Get to Know Your Subprime Auto Lenders

There’s no doubt that competition is spurring subprime auto lenders to stretch their underwriting guidelines for new customers, which could lead to another bust. In February, 5.16% of securitized subprime auto loans were at least 60 days past due, according to Fitch Ratings. That slightly exceeded the level of late payments at the height of the Great Recession. Here’s a guide to who’s doing what.

Skopos has only been originating loans since 2012, though it has an experienced management team with past ties to Drive Financial, Santander and GE Capital. It lends to customers who have experienced prior credit difficulties or have limited credit histories; credit scores typically range from 460 to 625. By October 2015, when it completed its first rated securitization, it had built a servicing portfolio with an outstanding balance of $340 million. Kroll Bond Rating Agency has described the company’s growth strategy as “controlled.” The lender’s heavy concentration of loans in Texas (47% of the loans in the October deal) and Oklahoma (8.8%) could expose it to the worsening economic conditions of those oil and gas states, however.

Prestige Financial Services is part of the Larry H. Miller Group. Its niche is lending to prospective borrowers who have recently declared personal bankruptcy. These consumers may have had many of their debts discharged, or are repaying them under a court order. Court documentation allows Prestige to calculate a precise debt-to-income ratio. Debtors in Chapter 13 bankruptcy specifically must get permission to incur additional debt from a trustee or court order, depending on the state. Tidewater Finance Co. has been making subprime auto loans through franchised and independent auto dealers since 1995; in 2001 it launched a product targeted at consumers who had recently entered or had been discharged from Chapter 7 bankruptcy. The “341 loan program” takes its name from what is referred to as a “341 hearing,” generally held 30 to 45 days after a debtor files for bankruptcy protection. Between this program and a traditional subprime program, Tidewater Motor has expanded to service close to 1,000 auto dealerships in over 30 states.

American Credit Acceptance, based in Spartanburg, S.C., focuses on lower quality subprime borrowers with an average FICO score in the low-to-mid 500s. About 12.9% of the loans in company’s latest transaction, completed in February, have no FICO score, according to Kroll. The rating agency expects losses to range from 24.60% to 26.60%, and that’s after taking into account the seasoning of loans called from prior securitizations.J.D. Byrider, based in Carmel, Ind., and majority-owned by private equity firm Altamont Capital Partners, also focuses on lower-quality borrowers with FICO scores typically ranging from 525 to 550 About 23.16% of the loans in company’s latest securitization, completed in 2015, have no FICO score. Kroll’s base-case loss expectation for this transaction is 24.75% to 26.75%.

Military personnel, even those with poor credit, benefit from steadier employment, less exposure to an economic downturn, and certain benefits that enhance their financial security, such as comprehensive health coverage, a housing allowance, and food allowances. Security National Automotive Acceptance Co., a nonbank lender based in Ohio that caters to this market, benefits from an another feature: it lends primarily to service members who agree to make payments via the U.S. military’s automated electronic allotment system. More than 90% of the pool of borrowers in Security National’s latest securitization, completed in 2014, paid via allotment, according to Standard & Poor’s. At the time, S&P said the company had been expanding its managed portfolio modestly. The portfolio was $378 million as of Dec. 31, 2013, with roughly 15% year-over-year growth. Flagship Credit Acceptance, founded in 2005 by CEO Michael Ritter, an auto industry veteran, and controlled by private equity firm Perella Weinberg, has been catering to service members since 2012. However the $185 million funded through this program accounts for a small portion of the company’s total assets of $2.7 billion. In January 2015, Flagship merged with CarFinace Capital, bringing the CarFinance.com direct lending portal under its fold. The company had substantially increased defaults and collections in 2015, as its 31-60 day delinquency rates increased to 5.48% (112 basis points higher than in 2014) and net charge offs nearly doubled to $102.11 million.

First Investors, based in Houston and in business for 27 years, has been proactive in tightening its underwriting standards and reducing origination volumes ahead of industry or economic downturns, according to Kroll. In December 2014, the company tightened its underwriting standards to lower the maximum allowable loan-to-value ratio for most of its products and enhancing verification for certain borrowers. It courts customers with FICO scores between 510 and 640. First Investors’ managed portfolio was $1.17 billion as of October 2015, an increase of 24% over April 2014. It has completed 18 securitizations.Drivetime Automotive is another longtime securitizer, with more than 50 transactions since 1996. It operates in the deep subprime market with an average FICO score of 546. S&P expects the company’s securitizations issued from 2012 onward to build cumulative net losses of 26% to 30.5%. It no longer originates any loan without installing GPS devices and payment reminder functionality on the vehicle sold (though it does not employ starter-interruption). Exeter Finance Corp., majority owned by The Blackstone Group, was founded in 2006, and has 11 outstanding securitizations. It is largely fed by its CarMax new and late-model used-car origination channel (approximately 30%), but has ties to 9,000 dealerships nationwide. The company, which has portfolio concentrations in Texas, Florida and California, reported several consecutive years of net losses before turning a modest profit in 2015. The company has grown to $3.175 billion in managed portfolio assets through 2 million loans, but S&P worries that this growth “may have come at the expense of credit quality and adequate infrastructure.”Consumer Portfolio Services has been a regular issuer in the asset-backed market since 1994, and has completed 22 deals since the financial crisis, according to S&P. The company returned to profitability in the fourth quarter of 2011 and has remained in the black since then. It has been increasing its origination volume but in a “controlled manner,” according to the rating agency, with a total managed portfolio of $1.9 billion as of September 2015, up from $1.5 billion one year earlier but off from a $2.1 billion peak in 2007. However, cumulative net losses on deals completed between 2012 and 2014 are higher than S&P originally expected and could reach 15.50% to 16.50%.

Santander Consumer USA, which has made a big push into deeper subprime loans, is reporting and uptick in chargeoffs. Chief Executive Jason Kulas said recently said the company is taking steps to limit its exposure to the market, as signs of risk emerge. The company has seen a “gradual decline in our overall market share,” as a number of smaller competitors have entered the market for subprime loans, he said.Ally Financial, formerly known as General Motors Acceptance Corp., returned to the securitization market in January 2013 after a four-year hiatus. As of Dec. 31, 2015, it had 1.734 million retail contracts outstanding. Delinquencies and losses have been on an upward trend since 2012, reflecting an increase in longer-term loans and a decrease in loans with interest rates that are subvented, or subsidized. For 2015, the portfolio’s net losses increased to 1.61%, from 1.47% the previous year. The portfolio’s 30-plus-day delinquencies increased to 5.59% at Dec. 31, 2015, from 4.91% at Dec. 31, 2014. Still, losses remain lower than in 2009.