Increasingly relaxed credit underwriting standards in the subprime auto world are helping lift auto sales across the country, according to a report today from Bloomberg News.
Bloomberg checks in on Houston auto dealer Alan Helfman, who tells the story of a customer who drove away with a new Dodge Dart-despite a credit score south of 500.
“A year ago, with a credit ranking in the bottom eighth percentile, I would’ve told her don’t even bother coming in,” said Helfman, who owns River Oaks Chrysler Dodge Jeep Ram, where sales rose about 20 percent this year. “But she had a good job, so I told her to bring a phone bill, a light bill, your last couple of paycheck stubs and bring me some down payment.”
That scene confirms a lot of what we’ve been hearing about an increasingly competitive subprime market that’s led some lenders down the credit scale ― but has also strengthened data analysis of consumer creditworthiness.
It’s clear that having a job in what’s still a brutally tight job market is a good sign. Put simply, the borrower depends on a set of wheels to get to work each day.
But Bloomberg points out that Fed stimulus-inspired low interest rates have encouraged yield-hungry private equity capital into what seems like easy-peasy returns. Clearly, only time will tell whether lenders have figured out how to minimize losses and max out returns.
Bloomberg cited an Oct. 10 Citigroup report that said:
The successful companies will be those that can underwrite and collect on loans while holding costs and defaults to a minimum.
On average, finance amounts are growing. Yet to keep down monthly payments, some lenders are extending terms. And when one lender moves into the longer term space, the entire market becomes more competitive and, eventually, there’s a battle on for marketshare. To boot, the longer the term, the lower the recovery, typically.
How will these dynamics play out? I’m not sure. So far, it doesn’t seem like any red flags have been raised. But if loan performance starts to sour rapidly, I’m guessing we’ll be in for a very bumpy ride.
If the information is NOT disclosed, there is no chance of the consumer understanding the terms of the deal for them to make an informed decision. On a loan that has a 20% discount fee, I do not understand the logic of not disclosing the amount to the consumer. If that is not important, why disclose APR?
The real dynamics are whether this female borrower received a comparable rate of a male borrower with the same credit score and employment. The CFPB won’t care at all about the loans’s eventual performance but will care about whether the Dealer and Lender examined the Social Security “first name database,” the Census Bureau “last name database,” and the GEO Code where the borrower’s residence is located prior to pricing the loan based on the CFPB post on 11/06/2013 stipulating that all 3 measures are expected as that is how they will be examining the credit application disposition.
Allan makes a very important point. Additionally,
1) The CFPB should be looking at the risk premium spreads being charged to these sub-prime borrowers. What is the ROE target for this group and why is the lender entitled to a windfall above the ROE being received for prime borrowers because FICO “is so good at predictive behavior” is it not?
2) The lengthening of terms (if the lender is a bank) is not usually a good financial practice. Does the bank have any financial planners that would endorse these extended terms? If not, then the bank is setting itself up to be labeled a “bad place for financial advice”! And this gives the CFPB additional reasons to investigate because where there is smoke (bad financial practices) there is usually fire!