Subprime auto lender Credit Acceptance Corp. is marketing another securitization of dealer advances and consumer loans, in the aftermath of its pioneering founder’s retirement and the launch of yet another government investigation of its consumer practices.
The $350 million Credit Acceptance Auto Loan Trust (CAALT) 2017-1 is the ninth U.S. subprime auto ABS offering of the year, and has a preliminary triple-A rating from bond rating agency DBRS that was released Thursday.
CAC’s deal is the fourth launched this week – including a new $225 million deal by Houston-based First Investors Financial Services that on Thursday was also granted provisional ratings in a pre-sale report by Kroll Bond Rating Agency.
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This CAALT 2017-1 includes a $326 million Class A note series, $65.5 million in Class B notes (rated ‘AA’ by DBRS) and $48.5 million in Class C notes (‘A’).
Like its previous deal, CAALT 2017-1’s collateral is mostly comprised of dealer advances rather than indirect consumer loans. With most subprime lenders, companies will underwrite finance contracts for borrowers through dealers and acquire the loans for servicing.
CAC instead finances both franchise and independent car dealers (including the “buy here, pay here” variety) with upfront dealer advances that are secured by consumer loans. CAC services the consumer notes for up to a 20% fee of collected notes, and the dealer’s 80% advancement is repaid through consumer collection receivables to CAC. Dealers receive a holdback fee from CAC after the advance is fully repaid.
The dealer advances in the latest deal comprise 77.9% of the $737.7 million consumer notes pool balance, with the remainder for consumer notes it has purchased on a limited basis from dealers.
The level of dealer advances is lower than CAC’s most recent transaction
The pool includes a large number of defaulted loans totaling $148 million, of which CAC attempts to cover through collection activity that involves wholesale auction sales of repossessed vehicles and the use of third-party collection agents (or lawyers) when vehicles sales are insufficient to pay the balance owed.
The report from DBRS did not provide collateral details of the vehicles being financed to support the dealer advances, but noted the average used car loan is only $9,165 – less than half the average original loan balances that lie between $17,246 and $20,976 for newer vintage vehicles included in recent deals by subprime lenders Flagship Credit Acceptance, Santander Consumer USA, AmeriCredit and First Investors.
The Class A notes are supported by initial credit enhancement of 61.2%, slightly lower than the CAALT 2016-3’s level of 64.1%. DBRS forecasts a cumulative net loss of 23.5%.
CAALT is CAC’s 20th term ABS securitization, along with 10 bank-sponsored facilities, that the company has placed in the market since 1998. This is the first securitization without chairman and founder Donald Foss, who in January retired from the company’s board of directors.
Foss launched the Detroit-area firm in 1972 as an early forerunner to the subprime auto loan industry. The company went public in 1992, and Foss led the company as chief executive in 2001. At the end of 2016, CAC had a market cap in excess of $4.5 billion.
While innovating the subprime lending field (Foss was added to an industry’s “Buy Here, Pay Here” hall of fame in 2015), Foss and CAC’s management have run into legal hurdles with regulators in recent years. According to Bloomberg, CAC has been hit with at least five state and federal investigations into its origination, lending and collections practices since December 2014.
The company is now facing a new investigation by the Federal Trade Commission that CAC disclosed in an SEC filing last Friday. CAC announced it received a civil investigative demand in November from the FTC over the installation of GPS-enabled “start interruptor” devices on consumers’ cars. The devices allow dealers to disable cars remotely due to late payments and repossess them, often to feed a business model that churns older vehicles repeatedly through the sales channel to other customers with poor credit histories.
First Investors
First Investors debut 2017 securitization is a series of six fixed-rate notes secured by the receivables of 9,971 used subprime car loans with a principal aggregate balance of $200 million. The transaction includes a $25 million pre-funding account.
The capital structure includes a $130 million Class A-1 tranche due 2021 and a $38.41 million series Class A-2 notes due 2022. Both have preliminary ‘AAA’ ratings from Kroll.
According to a presale report from KBRA, the loans issued through its network of 2,121 franchise dealerships have an average size of $20,058, an interest rate of 13.64% and original term lengths of 70 months. The weighted average borrower FICO score is 587, slightly lower than those of subprime lenders like Flagship and Santander Consumer USA.
One of the key changes from First Investors’ most recent deal in 2016 was a greater concentration of direct-loan refinancings in the pool. Last year more nearly 87% of the loans were indirect loans through dealers; the latest transaction has that reduced to 78.47%.
