Driveway Finance Corp. has launched its first auto loan asset-backed security (ABS) that pools loans to used and new car buyers concentrated in five states and who have sub-700 average FICO scores.
The inaugural $344.39 million LAD Auto Receivables Trust 2021-1 (LADAR 2021-1) is split into four tranches: a $282.77-million piece rated ‘AA’ that provides credit enhancement (CE) of 23.9 %; a $18.34-million portion rated ‘A’ with CE of 18.9 %; a $26-million piece rated ‘BBB’ with CE of 11.8 %; and a $17.24-million, ‘BB’-rated piece with CE of 7.1%, according to the Kroll Bond Rating Agency (KBRA) in a Nov. 15 pre-sale report.
The deal will be sponsored, sold, and serviced by Oregon’s Driveway Finance Corporation (DFC), formerly known as Southern Cascades Finance Corp. DFC’s parent company, automotive retailer Lithia, has been in business for more than 75 years, operating DCF for about a decade. DCF shares its senior management team with Lithia. Lithia is a Fortune 500 company that operates 277 dealership locations in 27 states in the U.S. and three Canadian provinces. Lithia has assets worth $10.2 billion and equity of $4.5 billion.
As of September, the pooled loans’ average principal balance was $30,617, and each loan contract had an annual percentage rate (APR) of at least 2.54% and as high as 27%. Sixty-one percent of the cars are used, the rest are new. The borrowers’ have a non-zero weighted average FICO score of 669.
The borrowers include a hefty number of subprime customers who may have limited incomes and spotty credit histories, KBRA noted. Subprime lending is under scrutiny by the Consumer Financial Protection Bureau and state regulators for predatory auto-lending practices.
Last month, prominent investor Steve Eisman pegged Credit Acceptance Corp. as his new big short, based on a belief the subprime auto lender and its industry may come under closer CFPB scrutiny under the new administration. Analysts are taking note, as well.
The perception of lenders engaging in predatory lending could cause the capital providers to leave the subprime market in an economic downturn, KRBA said, adding that could in turn impact the financial position and liquidity of the company.
Post-pandemic issues including supply-chain bottlenecks, changing consumer behaviors, and a tight-labor market could worsen during the term of the securitization, the report cautioned. In addition, rising auto prices are prompting borrowers to use longer-term loans, leaving them more vulnerable to economic downturns during the repayment period.
The top five states by principal balance — Texas (32.6%), California (22.6%), Florida (9.23%), Oregon (7.32%) and Nevada (5.4%) — make up 77 % of the collateral pool.
