FORT WORTH, Texas -- The number of finance companies servicing customers with risky credit shrank about 20 percent last year, a study shows.
But the ranks of independent finance companies probably will swell again this year as they are able to tap improving credit markets for funds, experts said here this month at the National Automotive Finance Association's annual conference.
Currently, 175 auto finance companies lend to U.S. customers with high-risk credit, reported Benchmark Consulting International, an Atlanta consulting firm for financial institutions.
At the start of 2009 there were 220 independent finance companies specializing in the risky-credit segments, Benchmark reported. Traditionally, this subprime customer has a credit score of 620 or less.
"There was a shakeout last year that continued this year, but the industry is now on the upswing," said Richard Apicella, managing director of the Americas at Benchmark Consulting.
He said some larger players bought smaller finance companies, giving the industry more stable lenders.
The subprime segment also has grown because many workers lost jobs and defaulted on debts, he said. Those losses put those consumers into the high-risk credit category.
As loan demand increases, more lenders are entering subprime financing. Some are newly created companies or companies from overseas, Apicella said.
AmeriCredit, a leader in subprime auto loans, reduced its business substantially during the credit crisis but is now expanding. "More than 40 percent of the population could be considered below-prime credit," said Dan Berce, CEO of AmeriCredit Corp., of Fort Worth. "Unless they're in an area of great mass transit, they have to have transportation to suit their needs."
Berce said his business also is getting a boost from the thawing credit markets. AmeriCredit raised $1.4 billion this year by selling auto loans as securities to investors.
Amy Martin, a senior director with Standard & Poor's, told the finance association's conference that lenders were unable to securitize subprime auto loans last year. But she said that in 2010, five subprime auto loan transactions have been completed.
Independent finance companies rely on the securities market to raise funds to write more loans, so its recovery also is likely to revive subprime lending.