Garnet Capital Advisors Blog

Subprime auto lending has recently experienced a sharp uptick, and the robust activity has provoked warnings that a bubble is forming.

Wells Fargo auto lending moves higher
Wells Fargo's auto loan origination totaled $7.8 billion during the second quarter, which represented a 9 percent year-over-year gain, according to The New York Times. In May, the major lender told investors that it had $52.6 billion in outstanding car loans at the time, and that at the end of 2013, 17 percent of these went to borrowers with credit scores of 600 or less, the media outlet reported. The credit quality of the firm's loans has not declined amid the sharp increase in subprime lending, Wells Fargo executives have stated.

Delinquency rates climb in Q2, says Experian
Amid these optimistic statements, Experian Automotive figures reported on by Fortune showed that the 60-day delinquency rate rose to 0.62 percent during the second quarter, a 7 percent increase from the same time in 2013. Repossessions reached 0.62 percent, a 70 percent jump. In addition, outstanding auto loan balances hit an all-time high of $839.1 billion, an 11.7 percent increase from 2013.

Experian data for the first quarter showed a similar uptick in repossessions and 60-day delinquencies, illustrating that the former surged 78 percent from the same time in 2013 and the latter moved higher in 22 states, according to The New York Times.

Melinda Zabritski, senior director of automotive finance at Experian Automotive, cited the rising percentage of subprime loans when explaining the uptick in delinquency and repossession rates, according to Fortune. She stated that while these rates will grow in frequency over the next few quarters, they are still fairly low.

Zabritski also spoke to the record loan balances, emphasizing that while financial institutions are benefiting from this situation, it could combine with rising interest rates to increase risks for banks.

Financial institutions are already encountering challenges in the current situation, as Experian figures show that banks had to write off $8,541 on average for each delinquent auto loan in the first quarter, according to The New York Times. This figure represented a 15 percent increase from the same period in 2013.

Moody's: Bank lending grows more conservative
However, a recent report from Moody's Investors Service maintains that banks have become less aggressive in their efforts to entice borrowers with low credit scores, The Washington Post reported.

"Lenders are beginning to show some caution in lending to riskier borrowers," analysts for the credit ratings agency wrote, according to the news source. "That caution, if it continues, could help rein in subprime auto loan losses ... Subprime loan volumes are still high, although they have flattened somewhat over the past year."

Harnessing technology to manage default risk
Some financial institutions have been taking a different approach, leveraging innovative technologies to mitigate the risks stemming from working with subprime borrowers, according to The New York Times.

In some cases, lenders can remotely disable the ignition of a vehicle very shortly after the borrower misses a payment, the media outlet reported. Because of this innovation, financial institutions can repossess vehicles without having to go on a wild goose chase looking for the borrower.

Advocates of such methods assert that they make borrowers more responsible and help expand lending activity, according to The Wall Street Journal. Don Lavoie, president and CEO of Sekurus Inc., maker of the On Time disabler device, described the technologies as "a behavior-modification method."

Financial institutions interested in learning more about how these subprime auto lending developments could impact loan sales might benefit from speaking with Garnet Capital Advisors, which has significant experience in prime, subprime and superprime auto loan portfolios.