Automakers shrug off subprime worries

In December, the auto industry's share of subprime financing, excluding GM, was 6.3 percent, up from 5.2 percent a year ago, GM says.

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Mega used-car retailer CarMax Inc. caused a stir on Wall Street late last month when it told investors it would start buying some of its own subprime auto loans in part because its preferred lenders had dialed back on aggressive subprime offers.

The comment prompted analysts and reporters to ask automakers about the health of subprime lending last week during the companies' conference calls announcing year-end sales results.

Executives for General Motors, Ford Motor Co. and Toyota Motor Sales U.S.A., during separate calls on Jan. 3, all denied any widespread pullback in subprime.

"We're not really seeing that," said Kurt McNeil, GM vice president of U.S. sales operations. He noted that subprime is rising, saying that in December the industry share of subprime financing, not counting GM, was 6.3 percent, up from 5.2 percent a year ago. For GM, he said, subprime accounted for 7.5 percent of sales volume. GM defines subprime as credit scores 620 or below.

Toyota Division General Manager Bill Fay, while not providing numbers, said Toyota hasn't noticed much change in subprime. "On average we do less of that subprime business than maybe others in the industry," he said.

Ford Motor Co., also without disclosing a number, said its subprime share was "consistent."

During CarMax's Dec. 20 conference call with investors, CEO Thomas Folliard said the company's preferred subprime lenders had become somewhat less aggressive.

"Look, a number of times over the last several quarters we've said that our subprime providers have gotten more and more comfortable and more and more aggressive with the CarMax origination channel," Folliard said, according to a transcript of the call posted on SeekingAlpha.com. "It just makes sense that, at some point, you'd bump up against some performance metric and probably have to scale back a little bit."

CarMax CFO Thomas Reedy said during the call that CarMax's move to buy some of its own subprime loans had been in the works for a year and was "not a reactionary move at all."

CarMax said it would launch a pilot program for its existing finance subsidiary, CarMax Auto Finance, to start originating a limited volume of subprime loans instead of referring them to its preferred lenders in the subprime space.

Starting in the fourth quarter of 2013 through 2014, the company expects CarMax Auto Finance to originate about $70 million worth of subprime loans, or about 2 percent of CarMax Auto Finance volume in 2013.

"Customers with challenged credit have become a meaningful part of our overall business, and they're a meaningful part of the used car market, so we feel like we owe it to ourselves to get smarter about this space," Reedy said.

According to Reedy, third-party subprime providers accounted for about 18 percent of CarMax sales in the third quarter of 2013, up from 15 percent a year earlier.

Said Folliard: "When this was 3 percent or 4 percent of our business, it wasn't as big of a discussion point. But when it's 15 percent plus, we have to look at what's in the overall best interest of the company. So this is just a step in that direction to really learn more about the segment."

A CarMax spokesperson told Automotive News this week that CarMax's preferred subprime lenders are American Credit Acceptance in Spartanburg, S.C., and Dallas-based Drive Financial Services, a unit of Santander Consumer USA. The spokesperson referred all other questions to the Dec. 20 conference call transcript. Both lenders also declined to comment when contacted by Automotive News.

You can reach Jim Henry at autonews@crain.com.

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