After the crunch: A look at subprime's recovery
 | Ken Baruth, Toyota Financial Services: "We have some customers with a score less than 500. We are here to finance brand loyalty." |
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These days, dealership finance exec Rhonda Bystry isn't struggling as much to get subprime customers financed.
"It's easier now than it was a year ago," says Bystry, corporate finance director for the Royal Automotive Group in Tucson, Ariz.
Dan Thomas, subprime director at Larry H. Miller Nissan in Mesa, Ariz., agrees. "It's getting back to where there's a good selection" of lenders with more competition, he says.
The subprime market is coming back. Dealerships are finding credit more available now than during the height of the credit crunch in late 2008 and early 2009. There are some new subprime lenders, and all are more willing to lend, but their finance requirements may be stiffer than before. Even some captives are more willing to get involved in subprime. How do the players feel about subprime's future? Lenders are cautious, and dealers are optimistic.
More applicants
Dealers and lenders are seeing more subprime applicants this year. For instance, Chase Custom Finance, the subprime arm of Chase Auto Finance, had an 18 percent increase in subprime applications from July 2010 to July 2011.
Melinda Zabritski, director of automotive credit at research firm Experian Automotive, confirms that subprime has grown industrywide: The first quarter of 2011 was the fourth in a row with a year-over-year increase in the percentage of loans that were subprime. But, she says, "We're still nowhere near where we were several years ago."
Even so, subprime loans accounted for 40.8 percent of all auto financing in the second quarter of this year, according to Experian. The sector growing the most is consumers with credit scores of 550 to 619, up 18 percent from last year. That group makes up 14 percent of all auto financing.
The current subprime rate is far below the peak of 46.2 percent in the second quarter of 2007 but up from the second-quarter low of 37.2 percent in 2010.
New players, terms
Here's what has changed in subprime auto finance since the credit crunch:
-- Lenders have exited and entered the subprime market. Triad Financial Holdings was bought by Santander Consumer USA, which also took over HSBC's subprime business. United Auto Credit Corp. closed many of its branches, then re-entered the market in 2010 and continues to grow.
This year, Triad founder and CEO Jim Landy launched CarFinance Capital LLC in partnership with an affiliate of financial services firm Perella Weinberg Partners. In August, investment and advisory firm Blackstone Group bought subprime lender Exeter Finance Corp., giving Exeter greater access to capital.
-- Credit is more available for subprime customers. Right after the crunch, says Steve Levi, finance manager of Goodson Acura in Irving, Texas, it was hard to get subprime customers financed. Gradually, it has become easier. Before, some banks would consider only customers with scores of 640 to 680, Levi says. "Now, they'll do from 580 to the low 600s."
-- The range of subprime buyers' credit scores has risen. That's because more customers with good credit histories have lost their jobs or had other problems such as mortgage modifications. Most lenders now define subprime buyers as those with scores below 620 and label customers in the traditional nonprime range of 620 to 679 as "near prime."
-- Lenders are more cautious. They're not advancing as much over vehicle value as they did even a year ago, according to the 2011 survey of nonprime lenders by the National Automotive Finance Association. Average loan-to-vehicle value dropped to 111 percent in 2010 from 117 percent in 2009.
Kyle Birch, executive vice president of dealer services at GM Financial, says there are more subprime customers than ever and more approvals. GM bought AmeriCredit last fall and renamed it GM Financial. "From a lender's perspective, there's a well-disciplined approach to making a decision on those nonprime customers," Birch says. "We're going to keep the loan-to-value in check, and the payment-to-income."
-- Lenders are more flexible. Even while they're cautious, some lenders will consider individual applicants that might not seem at first like good prospects. Bystry, Royal Automotive's finance director, uses three lenders -- Tidewater Motor Credit, Prestige Financial Services and United Auto Credit -- that will work with customers in bankruptcy, she says.
Bystry also has arranged financing for customers who may not even have a credit score but may have a $3,000 down payment and a loan-to-value under book value. Santander and Capital One will finance consumers with foreclosures, says auto finance consultant Gary Dirstine.
Geoff Crossley, finance director for seven stores in and around Elmira, N.Y., gets a lot of subprime financing from Ally Financial Inc., formerly GMAC Financial Services. He says Ally is financing customers it would not have considered previously, such as those with scores of 550.
Another example of flexibility: Credit evaluations are becoming less automated. Finance manager Levi says he has found that many more credit applications are being evaluated by people rather than by a computer. Chase and Toyota Financial Services say they don't use automated decision making.
-- Captives offer a range of subprime to build brand loyalty. "We have some customers with a score less than 500," says Ken Baruth, vice president of risk and dealer credit at Toyota Financial. "We are here to finance brand loyalty."
Says consultant Dirstine: "GM buying AmeriCredit shows they want to have programs available for a wider range of credit customers."
-- Loan terms are longer to make payments lower. Average terms rose 6 percent from 2009 to 2010, though they're still at only 53 months, according to the automotive finance association.
Bill Jensen, custom finance business executive at Chase Auto Finance, says cautious buyers are being more careful about the payment amount, which can mean longer terms. But Experian's Zabritski says that because advances are now more well-managed the industry is not creating a new crop of upside-down customers, or customers who owe more on their vehicles than the vehicles are worth.
-- Delinquencies and repossessions are at near-record lows. Annualized 30-day delinquencies fell 15.6 percent from 2009 to 2010, the automotive finance association says. "That's because the lenders have done a good job of vetting the loans they've put on the books, and the performance of those loans is very good," says Peter Turek, automotive vice president of TransUnion's financial services group. When there are repos, Chase's Jensen says, "loss performance has been somewhat mitigated by higher used-car value."
| How they score | |
| Risk Tier | Credit score |
| Superprime | 740-plus |
| Prime | 680-739 |
| Nonprime | 620-679 |
| Subprime | 550-619 |
| Deep subprime | below 550 |
| Source: Experian Automotive Scorex PLUS credit scores | |
Looking ahead
What's next for this niche? There are plenty of subprime consumers, but whether they will have the confidence to buy a car in this shaky recovery is unclear.
"There's certainly a possibility of a double-dip recession," says Capital One Auto Finance President Kevin Borgmann. "We don't have predictions for a big uptick in demand."
On the ground, some dealers have a different view. Says finance director Crossley: "The subprime market's going to explode."
2007: 46.2%
2008: 42.0
2009: 37.8
2010: 37.2
2011: 40.8
Source: Experian Automotive
