Dealers' response: What stampede?
Santander Consumer USA, which had led the rush, has started to look for alternative niches, such as motorcycles or recreational vehicles.
“Prices and credit are heading in a direction we wish they wouldn't go so quickly,” said Tom Dundon, CEO of Santander Consumer, at the Auto Finance Summit here hosted by Royal Media Group. “There's a lot of money chasing the market again. The only way to grow is to lower price, to take more risk, to get more volume. That's the only way.”
That's a sharp change from Santander Consumer's recent strategy of growing by acquiring subprime loan portfolios from other lenders eager to exit the business. “In our opinion,” the days of other lenders abandoning subprime lending, and thus creating opportunities for Santander Consumer, are “over,” Dundon said.
Lower prices and lenders willing to take on more risk sound good to dealers. They say their subprime customers are starved for credit. Indeed, a couple of dealers on a panel at the conference disagreed with Dundon. The dealers said they're not experiencing any rush to serve those customers, especially in the segment just below prime.
Don Forman, dealer principal at United Nissan in Las Vegas, pointed out the plight of customers in the near-prime 580 to 640 credit-score range. “It's really important for the financial health of the dealer body” that those customers get loans, he said. “Right now, they are underserved.”
He said lenders should be able to show more discretion in the current sluggish economy, where some consumers are better risks than their current credit score indicates.
“I'm in the largest foreclosure market in the country,” Forman said. “I've got people with 15 years in the same job, who are now renting. They had a 700 score a year ago, and now it's 580. Is that truly a subprime deal? Dealers would say that's a pretty good deal. Lenders would have a question whether that's a good risk.”
Josh Aaronson, who owns Yonkers Auto Mall in Yonkers, N.Y., said he's not seeing any rush into subprime, either.
On a national level, though, it's clear that subprime lending is growing again.
Santander Consumer, a Dallas subsidiary of Spanish bank Banco Santander, has made billions of dollars worth of acquisitions in the subprime segment. As recently as June, Santander bought $3.2 billion in loans from CitiFinancial Auto and entered into an agreement to service another $7.2 billion worth that Citi will retain. In March, Santander completed the takeover of the former auto-loan servicing operations of HSBC Finance Corp. and part of HSBC's auto loan portfolio. Before that, in October 2009, Santander bought Triad Financial Holdings.
“In the last couple of years, we've had a pretty good run,” Dundon said. “We've been able to take advantage of the disjointed market.”
Between acquisitions and its own growth, Santander's U.S. market share in the second quarter of 2010 was up more than sixfold from the year-ago quarter, data from Experian Automotive show.
Another major subprime player, AmeriCredit Corp., originated five times the volume of loans in the second quarter than it did in the year-earlier quarter. AmeriCredit was acquired by General Motors Co. and became General Motors Financial Co. on Oct. 1.
New entries in subprime include New York investment firm Perella Weinberg Partners, which recently bought control of regional auto lender Flagship Credit Acceptance of Chadds Ford, Pa., with plans to expand nationwide.
Calling it a day
“The time when you could buy low and sell high is past,” Dundon said at last week's conference.
In pursuit of higher volume, Santander Consumer last month in effect lowered its prices to dealers. Dundon said in a separate interview that the company was passing along savings it achieved from a lower level of bad loans. He said the lowered prices, an attempt to grow existing business, dovetails with the end for now of its strategy of acquisitions as a path to growth.
Dundon said at the conference that despite more competition, he would draw the line at purposely taking on more risk without pricing accordingly. “We are prepared to lose as much market share as we need to maintain the right risk-return ratio,” he said.
“We want to make sure we're able to walk away a little bit. We want to get into [lending in] other asset classes. A loan's a loan.”