OneMain is testing investor appetite for a new kind of subprime auto loan, one that allows borrowers to cash out some of the equity in their vehicles.
A number of lenders, including Avant, Wells Fargo and Santander Consumer, already offer such loans, which feature some unique risks.
OneMain, formerly known as Springleaf Financial, is one of the first to securitize a pool of primarily cash-out refinancing auto loans.
On Friday, it launched OneMain Direct Auto Receivables Trust (ODART) 2016-1, an offering of $400 million of bonds backed by auto loans that it has originated over the past two years. The majority of borrowers, 92%, are taking out a new, larger loan for the purpose of accessing cash, according to rating agency reports.
In an unusual move that may speak to potential investor concerns about the asset class, OneMain hired four credit rating agencies, Moody’s Investors Service, Standard & Poor’s, Kroll Bond Rating Agency, and DBRS, to rate the deal.
It’s not unusual for borrowers to refinance their homes to pull out equity they have built up, either by paying down their original loan or because of home price appreciation. Unlike houses, however, cars and trucks do not generally appreciate over time. In fact, a new car typically depreciates rapidly once a buyer drives it home. That means borrowers often start out “underwater” on their car loans, owing more than the depreciated value of the vehicle.
Most subprime borrowers acquire used cars, so the immediate depreciation is not as marked. Still, taking on additional debt is an additional risk factor for a loan to a borrower with weak credit.
OneMain also offers auto purchase loans, but the vast majority of its customers have responded to mailers and promotions to take out refi loans that allow them to add on more debt.
The vehicles securing the loans in ODART are on average about five years old, with average loan terms of 53 months, That compares to over 70 months for purchase loans originated by subprime lenders Santander, Flagship and First Investors.
Borrowers have the option to tap into the well and take out another loan (which OneMain considers a “renewal” for a new customer) when they pay down enough to free up more available equity to borrow against.
Moody's states in its report that the accelerated prepayment levels through the renewals of OneMain's loans provide a lower rate of default that typical auto loans, plus less exposure to negative credit events. But nevertheless Moody's points to the loan's purpose - a cash-out refi - points to a riskier borrower base.
“The willingness of these borrowers to frequently undertake high APR [annual percentage rate] obligations as a source of cash points to the performance of these loans being potentially volatile,” Moody’s states in its presale report.
Cashing out equity isn’t the only reason that borrowers refinance car loans; some may wish to extend the terms in order to lower their monthly payments. In the case of 20% of Springleaf’s loan originations since 2014, borrowers have borrowed “free-and-clear” loans on a paid-off vehicle, according to ratings agency reports. More than 70% have refinanced to borrow cash against an auto’s value; only 3.4% have refinanced without requesting additional cash above their existing note balance. Only approximately 5% of the loans are purchase loans.
Because of the lack of performance history of OneMain’s auto loans, as well as the limited comparisons to standard subprime purchase loan securitizations, none of the four are willing to assign top ratings to the deal. The senior, at $344.64 million tranche of five-year notes, which benefits from 21% credit enhancement, is rated single-A by Moody’s and S&P and single-A by Kroll and DBRS.
By some measures, however, the loans used as collateral for OneMain’s inaugural deal are less risky than those of some other subprime lenders: they have a higher average weighted FICO score of 609 and the shorter weighted average term (53 months). than those offered by companies like Santander, Flagship and Americredit, according to KBRS.
OneMain’s auto loans feature lower interest rates and longer terms than its hard secured consumer loans. Still, all four ratings agencies were willing to use historical performance data on the consumer loans ($6,000 and up) to forecast and stress-test for cash flow, delinquency and default scenarios on the auto loans.
In the case of DBRS, that allowed the agency to apply a higher credit quality to the pool.
Moody’s noted in its presale report that, so far, at least, the auto loan portfolio is outperforming both its secured personal loan portfolio and other subprime auto loan pools. Nevertheless, it believes that defaults and recovery rates will be difficult to forecast accurately until more data is gathered. “As a result, we expect a higher degree of performance volatility,” the report states.
OneMain renamed itself in March after buying its top competitor from Citigroup for $4.49 billion.
As of March 2016, the company’s direct auto loan portfolio had a principal balance of $877.6 million. In the first three months of the year, it originated approximately $177.6 million of direct auto loans, with an average weighted APR of 17.8% and an average loan size of $15,126.
OneMain had over 2.2 million personal loans (including auto) outstanding representing $12.9 billion of net finance receivables as of December 2015.
The combined Springleaf and OneMain Financial operations include $14.8 billion in consumer net finance receivables, 1,837 decentralized branch operations, including 697 legacy Springleaf branches and 1,140 legacy OneMain offices.
