Subprime auto lending activity is close to pre-financial crisis levels as a result of lenders’ increased access to capital, and because of more aggressive lending standards, according to the Subprime Auto Loan ABS Tracker from Standard & Poor’s Ratings Agency.
S&P said in the July 22 report that both established as well as new subprime auto lenders continue to seek funding through securitizations. Volume for subprime auto loan securitization is expected to grow with new and used car sales, and as issuers increase origination volume by broadening and deepening dealer relationships.
The report also states that subprime auto loan ABS performance continues to weaken. Annualized net losses increased in the first quarter of 2014 to 5.79%, up from 4.16% in the first quarter of 2013. Nonetheless, S&P says the increase in losses have not reached the levels reported the first quarter 2010, shortly after the recession, when they spiked up to 10.72%. Despite the more recent deterioration in performance, the increase in credit enhancement and strong structures leads S&P to expect that ratings, specifically those ‘BBB’ and higher, will remain stable.
Also on July 22, during a webcast called “What’s Driving U.S. Subprime Auto Lending,” a listener asked what type of questions should investors be asking to really understand whether or not ABS issuers have appropriate processes and risk controls in place to identify dealer fraud and other unethical practices.
Amy Martin, S&P Senior Manager of ABS Ratings, said one of the things they’d been noticing is that the subprime auto finance industry has become more automated. Decisions are being made more quickly.
With increased automation and the need to make approvals more quickly, coupled with increasingly intense competition, S&P is concerned whether or not all of the verifications that are normally done are still getting done.
As part of the onsite operations review, S&P now asks lenders about specific verification processes. Many of the lenders walk S&P through how they check borrower income by using pay stubs and tax returns, validating residence, and looking at other documents, what lenders call “stips.”
In some cases, the lenders show S&P how they verify the accuracy of those paystubs by calculating the tax rates to make sure the withholding is correct, the goal being to make sure the pay stub has not been falsified.
“The more diligent lenders are not only doing this, but if they see application information is incorrect, they typically require the dealer to buy back the loan, and if there’s a high incidence of misrepresentation from a particular dealer, and it could come from the dealer or the customer, or if there are more higher losses from a particular dealer, the more diligent lenders stop buying the contracts from the dealer,” Martin told listeners.
She said that’s an important consideration for S&P, which is looking at the underwriting process and overall verification processes. She said S&P would encourage all subprime lenders to be more focused on the verification process.
“We have noticed many lenders track their performance by dealer, and those that aren’t performing well, they eliminate,” she said.Like This Post