In the midst of increased government and media scrutiny, parts of the subprime auto sector are facing a new critique: Fitch Rating’s view that contagion risk is rising in the industry.  

The agency put out a report today contending that problems arising in one lender could “quickly spread” to others.

In Fitch’s view, the chance of a domino effect is higher than in other asset classes used as collateral in securitizations. Brisk competition among lenders is fueling this risk, as some of these firms are relying heavily on securitization to grow fast.

“Those lenders that have become overly reliant on securitization face excessive exposure  to  market volatility, which could ultimately affect investors and customers,” the agency said. Losses are also more volatile in subprime than in the prime sector.

Due to the perceived risks hovering over this high-growth sector, Fitch has imposed an ‘Asf’ cap on most subprime auto deals. But so far the agency has rated transactions sponsored only by GM Financial (AMCAR vehicle), Santander Consumer USA (SDART) and Ally Financial (CARAT) from a total of 20 subprime auto lenders which have lately been securitizing their loans.

Fitch believes that if the credit lines and private equity support were pulled from several smaller lenders at the same time, larger lenders may not see an advantage in acquiring them. This would leave them “stranded and their borrowers under-serviced,” the agency said, comparing such a scenario to an analogous event that hit subprime auto, equipment leasing and franchise lending in the late 1990s.

Despite the risks, Fitch believes media reports suggesting that a collapse of the sector could have an economic impact akin to that of the subprime housing crisis are vastly overblown. 

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