NEW YORK — Moody's Investors Service explained that subprime
auto lenders, in particular, use historical granular customer and loan
characteristics to build and refresh custom scores that can supplement the
information contained in FICO scores.

Since auto lenders often develop and rely on proprietary,
internal credit scores that tend to rank and order subprime credit risk more
accurately than do FICO scores, Moody's indicated internal credit scores tend
to be a lender's most effective tool for predicting loan defaults.

"Although economic conditions can push an individual transaction's
ultimate losses outside the lender's range of expectation," stated Yan Yan,
vice president and senior analyst with Moody's Investors Service in the firm's
latest edition of its Auto Navigator.

"Internal scores better differentiate credit performance
than do FICO scores for loans amortizing under similar economic conditions
because they incorporate factors that FICO scores do not capture," Yan
continued.

"In addition to FICO scores themselves and the credit bureau
information that they're based on, typical internal credit scores also consider
obligor characteristics (such as age, education, time on job, and living
situation), affordability characteristics (such as payment and
debt to income), and loan characteristics (such as term, down payments, and
loan to value)," Yan went on to explain.

"Subprime lenders generally employ internal scores more
prominently in their credit decisions than do prime lenders, which rely more heavily
on FICO scores, because the additional factors provide limited marginal benefit
for risk differentiation of higher-quality borrowers," Yan added.

Moody's acknowledged that while the FICO scores do broadly
indicate the obligor credit risk, internal scores typically rank and order them
with more precision as loans with similar internal scores have similar loss rates
regardless of the obligor's FICO score.

"Looking at it another way, the internal scores successfully
segregate obligors that have the same FICO score," Yan pointed out.

Economic Fluctuations Can Limit Predictive Power of Internal
Scores

Although internal credit scores can differentiate risk well
during a given time period, Moody's reiterated that economic fluctuations can
cause loan defaults to fall outside the loss range suggested by the scores.

As an example, the firm took the average internal scores of
AmeriCredit's loan pools in securitizations issued between 2001 and 2010
against the lender's cumulative net losses.

"Although the pools with higher average internal scores have
tended to suffer lower cumulative losses, the dispersion around the trend line
demonstrates that internal scores can't finely pinpoint cumulative losses," Yan
noted.

"Internal scores do generally outperform FICO scores by this
measure; even though the relationship between AmeriCredit's pool losses and
average internal scores is fairly weak, it is much stronger than the relationship
between the same pools' losses and average borrower FICO scores," Yan
continued.

"As a result of the economy's potential to influence loan
defaults, the securitizations with the highest cumulative net losses are
typically those that closed just before, or during, periods of economic
stress," Yan added.

Yan discussed another example tied to AmeriCredit's
performance, referencing its 2004 and 2007 transactions. Yan noted both years have
similar internal scores, but the 2007 transactions' cumulative net losses more
than doubled those of the 2004 transactions.

"The 2007 transactions' higher losses are largely a result
of the deep recession the obligors endured that began shortly after loan
origination," Yan emphasized. "Performance outside the expected loss ranges
indicated by internal credit scores is not unique to AmeriCredit, however, and
occurs in other auto ABS in both the prime and subprime spaces."

With that condition in mind, Moody's mentioned economy-related
factors that can trump the predictive power of internal credit scores. Those
indicators can include employment levels, which can influence the frequency of
loan defaults, and used-vehicle prices, which can affect the severity of loss
on the defaulted contracts.

"Job losses are the No. 1 reason that obligors default on
their auto loans," Yan declared.

"A less prominent but still important driver of loan losses
is the used car market, which affects the amounts recovered on the autos that
are repossessed after the obligor has defaulted and sold at auction," Yan
concluded.


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