Finance Companies Outpace Others With Less Restrictive Subprime Lending

Looser underwriting standards are propping up subprime loan volume at finance companies. In fact, originations are up 47% compared with 2009, outpacing bank and credit union lending to consumers with Equifax credit scores below 640, according to a new report.

“Banks and credit unions are being more selective in their loan processes, opening lending back up to pre-recession levels at a much slower rate than captive lenders,” Daryl Toor, an Equifax spokesman, told AutoFinanceNews.net.

According to the Equifax National Credit Trends Report, numbers are approaching pre-recession levels as auto loans to subprime borrowers now account for 38.5% of all auto loan originations for auto finance companies and 17.6% for banks and credit unions. Auto finance companies originated 854,800 in July 2011, up from 581,300 in July 2009. By contrast, 820,200 loans were originated by banks and credit unions for the same period in July 2011 down from 832,000 for July 2009.

“With unemployment rates remaining elevated for a prolonged period, auto lenders have proactively adopted more comprehensive data and verification tools for greater loan-level transparency in evaluating a wider band of consumers, which has helped enable the auto lending industry to recover more quickly than others” said Michael Koukounas, senior vice president of special client services for Equifax in a press release. 

Additionally, 60-day delinquency rates for auto loan payments continue to improve to 1.63%, down from a peak near 3% in late 2008, “reflecting a continuation of sustained credit retraction that the auto lending industry is experiencing earlier than other loan types,” Koukounas said.

Through July, 11.3 million new auto loans had been originated (a 13.2% increase over January-July 2010 totals) — worth a collective $213.9 billion (a 14.8% increase over the amount totals for the same period in 2010). In July 2011, 1.7 million auto loans worth $32 billion collectively were originated.

The report also revealed that in the past year, monthly payments for auto finance company-originated loans have held relatively steady at $407 in July 2011 versus $404 in July 2010. For bank and credit union-originated loans, average monthly payments were $364, down from $377. As such, the industry’s growth is tied to increases in loan volume, rather than to loan amounts, the company said.

“We don’t have a crystal ball to predict the future,” Toor said. “I think it’s safe to say that as the economy improves, lending practices will become more open.”