March 2, 2015

Captives Maintain Credit Standards as Subprime Auto Financing Demand Increases

(New York, NY): There is clear demand in the captive subprime auto lending sector as economic conditions improve and auto sales surge to near record levels: new and used car loan application volume increased 12% year-over-year through the third quarter of 2014 and more consumers across the full credit spectrum are buying and financing cars.

However, captive auto lenders have maintained their credit standards as the applicant pool has expanded—defying media speculation that the market is on the verge of a credit bubble. Subprime new car approval rates for these lenders fell nearly three percentage points year-over-year to 35%—less than half that of prime and near prime loans—and are even lower for used cars. Captives booked 7% more loans to subprime customers in 2014, even as approval rates declined.

“This is a clear demonstration of the conscious intention to limit risk to customers and lenders as greater numbers of subprime prospects seek credit,” said Ed Falco, Director at Auriemma. “This is a good thing for consumers and the economy; not just for the auto industry.”

Captive auto lenders are committed to responsible lending and the prudent underwriting of all loans. As nonbanks prepare for federal oversight they have taken incremental steps to expand compliance management systems, with particular attention paid to fair treatment in the origination process.

The results speak for themselves: gross write-off rates are hovering around 3.5%, near-record low delinquency rates have been maintained, and fewer loan extensions are contained within portfolios.

“While we should all watch closely to ensure there aren’t any negative portfolio trends emerging, there is no evidence of a looming bubble in the captive market,” said Falco. “Quite the contrary, subprime credit performance remains strong.”

About Auriemma Group

Auriemma is a boutique management consulting firm with specialized focus on the Payments and Lending space. We deliver actionable solutions and insights that add value to our clients’ business activities across a broad set of industry topics and disciplines. For more information, please contact Ed Falco at (212) 323-7000.

You are now leaving the Auriemma Roundtables website and being redirected to Auriemma Group.

Go Back Continue