, and their borrowing costs are higher.”
These companies are buying deeper “so that they can compete in a segment where they can be profitable and not have to compete with those who have a cheaper cost for infrastructure,” she added.
