The American Financial Services Association announced on Tuesday that a panel of experts representing the three major U.S. credit bureaus – Equifax, Experian and TransUnion – concluded that national consumer credit data indicates a stable subprime auto lending market and no evident weakening in lenders’ underwriting practices.
Speaking at the start of AFSA’s 21st annual Vehicle Financing Conference and Expo, the panelists cited factors like low unemployment, the healthy economy and risk-based analytics tools used today by lenders as some of the reasons for their conclusions.
“We are happy that AFSA is providing the forum for the credit reporting agencies to set the record straight on the health of the subprime auto finance market,” said Chris Stinebert, President & CEO of AFSA. “It’s especially important coming off another record year of light vehicle sales.”
New research from Equifax examines auto lending dynamics and resulting performance differences. Findings point to continued strength in what has increasingly become a segmented sector within which different lender types specialize in narrow credit bands. Most lenders remain very conservative relative to their pre-recession lending habits, while some are meeting the needs of consumers with lower credit scores.
“The fact is loan performance is good relative to historical levels and the slight weakening we are seeing cannot be attributed to a change in how lenders are underwriting their loans or call into question the stability of the subprime market as a whole,” said Amy Crews Cutts, SVP and Chief Economist for Equifax. “Consumer data tells us that market share is shifting across different lender types and specialty lenders are lending in higher-risk segments that are not otherwise being served.”
Experian’s data has shown that the overall automotive lending market is quite healthy. In fact, based on its third quarter data, lenders are becoming increasingly conservative, reducing their share of subprime loans and lending to customers with higher average credit scores.
Specifically, the total subprime market is down 4.3 percent from 2015, to make up 20.39 percent of the loan origination market. Conversely, the total prime market rose 2 percent in Q3 2016 to make up 59.8 percent of loan originations. The average credit score for a vehicle loan also increased 3 points, going from 715 to 718.
“The sky is most definitely not falling on automotive lending,” said Melinda Zabritski, senior director of automotive finance for Experian. “While we may have seen growth in subprime or deep-subprime loans in recent years, it is important to keep it in perspective – the entire market has grown from a volume standpoint across all risk tiers. Some of the more interesting trends our research has shown is that consumers, most notably prime consumers, are moving away from new car shopping and leaning towards leasing and financing used vehicles in order to keep payments more manageable.”
According to TransUnion’s Industry Insights Report, outstanding auto loan and lease balances for subprime consumers totaled $172 billion at the end of Q3 2016. This represents 16% of the $1.1 trillion in total auto balances. By comparison, subprime balances represented over 20% of outstanding auto balances at the end of the recession in Q3 2009. While TransUnion observes an increase in 60-day+ delinquency for auto accounts, it is still below the levels observed in 2009, and auto loans and leases remain among the lowest delinquency credit products.
“Subprime auto financing today is very different from subprime mortgage lending 10 years ago. Subprime auto lending is much smaller than mortgage in terms of total outstanding loan balance and average loan size, so exposure from loss at a macro and micro level is likely to be less severe. Risk is also broadly distributed among lenders and investors, limiting the systemic risk stemming from one lender’s challenges,” said Jason Laky, senior vice president and automotive business leader at TransUnion. “Auto payments also continue to be a priority for consumers, and a hedge against the risk of an auto finance bubble. In fact, TransUnion research has found that – since at least 2003 – consumers have placed an emphasis on paying their auto loans before their mortgages and credit cards.”
Let us know! How do you feel about the current climate in the subprime lending market?