Some of the nation's largest auto lenders are likely to remain cautious about subprime in 2017 -- especially the lower end of subprime -- after hitting the brakes on the segment to varying degrees in 2016.
The void could result in smaller lenders, including buy-here, pay-here dealerships, gaining share, including business from customers who can no longer find financing at new-car dealerships.
Big auto lenders Ally Financial, Capital One, GM Financial, Santander Consumer USA and Wells Fargo, in investor calls last month, cited factors such as rising interest rates, greater delinquencies and losses, and what some considered reckless competition to justify their caution in financing subprime loans.
"We took some pretty drastic actions in the first quarter of '16," when it became clear certain loans originated in 2015 were not as profitable as expected, said Rich Morrin, COO of Santander Consumer USA, of Dallas. "We took action even though there was an immediate impact on volume and ... it took the better part of six to seven months to start to make the right kind of changes so we could see the capture rate begin to improve again."
For the whole of 2016, Santander Consumer auto originations were $21.9 billion, down 20 percent from 2015. That included a 32 percent drop in Chrysler Capital-branded loans to customers with credit scores below 640, which Santander Consumer considers subprime. The lender is historically a subprime specialist but in 2013 started providing loans for Fiat Chrysler under the Chrysler Capital brand and later added leases. A majority of that Chrysler Capital business is prime risk.
Even though Santander Consumer passed up some business, Morrin said, it found other niches it could exploit. For example, it reduced interest rates to some subprime customers with well-established credit histories on loans with relatively low loan-to-vehicle-value ratios, he said, and profitably captured more business in the niche.
Wells Fargo & Co., the perennial No. 1 in used-car auto loans, sacrificed some auto share in 2016 because it refused to join a trend to 84-month loans and stuck to its standards for proof of income and ability to pay, CFO John Shrewsberry said in January. The company said in 2015 it would limit subprime to no more than 10 percent of its auto loans.
Its auto originations in the fourth quarter of 2016 were $6.4 billion, down 15 percent from the year-earlier period. That was a reversal from higher originations through the first three quarters of 2016. For the full year, Wells Fargo said total auto loans outstanding were $62.3 billion, up just 4 percent vs. 2015. "We currently expect balances in our auto portfolio to continue to decline in the near term," Shrewsberry said.