LTVs Decline in 1Q as Subprime Lenders Aim to Steady Loss Levels

DALLAS — Six subprime auto finance companies in the secondary market have reduced loan-to-value ratios in their underwriting by 100 basis points or more in the first quarter, said Amy Martin, lead analyst for auto ABS at S&P Global, during a presentation at the NAF Association’s Nonprime Auto Financing Conference.

Those six include American Credit Acceptance LLC, Exeter Finance Corp., First Investors Financial Services Group Inc., General Motors Financial Co., Santander Consumer USA’s Drive unit, and Westlake Financial Services.

The average LTV ratio among subprime issuers fell to 110% compared with 114% during the same time a year prior, and down from 112% for the full-year 2016, Martin said. “This reduction in LTV shows us that companies are preparing for lower recovery rates,” she said. “We all know used-car values have been in decline — there are a lot of vehicles coming off of lease — so it looks like companies are preparing for that.”

However, reducing LTV is not likely to reduce the record level of subprime auto ABS losses today, she said. “At this point, we believe companies are doing this just to maintain their level of losses,” Martin said. “We don’t think it will help with lower losses. It just helps with consistency and performance.”

Lenders are taking action in response to the increase in losses rather than pushing through like they did in the 1990s, she added. “Subprime auto finance companies are much more disciplined this time around,” Martin said. “We’ve already seen them tighten their underwriting standards, they lowered their LTVs, and we’re seeing some companies cut back on their origination volumes.”