The U.S. subprime auto market continued to expand for the fourth consecutive year in 2014, but the smallest lenders posted by far the biggest gains in portfolio size and value, according to the National Automotive Finance Association’s 2015 Non-Prime Automotive Financing Survey.
The association is a trade group for lenders that specialize in higher risk auto loans.
The survey’s record 45 participating companies consisted of five large lenders (more than 100,000 accounts), 21 medium-sized lenders (10,000 to 100,000 accounts) and 19 small firms (fewer than 10,000 accounts).
Overall, the financial institutions surveyed reported a 17 percent jump in the value of their portfolios in 2014. A more conservative estimate by Experian Automotive pegged the market expansion at 12 percent to $338 billion compared with gains of 13 percent in 2013 and 10 percent in 2012.
Results by size
But the growth varied sharply by the size of the institution.
Last year, small lenders boosted applications 68 percent, volume of new contracts 20 percent and dollar value of new loans 31 percent. In those categories midsize companies posted advances of 41 percent, 12 percent and 18 percent, respectively. For large institutions the increases were 18 percent, 4 percent and 13 percent.
But if smaller institutions got more business, their returns on that business lagged that of their larger brethren.
Average profitability among survey participants dropped 20 percent year over year, the association said. The average 3.1 percent return on assets seen by small companies lagged big lenders’ 6.1 percent and midsize institutions’ 3.9 percent.
The repossession rate climbed to 12.6 percent in 2014 from the year before. Large lenders continue to enjoy considerably lower than average repo rates. And while big companies were able to hold their cost of funds to 1.8 percent last year, small and medium lenders paid an average of 3.7 percent and 3.6 percent, respectively.
Operating expenses jumped at finance companies of all sizes for an average increase of 10.5 percent year over year.
Pickier about customers
Subprime lenders got pickier last year. But small banks still approved a much larger proportion of loan applications received: 14.5 percent compared with 7.3 percent at midsize lenders and 3.8 percent at the biggest companies.
But the difference had been even sharper in 2013 when small institutions green-lighted a whopping 19.4 percent of loan requests.
The largest lenders were able to achieve greater automation, which allowed them to review more applications. All the large players, 80 percent of medium-sized companies and just one-third of small lenders had the capability to make automatic credit decisions, which require no human intervention, according to Benchmark Consulting International.
Market share shifts
Captive finance units and credit unions were the only nonprime lenders to gain market share over the last three years with increases of 2 points, to 16 percent, and 1 point, to 14 percent, respectively. Banks and finance companies, which together control more than half the market, have lost 4 points of market share since 2012.
The number of companies in the NAF survey doubled from 2014, thanks to the added participation of members of the American Financial Services Association, the national association for the consumer credit industry. Those surveyed were asked questions about topics ranging from finance ratios and originations to servicing and loss management.