Lenders Shun Subprime Market

As credit standards tighten, customers switch to cheaper models, used cars

Donna Harris, Automotive News – February 20, 2008

SAN FRANCISCO - As the credit crunch deepens, many independent lenders are cutting back on loans to customers with tarnished credit histories. In January, more than 4 percent of subprime auto loans were at least 60 days delinquent, according to Fitch Ratings. That rate was up 43 percent from January 2007 and the highest in 10 years.

Some small regional banks have stopped making loans through auto dealerships altogether.

The credit crunch is forcing many would-be consumers to buy cheaper models, or purchase a used vehicle instead. If customers with shaky credit can get loans at all, often they must make a bigger down payment, pay higher interest rates and accept loans of shorter duration.

For dealers, tighter credit policies sometimes force them to shoulder more liability when loans go sour. And in some cases, independent lenders are ending long-term relationships with dealers.

That will create a significant drag on vehicle sales. According to industry estimates, consumers with subprime credit ratings buy nearly 30 percent of all new vehicles. The bottom line: Dealers are more dependent than ever on automakers' captive lenders. The captives appear more willing than independent lenders to make subprime loans in what is shaping up as the worst year in a decade for new-vehicle sales.

Many lenders say that because their cost of money has increased, it is more expensive for them to offer subprime loans.

"For folks in the subprime and near-prime end of the market, it is a much tougher place," said Brent Burns, president of World Omni Financial Corp., an auto finance company that is part of JM Family Enterprises Inc. Bums spoke this month at the annual meeting of the American Financial Services Association, which preceded the National Automobile Dealers Association convention.

Some dealers who attended the NADA convention said lenders are shifting more responsibility to them for failed subprime deals or are canceling lending agreements. Others cited tougher criteria for subprime loans.

Travis Christensen, sales manager of Mark Miller Toyota in Salt Lake City, said Capital One Auto Finance is demanding larger down payments on subprime loans. "That could mean switching the customer to a car they don't necessarily want”, to he said.

(Sub) prime cut
Many independent lenders are cutting back on subprime vehicle loans. They are:
• Leaving the subprime market
• Canceling loan arrangements with auto dealers
• Requiring larger down payments
• Raising interest rates on subprime loans

Tougher Rules

Among major lenders, Chase Auto Finance CEO Marc Sheinbaum said his company is shunning subprime loans longer than 72 months, calling them "a volatile part of the market.

“AmeriCredit Corp. said it is slashing subprime loan volume this year.”Our loan volume was $9 billion last year," said AmeriCredit CEO Dan Berce. "But we expect it to be $5 billion to $6 billion in 2008."

Last December, subprime loans made by AmeriCredit had an average retail interest rate of 16.5 percent, the company says. The rate for prime customers was 9.7 percent.

Although subprime loans can be lucrative, Wall Street has grown skittish about rising loan defaults. "This is a very difficult environment for a company like ours," Berce said. "Capital markets are very difficult to get money from and at an affordable rate."

Last month, Wells Fargo Auto finance told dealers it would not finance customers with credit scores below 540. Credit scores generally range from 300 to 850; most are from 600 to 800.

Mechanics Bank, a major California lender, stopped buying finance contracts from dealers in January. Thomas Brennan, a bank vice president, cited "the deteriorating profitability of indirect retail financing."

Sovereign Bank, of Reading, Pa, has stopped writing auto loans in the Southwest and Southeast. The bank has retreated to its original business territory in the Northeast.

To the rescue
At the same time, captive finance companies say they are willing to "buy deeper" than outside lenders. "Our underwriting criteria have been constant over the past five years," said Mike Bannister, CEO of Ford Motor Credit Co.

George Borst, CEO of Toyota Financial Services, said his company does not focus on subprime loans but will make them to help dealers close sales.

Likewise, GM and Chrysler dealers say they can finance loans for subprime customers through captives.

Some independent lenders, such as Wachovia Dealer Services, aren't backing away from subprime loans. "We are comfortable with the quality of our portfolio," said CEO Tom Wolfe.

Dealers say lenders are getting tougher even on nonprime customers who have slight credit blemishes. And David Duncan, general manager of Duncan Ford Mazda-Lincoln ·Mercury in Blacksburg, Va., said he is seeing changes in his dealership's agreements with lenders.

"What the lender used to assume responsibility for is becoming our responsibility," Duncan said. "If the deal fails, it's the dealer who has to buy the contract back.”