There is increased scrutiny of the subprime loan market by regulators, the Department of Justice and consumer advocates. A primary reason for this increased scrutiny is the growth rate of the subprime auto loan securitization market. According to Dealbook, subprime auto securitizations have increased by more than 300% to $20 billion since 2010. Is the markets demand for higher returns leading to an increase in subprime auto originations? Are lenders loosening credit standards to fuel this demand?
According to a recent Federal Reserve Bank survey of credit officers, subprime auto delinquencies are expected to rise this year. This should not be surprising to the marketplace given the growth in auto lending over the past several years.
While there has been a tremendous amount of media coverage and news stories depicting consumers having problems with their subprime auto loans, delinquencies are still considered to be relatively low as compared to pre-recession delinquency levels. However, because a near prime or subprime borrower inherently poses a higher risk to the lender, the importance of understanding the consumer’s willingness and ability to repay cannot be undervalued.
In today’s environment, the risk to a lender is not just the consumer’s probability of default but also the reputational risk associated with making decisions that can adversely impact a consumer’s financial wellness.
Consumers are unique individuals with different attitudes and life circumstances. Technology and information is helping lenders refine segmentation by not relying solely on traditional credit bureau data to make a lending decision. In my conversations with lenders, the majority are trying to figure out how to attract and retain the next generation of customers, improve trust and create positive customer experiences. These objectives require better decision making and more in-depth understanding of the consumer.
Gaining a competitive advantage in the auto financing industry is a challenge that many lenders face. Having more knowledge about the consumer is one way to gain a competitive advantage and combat risk. Identifying key bits of information that refine a lender’s segmentation helps ensure lenders are making lending decisions that meet their strategic objectives while at the same time balancing consumer demand.
Building strategies that identify consumer profiles that meet their business objectives can be challenging without integrating additional information into credit underwriting at origination or account management. Having a multi-dimensional view of an applicant enhances a lender’s ability to originate, sell or service subprime auto loans.
Many industry experts, like Kelley Blue Book, are forecasting that 2015 auto sales will reach the highest in a decade and close the year with a seasonally adjusted annual rate (SAAR) of 16.9 million units. Inevitable, a portion of these auto sales will be financed with either loans or leases originated to consumers falling into the subprime credit category.
Lenders are strengthening their underwriting processes with a deeper set of insights into consumer behavior. These deeper insights are coming from information not traditionally found on a consumer credit report that are highly predictive and correlate to credit risk. While subprime auto lending is increasing, is this increase really being driven by the desire for Wall Street returns or can this increase in subprime auto lending be attributed to consumer demand and better credit risk assessments that integrate NextGen or alternative data into credit risk assessments?
NADA.org: Market Beat January 2015
Kelley Blue Book: New-Vehicle Sales To Jump Nearly 10 Percent In Best December Since 2004; Kelley Blue Book Forecasts 16.9 Million SAAR In 2015
DealB%k New York Times: Investment Riches Built on Subprime Auto Loans to Poor