Executives at some of the biggest banks in auto lending said at a conference that they’re tapping the brakes on subprime lending, especially at the lower end of the credit spectrum. But they insisted the credit environment is good for auto lending overall.
“We love the auto business, but we are going to do it on our own terms,” said Richard Fairbank, CEO of Capital One Financial Corp., at the Sanford C. Bernstein Strategic Decisions Conference in New York on Thursday.
Jamie Dimon, CEO of JPMorgan Chase & Co., singled out subprime when he said auto lending is “clearly a little stretched.” He said some lenders -- not Chase -- will get “hurt.”
Jeffrey Brown, CEO of Ally Financial Inc., said Ally is dialing back on lending to consumers at the lower end of the subprime credit score spectrum. He said subprime, which he defined as credit scores of 540 to 620, accounted for around 11 percent of Ally’s originations in the second quarter, down from around 13 percent in 2015.
Fairbank said Capital One is worried about subprime auto lending on two fronts: first, some lenders are taking greater risks in subprime, and second, used-car auction prices are reverting to more normal levels from relative highs. “Gravity has got to pull them down over time,” he said.
“For six quarters now, we have been raising flags about the underwriting experience we have seen in the industry -- not universally, but on a selected basis -- that we are not comfortable with,” he said.
Some dealers may respond to Cap One’s caution by taking their business elsewhere, and Fairbank said he’s OK with that. “In the subprime space for the last four quarters, we see our growth opportunities slowing down because of our not going there, in terms of underwriting practices,” he said.
At the end of the first quarter, customers with FICO scores of 620 or below accounted for 32 percent of Cap One’s outstanding auto loans, down from 35 percent a year earlier. At the same time, the mix of credit scores above 660 increased to 51 percent, from 48 percent, the company said in its quarterly report.
Ally’s Brown said that, in pursuit of higher margins, Ally Financial raised rates across the board at the beginning of 2016. He said the move cost Ally some share at both extremes of the credit spectrum: superprime, where risk is low and margins are low, and at the low end of subprime, where margins are high and so is risk.
“Chasing the high-risk consumer while consumers are doing well, that’s going to do well,” Brown said. “But when they’re not [doing well], [lenders] are going to have some trouble.”