Companies that continue to loosen their underwriting standards could end up with lower ratings in 2015 and 2016, according to a report by Standard & Poor’s Ratings Services.
The auto sector has benefited from robust vehicle sales, stable credit performance and strong used-car prices. Simultaneously, resurgence in the auto market increased competition among banks, captives and other specialty lenders, according to S&P analysis released last week. Increased market competition caused some lenders to boost origination volume by loosening underwriting standards. This strategy results in immediate profitability for the company, but affects credit quality in the long term.
As a result, consumers benefit from available longer-term loans, while lenders are exposed to higher credit risk. Almost 55% of outstanding financing contracts are longer than 60 months, the study shows.
The gradual industry softening and regulatory changes will also affect credit quality, according to the study. The S&P report indicates that captives will maintain regulation credit and pricing on loan structures. However, there is uncertainty whether other finance companies will follow that lead.