Some lenders in the subprime auto-loan space appear to be raising their underwriting standards, according to Moody’s Investors Service.
This may help quiet down concern that the subprime auto sector is growing too lax in vetting borrowers.
“If the trend continues, loan losses, which have risen among recent originations, may stabilize for the time being among newer loans,” the agency said in a report released today.
Using data from Experian, Moody’s pointed to a few factors that suggest tighter standards. The credit scores of borrowers funding used-car purchases rose in 4Q14 for the first time since 2010; the growth of subprime portfolios among some types of lenders has eased; and interest rates are going up for these riskier borrowers.
The agency said captive lenders upped their ratio of total loans to lower-than-prime loans by 6% in 4Q2014 from a year earlier. Credit unions did the same but by less than 1%. Banks in contrast lowered that ratio by about 1%, thereby slightly increasing the share of less-than-prime loans in their auto loan portfolios.
But the pullback among captive lenders is significant in Moody’s view. This reduces the pressure on independent finance companies to tap ever-weaker borrowers as a way to keep up their lending volumes.
Experian also reported that the scores of borrowers for used vehicle loans edged up to 646 in 4Q2014 from 644 a year earlier. Moody’s sees this potentially reverberating in the subprime segment. “Used vehicle sales have a greater impact on subprime average credit than on prime average credit, because higher proportions of used vehicle loans go to subprime borrowers,” the agency said.
In 4Q2013, lower-than-prime borrowers had taken out 63% of used vehicle loans and 34% of new vehicle loans.
Still, the agency said loan-to-value ratios keep rising and loan maturities keep getting termed out two signs that lenders are still open to risk.
And, while the share of subprime loans fell in the portfolios of some lenders, overall the market is still growing. Moody’s expects origination of subprime auto loans to rise slightly in 2014 and 2015.
The table below shows how origination of subprime auto loans in 4Q2013 roughly matched the sector’s peak in 2007.