Subprime Shrinks, Delinquencies Rise

In today’s high-price, rising interest rate environment, the subprime share of auto loan originations continues to shrink and delinquencies among younger borrowers are on the rise, researchers for the New York Federal Reserve Bank say in their first-quarter Report on Household Debt and Credit.

Over time, those trends could have a more significant impact on brands and dealers with a higher share of buyers with low credit scores, according to a separate Cox Automotive analysis.

For example, new-vehicle loans for Nissan, Ram, Volkswagen and Chevrolet carried above-average annual percentage rates as of January 2023, a likely sign those brands cater to a higher share of borrowers with lower credit scores, Cox says.

Brands with lower average credit scores “might be more vulnerable” in the event of a severe recession, Charlie Chesbrough, senior economist for Atlanta-based Cox Automotive, says in a webinar.

On May 15, a researcher for the New York Fed said that, on average, auto finance looks healthy, even though origination volume was down for the first quarter, and some warning signals such as auto loan delinquencies have increased.

That’s happening as the auto industry recovers from the COVID-19 pandemic and the ongoing computer chip shortage. New-car production is gradually on the rise.

Delinquencies were trending downward when new and used-vehicle inventories were lower. With customers waiting in line, automakers and lenders didn’t have to cut prices to gain volume. The share of borrowers with high credit score increased.

According to the New York Fed report, U.S. auto originations, including new and used, loan and lease, were $161 billion for the first quarter, down 8.74% vs. a year ago. But originations to borrowers with subprime credit, defined as credit scores below 620, were $23.4 billion, down 15.5%.

“In terms of these younger borrowers, it’s something we’re keeping an eye on,” a researcher says in a conference call with reporters.

“We are seeing larger numbers transitioning into serious delinquency, particularly among the youngest borrowers,” the researcher says. The New York Fed has a policy of not quoting individual researchers by name.

The New York Fed defines “serious” delinquency as 90-plus days overdue, a point at which a loan is likely to be written off. Each quarter, the bank measures “transition into serious delinquency.” That is, the percentage of loans that were already delinquent, which pass 90-plus days in a given quarter.

For the first quarter, about 4.6% of loans to borrowers aged 18 to 29 who were already delinquent passed the 90-day delinquent mark, the New York Fed says, up from 3% a year ago.

That’s a significant increase in absolute terms, but percentagewise it’s pretty close to the average increase in transition across nearly every age group. For the whole industry, about 2.3% of delinquent borrowers transitioned to 90-plus days in the first quarter, up from 1.6% a year ago, the New York Fed says.

Meanwhile, in their first-quarter earnings reports, some publicly traded, new-car dealer groups say they can consistently get customers with lower credit scores financed, but dealership F&I managers may have to work harder at it, shopping contracts to a higher number of auto lenders.

David Hult, president and CEO of Asbury Automotive Group, Duluth, GA, says in a conference call last month that subprime loans account for about 7% of volume at Asbury, down from an average share of about 10% historically.

“We have over 250 lenders that we’re signed up with. So, we have a lot of options,” Hult says. “As you can imagine, with those number of lenders that we have, certainly, some have tightened up their practices compared to others.”

However, given enough lenders to choose from, he said, “we just don’t have an issue seeking lending.”