Subprime originations rise for the first time in two years

It's too soon to call it a trend, but third-quarter subprime auto originations rose from the year earlier for the first time in more than two years, the Federal Reserve Bank of New York and TransUnion said in separate reports last week.

"This is more of a recovery from a pullback, as opposed to incremental growth. It's moderate growth," Kristen Bataillon, TransUnion senior manager of financial services research and consulting, told Automotive News.

According to the New York Fed's latest "Household Debt and Credit Report," auto originations for all credit scores reached $157.6 billion, up about 5 percent from a year ago. That number includes loans and leases, new and used vehicles combined.

According to the New York Fed, credit scores below 620 -- defined as subprime -- accounted for the biggest percentage volume increase in the third quarter out of five credit-score ranges it breaks out. Subprime auto originations were $32.6 billion, up about 10 percent from the third quarter of 2017.

Still, the biggest category as a percentage of total originations continued to be the highest credit-score range, 760-plus. The high-end range accounted for 31.7 percent of originations in the quarter, vs. 20.7 percent for subprime.

The third quarter marked the first time subprime originations grew year-over-year since the second quarter of 2016, according to New York Fed data.

Before that, quarterly subprime volume was up year over year for six years. In turn, that increase also represented a recovery after 14 straight quarters of subprime origination decreases, starting with the third quarter of 2006.

Subprime origination increases are happening alongside industrywide progress in adopting more technology in underwriting. As more companies take advantage of techniques such as machine learning models, lenders are gaining the confidence to dip their toes into near-prime and subprime waters, according to Brian Landau, senior vice president and automotive business leader at TransUnion.

There is also less competition among subprime lenders. Because many banks pulled out of the lower-tiered credit markets over the past two years, there is more opportunity for lenders to enter the subprime sector, Landau said.

Across all credit tiers, the auto lending market is performing better, and auto loans are steadily climbing. In the third quarter, the number of auto loan accounts reached 81.9 million, 4.2 percent higher than the year earlier, according to TransUnion. Of those, only 1.36 percent were delinquent, compared with 1.4 percent a year earlier.

Meanwhile, the average auto loan balance per borrower was $18,835 in the third quarter, an increase of 1.4 percent -- or $268 -- year over year.

Landau said affordability headwinds could be to blame for the balance increase as vehicle prices rise across the board and consumers select more expensive models, such as trucks and SUVs.

But, Landau added, consumers have more options in vehicle selection and financing than ever before. For example, as off-lease vehicles bring more late-model used vehicles to the market, consumers are finding more opportunity to control debt.

"Customers have other options. They can actually refinance if they want, extend the term out and give themselves a little bit of relief on their monthly payments," Landau said. "It's important that the market provide that kind of awareness to consumers so that they can take the best options."