Moody's Spotlights Troublesome Subprime Auto Lending

As signs continue to point to a deteriorating U.S. auto industry, a report from Moody’s Investor Service revealed one of the nation’s largest subprime auto lenders isn’t even bothering to check its borrowers’ income. Santander Consumer USA Holdings Inc SC, one of the largest subprime auto lenders in the country, only verified the income of roughly 8 percent of its auto borrowers, according to Moody's. “A lack of income verification … creates more uncertainty around whether borrowers will be able to afford their monthly payments,” the ratings firm said, according to CNN.

'Entirely Committed' To Responsible Lending

A Santander spokesperson told Benzinga in a statement that its loss performance is "strong" and in step with company and rating agency expectations.

"We consider a wide range of factors to manage and price for risk. We are entirely committed to treating our customers fairly and lending responsibly," the statement said, adding that other variables such as down payments and credit history are considered in lending decisions.

Highest Sector Delinquencies Since 2008

Earlier this month, data from Black Book revealed a 20-percent year-over-year decline in used car prices and a 17-percent decline in used truck prices. Year to date, used car and truck prices are both down 17 percent.

Recent data from the New York Federal Reserve revealed that auto loan delinquencies of at least 30 days are currently at their highest levels since 2008. The report also notes that there is currently more than $8.24 billion in auto debt that is delinquent by at least 90 days.

The loose auto lending practices are reminiscent of similar behavior in the mortgage business prior to the financial crisis. But a deteriorating auto market shouldn’t pose anywhere close to the level of systemic risk the housing market did. There was a total of more than $1.2 trillion in outstanding U.S. auto debt as of the end of 2016. In 2007, subprime mortgage loans alone accounted for roughly $1.3 trillion of the nation’s $10 trillion in total outstanding mortgage debt.

About 20 percent of auto loans are securitized and sold to investors.

Height Securities analyst Edwin Groshans said the softening in the auto market will impact subprime lenders the most.

“The combination of lower used car auction prices and weakening credit quality will manifest itself in the operations of auto finance companies with subprime lending concentrations.”

In addition to Santander, Height names the following subprime lenders as particularly at-risk:

• Credit Acceptance Corp. CACC.
• Ally Financial Inc ALLY.
• Capital One Financial Corp. COF.

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