Late payments on subprime auto loan securitizations are rising rapidly, and increased regulatory scrutiny of both lending and servicing is partly to blame, according to Standard & Poor’s.
The average 30-plus-day delinquency rate for subprime auto ABS bottomed out at 6% in 2011 and had risen by 65% at the end of 2014, to 10.00%.
Looser underwriting is part of the reason. Lenders are lending to a broader segment of the population and marketing loans with higher loan-to-value ratios. But S&P believes that other factors are contributing to the increase in delinquencies because annual net losses, while trending higher than prior years, have not risen to the same extent.
Between 2011 and 2014, annual net losses rose by 36%.
In a report published Monday, S&P said that relatively higher delinquencies are because companies are now giving borrowers more time to make late payments before repossessing the vehicle--sometimes as long as 120 days past due.
In addition, several lenders told S&P that they adopted ‘softer and gentler’ collection practices in response to increased regulatory oversight, which has shed light on alleged fair debt collection violations, the report states.
S&P thinks that strong recoveries on loans that eventually default are also playing a role in keeping losses down, relative to late payments.
Nevertheless, it is only a matter of time before losses catch up to delinquencies. That’s because as loan terms lengthen (some lenders are providing 75-month loans), loan-to-value ratios rise, and off-lease vehicle volumes increase, recoveries are likely to decline.
In addition, S&P believes that losses for most of the companies will continue to rise this year because their delinquencies, generally a leading indicator of the future direction of losses, are all up.
Amy Martin, the credit analyst who authored the report, said that rising delinquencies and losses are unlikely to result in downgrades for investment grade subprime auto ABS, given current trends.