Quarterly rise in subprime originations a positive sign

Quarterly subprime auto originations in the U.S. rose for the first time in more than two years.

Several years ago, such news might have been a cause for alarm — a sign that lenders were making more loans to the least creditworthy customers as the new-vehicle market was losing steam.

But today, the moderate uptick is a positive sign, says the author of one of two reports showing that while subprime is up, credit risk is declining.

According to the New York Federal Reserve'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.

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, automotive business leader at TransUnion, which published similar data.

"It seems that the market has been very responsive to these effects of loan performance maybe not being what it was in the past and restricting their underwriting policies appropriately in the moment in which these delinquencies were rising," Landau said. "That is the overall story here, and I think it's a good one."

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. Though the practice limits the customer pool, lender portfolios that contain higher scores on average are considered more stable.

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 — the period leading up to, and through, the Great Recession.