Some Lenders Relax Standards Too Much, Dealer Says

Vehicle financing “started off the year with a bang,” says Melinda Zabritski, senior director-automotive financing for credit tracker Experian.

But some industry people worry heightened competition among lenders could blow up in their faces if there’s a surge in car-loan defaults. Others say there’s no need to fret.

Certain lenders are doing questionable things, such as relaxing credit standards to get dealers to steer business their way, says Joe Castle, dealer principal of the Castle Auto Group in Chicago.

The automotive-lending industry went into a deep freeze in 2009, a result of the nationwide financial crisis. But now car lending seems a bit too free flowing, with some aggressive lenders failing to properly vet credit-challenged consumers seeking loans, Castle says.

“What worries me is that I’m seeing lenders waiving stipulations (i.e. proof of employment and residency) on 550 (subprime) credit scores,” he says at a recent American Financial Services Assn. conference.  

“That bothers me, even though business is good right now,” he says. He advises hungry lenders: “Don’t be a greedy pig, because you might get slaughtered.”

Notes Elizabeth Webb, a vice president at Exeter Finance: “There’s a lot of competition in the market.”

The total balance of open auto loans increased 11% in the first quarter of 2016. It surpassed the $1 trillion mark for the first time on record, Experian Automotive says in its latest Automotive Finance Market report.

“With more and more consumers relying on financing, it is important for lenders to keep a close eye on delinquency trends to ensure the market remains healthy,” Zabritski says. “Likewise, consumers need to continue making their monthly payments on time to keep affordable financing options open and available.”

Experian says the first quarter showed slight increases in both 30- and 60-day delinquency rates, but the overall percentage of total delinquent loans remains relatively low when compared to pre-recession levels.

Thirty-day delinquencies in the first quarter were 2.1%, up from 2.02% for the same period last year. Sixty-day delinquencies went from 0.57% to 0.61%.

“Default rates are super low,” says Forrest McConnell, 2015 National Automobile Dealers Assn. chairman and head of McConnell Honda/Acura in Montgomery, AL.

Creditors should know enough not to give auto loans to people whom other lenders rejected, he says at the AFSA conference. “If you are buying paper no one else is buying, you can get burned. If you’re doing that, stop it.”

Some leery industry observers fear the possibility of a bubble bursting in the subprime vehicle-financing sector. They draw a parallel to the recessionary mortgage defaults.

Andrew Stuart, president and CEO of TD Auto Finance, waves off that comparison.

“A lot of it is hype,” he says. “There’s not a bubble like there was with the mortgage crisis. The fundamentals are different. Mortgage securitization back then had no value.”

Moreover, when subprime-mortgage defaults were rampant during the recession, auto-loan performance remained relatively strong. That’s because many financially distressed consumers make their car-payment obligations a higher priority than paying their mortgage.

Using remote-control devices during electronic polling at the AFSA’s annual Vehicle Finance Conference, 54.5% of attendees say they expect their origination volumes to rise this year. Most predict delinquencies with nudge up.

Castle speaks of the vagaries of the auto industry. “The car business is strange. You never know what will happen until it hits you on the forehead. But right now, business is good.”

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