That's the opposite of how things were during the credit freeze of the last recession and its aftermath -- roughly late 2008 to part of 2010. Investors closed their pockets. Many subprime lenders had trouble raising funds at almost any price. Several companies cut back or sold out. Dealers found it difficult to find a buyer for subprime loans.
"Ten years in this business is like 70 years -- it's like dog years, right?" joked Tommy Moore Jr., chairman of First Investors Financial Services in Houston. Moore co-founded the company in 1988.
Like many other lenders, First Investors is rebounding after cutting back drastically during the latest recession, which hit subprime lenders particularly hard. First Investors CFO Bennie Duck said last month the company had more than 1,100 franchised new-car dealerships signed up.
That's almost double the number of dealerships First Investors had just a year ago, but it's still short of the 1,300 or so it had before the recession, Duck said. "We are adding about 75 to 100 dealers a month," he said.
Private-equity firms are investing in subprime auto lenders. For example:
- New York financial services firm Perella Weinberg Partners launched CarFinance Capital in May 2011. Perella Weinberg also purchased control of Flagship Credit Acceptance in 2010. In July, Flagship raised money for the first time since the Perella Weinberg investment by selling off car loans in the securitization market, a deal worth $109 million.
- Blackstone Group, a New York-based private-equity firm, bought Exeter Finance Corp. in August 2011, with plans to take it nationwide from 13 states in early 2011.
- Also last year, investment funds affiliated with Warburg Pincus, Kohlberg Kravis Roberts & Co. and Centerbridge Partners bought 25 percent of Santander Consumer USA of Dallas for $1 billion.
Santander Consumer USA isn't an independent finance company, but its predecessor company was. The original U.S. business got its start in the mid-1990s as an independent subprime specialist. In 2000, the group became Drive Financial Services. Spanish banking giant Banco Santander bought out Drive Financial Services in 2006.
While others cut back, Santander Consumer USA grew through acquisitions. For example, it bought Triad Financial Holdings in 2009. In 2010, it bought part of HSBC Finance Corp.'s auto loan portfolio, plus its auto loan servicing operations.
Another subprime giant, GM Financial of Fort Worth, Texas, was the independent lender AmeriCredit Corp. until GM bought it in 2010.
Besides private equity investment and mergers and acquisitions, another key factor in the rise of the independents is the comeback in the market for asset-backed securities, which is how many subprime auto lenders traditionally raised funds to make new loans. The securitization market almost completely dried up in 2008 and 2009.
Securitization is the financial practice in which a lender sells the income from a bundle of loans to investors. While the lender gets less interest than it would if it collected the loans, it gets money to make new loans. In effect, it's as if the lender borrowed money from the investors.
According to Standard & Poor's Ratings Services, through July of this year subprime auto lenders sold $10.7 billion worth of asset-backed securities. That was a 43 percent increase from the same period a year earlier.
"A lot of issuers report they are seeing a record low cost of funds on their ABS transactions," said Amy Martin, senior director for structured finance ratings at S&P.
"Interest rates are low to begin with. There's also a lot of demand for auto loan ABS, in part because this asset class held up well in recessionary periods. These assets pay fast. They are short-term. And there are not a lot of alternatives out there," she said.
That's because investors have soured on several other potential investments, such as subprime mortgages.