DriveTime plans first subprime auto ABS following CFPB settlement

DriveTime Automotive Group plans to issue a $265-million securitization of subprime, used-vehicle loans.

The deal, DT Auto Trust 2015-1, is the issuer's firstsecuritization since it reached an $8 million settlement with the Consumer Financial Protection Bureau (CFPB) last November.

On offer are $130 million of senior bonds, rated a preliminary triple-A by Standard & Poor’s and DBRS. The notes are due September 17, 2018.  At the junior level, the trust will offer $31.5 million of double-A-rated class B notes due April 2019, $52.5 million of single-A-rated class C notes, due November 2020 and $51.6 million of triple-B-rated class D notes due February 15, 2022.

Wells Fargo Securities is lead underwriter on the deal.

The latest securitization pool has a high concentration of long term loans (86.3%), which is in line with prior Drive Time transactions, according to the presale report. Long-term loans — those with terms of 61 months and over — are generally riskier than the shorter-term variety because they take longer to pay down. However, 67.29% of the long-term loans backing the deal have received one of the top three credit grades of Drive Time’s internal scoring system.  

The company has over 22 years of history originating, underwriting, and servicing subprime auto loans and a 19-year history of securitizing subprime auto loans. DriveTime operates in the deep subprime market, lending to consumers with FICOs of less than 550. Roughly 20% of its borrowers have no FICO score.  

DriveTime isn’t one of the subprime financing companies targeted by the Department of Justice’s ongoing investigation into several subprime lenders and securitization practices. However the issuer has dealt with legal woes stemming from a CFPB-led investigation into its collection- and credit-reporting tactics.   

On Nov. 17, 2014, DriveTime reached a settlement with the CFPB. The settlement requires the company to pay a civil money penalty of $8 million; refrain from certain allegedly unfair debt collection practices — such as calling the borrower's workplace or third-party reference after being told not to call; and correct any inaccurate credit reporting information.

In addition, the settlement requires the company to implement specified changes in servicing practices and allow the CFPB to monitor compliance with the consent order for five years.  

S&P noted in its presale that the company has successfully changed its operating strategy from a “buy-here, pay-here concept," to “a buy-here, pay-centrally concept," which removes collections from the dealerships to centralized payment collections. The shift in collections “provides better protection to investors in the event of a servicer transition or the company's bankruptcy,” according to the presale.

The company also no longer relies heavily on workplace and reference contacts. In addition, 100% of vehicles financed by the issuer going forward and approximately 94% of the current managed portfolio have GPS devices with payment reminder functionality, which S&P said "should continue to improve call-back rate on late delinquency accounts and reduce time for repossession. We believe the company will be able to continue to effectively service the loans."

DriveTime has a strong earnings history and capital position, with approximately $467.9 million in equity as of Sept. 30, 2014 ($488.0 million as of Sept. 30, 2013), which supported assets of $2.9 billion for an assets/equity ratio of 4.6x and a net debt/equity ratio of 3.1x. Three lenders provide warehouse funding.

In June 2014, the company issued $400 million of 8.00% senior secured notes with a June 15, 2021 maturity date to retire its $250 million 12.625% senior secured notes with a June 15, 2017 maturity date. The company recorded a $22.0 million loss associated with the early tender in the second quarter of 2014, which partly contributed to its equity declining.

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