Auto Finance Needs a ‘Subprime Correction,’ CPS Says

Consumer Portfolio Services intends to “stay the course” rather than be more aggressive in loan terms and higher mileage vehicles because 2017 is the year for a “subprime correction,” Chief Executive Charles Bradley told Auto Finance News.

He cited the recent string of under performing fourth quarter earnings as evidence of this subprime correction.

“There are an awful lot of numbers that all point down: delinquencies are higher across the board for everyone, losses seem to be creeping up for everybody, used car prices are going down for everybody,” Bradley said during a meeting at the National Automotive Dealers Association Convention & Expo. “You put all those things together, it doesn’t bode for a huge bangin’ year for 2017.”

While none of the the indicators he listed — delinquencies, volume declines, used car prices, and cost of funds — are “killer negatives,” they are inclinations that subprime lenders should be working to avoid, he added.

The predicted downturn wouldn’t be nearly as big as it was in 2007, but if used-car values keep going down and unemployment rises, subprime lenders like CPS could see rising delinquencies, he said.

“The thing you don’t want to do is grow into a recession because unemployment will go up and defaults will go way higher than you want them to,” Bradley said. “For us it’s managing through what we think is an impending storm, but still trying to take advantage, because there is still a chance it all works out great.”

In 2016, vehicle depreciation rates crept up to 17.3%, which is on the high end of pre-recession levels, Anil Goyal, senior vice president of operations at Black Book, told AFN. It’s a sign that “the market has already turned” and in the third quarter banks recognized that and began tightening their lending criteria to prepare, he added.

For CPS, it’s about walking a fine line between growth and stability.

“We’re trying to avoid getting pulled into any of those whirlpools along the way,” Bradley said. “We don’t want to be overly aggressive and chase long term, we don’t want to be overly aggressive given that we don’t think the fundamental of the industry are all that strong.”