Subprime lending begins slow rebound

The subprime auto finance business has begun a slow recovery following a recession-spurred slump, the National Automotive Finance Association says.

Last year's late payment and repossession rates still topped those of 2007, the association said in its annual study. But stricter credit standards and an improving U.S. economy at the end of 2009 brought slight improvements to the subprime sector.

Financing to people with tarnished credit is especially critical to car dealers reeling from the lowest demand for autos in nearly three decades because that segment of the loan market is growing, said Richard Apicella, managing director of the Americas for Benchmark Consulting International, the Atlanta firm that conducted the study. Many people who were once prime credit risks lost their jobs or went through mortgage foreclosures, plunging into the risky credit category, he said.

NAFA reports two key improvements:

• The rate of new- and used-vehicle repossessions was 11.07 percent in 2009. That was down from 12.63 percent in 2008 but above the 10.64 percent reported in 2007.

• The 60-day delinquency rate on loans for new and used autos also declined. In 2009, 3.09 percent of the accounts were 60 days past due, down from 3.12 percent in 2008. The figure was 2.86 percent in 2007.

Other data from the study suggest the industry's recovery will be slow and gradual.

The percent of new and used auto loans that were 30 days past due climbed last year to 6.87 percent from 6.76 percent in 2008 and 6.12 percent in 2007.

Personal bankruptcy rates also rose slightly, the study said. And subprime lenders reported larger losses when borrowers went bankrupt.

Dealer profits dip

The average dealer finance profit on a subprime loan was $330 in 2009, down from $382 in 2008 and $394 in 2007.

That stemmed from lenders lacking funds during the credit crisis and cutting back on their volume, says Mark Floyd, a veteran of the subprime finance business who is now CEO of Exeter Finance Corp. in Irving, Texas.

"They needed to preserve their capital and paid less dealer participation," Floyd said.

The credit markets have opened up, giving lenders more liquidity. But Floyd isn't sure dealer profits will rebound. There are fewer subprime lenders competing for dealers' business because some went belly up or merged. And after the credit crisis, the survivors remain conservative.

"We're not going to compromise our profitability," Floyd said. "We're going to get the business we want and the profitability we want, and the big guys are taking the same approach."