By Ray Birch
ATLANTA—New data indicate subprime auto loans are declining, but it’s not the result of big banks such as Wells Fargo exiting the business as much as it is due to consumers’ improved financial status.
John Giamalvo, VP of dealer services for Equifax, told CUtoday.info that the percentage of subprime borrowers in the market has been steadily shrinking.
“A very good amount of this drop in subprime loans and leases is due to the increase in folks’ credit scores,” said Giamalvo. “Consumers’ credit scores have risen substantially over the last couple of years. I think we can draw a pretty clear line for this trend from when the credit bureaus were compelled to remove derogatory posts on a credit file that did not have three identifiers with it, such as name, Social Security number and address.”
Giamalvo emphasized, too, that many consumers today are doing a much better job of managing their finances and concentrating on improving their credit scores.
“People are paying much more attention to rebuilding their credit,” he said.
The Year to Date Data
According to recent Equifax data on subprime activity, 871,900 auto loans and leases have been originated so far through 2018 to consumers with a VantageScore 3.0 credit score below 620, considered subprime accounts.
This is an 8.7% decrease from February 2017, the company said. These newly issued loans have a corresponding total balance of $15.3 billion, an 8.7% decrease year-over-year.
Through February, 21.3% of auto loans and leases were issued to consumers with a subprime credit score. This is the lowest subprime share on a seasonal basis since 2006. In 2017 the year-to-date share was 22.2%, Equifax stated.
Giamalvo, as other experts have noted, said lenders have been encouraged to reach into lower credit tiers as delinquencies remain low and new car sales begin to decline from record highs.
“Lenders have not seen any material changes in delinquency rates, so they are encouraged to reach a bit lower to keep growth going,” he said.
Major banks were among the first to chase lower credit tiers, but many have since moved to scale back due, with some analysts citing concerns over impending risk and a potential increase in delinquencies.
Looking for Balance
But Giamalvo said the banks’ pullback may have less to do with those types of concerns and more to do with a simple desire to balance their portfolios.
“I would not say the big banks are pulling back from subprime,” said Giamalvo. “But any change in their focus here is more likely them wanting to keep a balance between prime, subprime and leasing.”
Giamalvo added that he does believe banks are stepping back a bit from leasing, with the large number of off-lease vehicles now returning to the market the result of the sharp rise in leasing a few years ago.
“Maybe the banks are tapping the brakes on leasing a bit,” he said.
Giamalvo said that while data do not show that credit unions are making a bigger play into the subprime space, the current economy, low delinquencies and improvement in credit scores, along with concerns over auto sales falling, might encourage some cooperatives to consider making more loans to subprime borrowers. While not offering an opinion on whether credit unions should reach deeper into subprime, Giamalvo emphasized that what the movement has been doing in recent years is working.
Steady as You Go
“Credit unions are doing well,” he said. “Each year they pick up an additional 1.5 to two percentage points in market share. So I’d say its steady as you go for credit unions. They have been increasing their participation in indirect lending, and delinquencies remain very low.”
Giamalvo, noted, too, that this year may not fall in line with predictions the auto sales and lending markets would cool off.
“I am not sure those forecasts will come to fruition,” he said. “The tax cuts gave consumers some extra money and we have recently had a bump up in sales. I think the mid-year forecasts are more positive about what we will see by the end of the year—not all the gloom and doom.”