ATLANTA — A big part of the American dream has always been
owning a vehicle. Most private purchases are made via loans and leasing, and in
the heady years leading up to the financial crisis, pretty much any would-be
buyer could find a way to finance a vehicle.

That included those with poor or almost non-existent credit
ratings as underwriting requirements were relaxed in the face of growing
competition amongst lenders and dealers for market share.

Those same subprime buyers, along with the dealers, banks
and other lenders, found themselves in a walking nightmare once the credit
crunch took hold in 2008. Hard-pressed consumers failed to keep up with loan
payments and repossession rates soared, flooding the used-car market and
depressing resale prices so that the bottom fell out the leasing market. 

U.S. auto originations almost halved between 2007 and 2009,
while the non-prime element of the total went into a tailspin. For all the
finance providers in whatever category — bank, captive, or credit union — the
huge drop in originations coupled with the higher rates of default made for
serious losses.

For many, the only hope was to cut back on lease and loan
volumes and attempt to select the best credit candidates from a much smaller
market. Subprime candidates could not get a look-in, let alone a test drive.

But now the picture is starting to look rather different. U.S.
vehile sales are rising as the country pulls out of recession — based on sales
in August, the seasonally adjusted annualized rate (SAAR) for U.S. car sales was
back at the high point last recorded in November 2007.

At the same time, average credit scores are dipping
downwards with subprime loans accounting for increasing shares of both the new-
and used-vehicle market, and U.S. banks making over a third of their vehicle
loans to consumers with less than stellar credit ratings.

But there the similarity ends. Finance providers and dealers
all know how this particular journey could end in another spectacular crash. So
while it is "business as usual" in one sense, in another, all the main players
are looking for a new road they can take. 

Building a convincing and sustainable lead in a market which
is fast heating up has been further complicated by increased regulation. The
newly introduced Consumer Financial Protection Bureau (CFPB), which came into
being as a result of the reforms of the financial services sector brought in by
the Dodd-Frank Act of 2010, is responsible for ensuring that consumers are not
subject to unfair or discriminatory practices.

Since subprime buyers may be offered different terms from
other purchasers, this is now a live topic for sellers and lenders. 

In this environment, finance providers and dealers have
decided that knowledge is power. The more they know about a prospective buyer,
the more they can demonstrate complete transparency about how a particular
finance package or mark-up has been developed. Better data also allows them to
make more nuanced offers, perhaps increasing the loan to value rate just for
certain makes or models, rather than across the whole of the book. 

The engine for all this is technology. New systems with
strong data integration capabilities allow lenders to provide more accurate
information more efficiently to dealers, speeding up the decisioning process
and streamlining the paperwork.

By bringing in third-party sources of data automatically,
these systems simplify the process of verifying income, residency, driving
license and employment and make it possible to leverage alternative data to
assess risk in order to maximize opportunities.

So while it might look like the pre-recession era all over
again, this time in the subprime automotive finance world the emphasis is on
greater partnership opportunities, with technology providing the communication
and data links between the finance providers, dealers and consumers.

Editor's note: Brendan Gleeson is a group executive vice president
at White Clarke Group. The White Clarke Group's U.S. Subprime Automotive
Finance Market report is available to download here.


Normal
0
false
false
false
EN-US
X-NONE
X-NONE

/* Style Definitions */
table.MsoNormalTable
{mso-style-name:”Table Normal”;
mso-tstyle-rowband-size:0;
mso-tstyle-colband-size:0;
mso-style-noshow:yes;
mso-style-priority:99;
mso-style-qformat:yes;
mso-style-parent:””;
mso-padding-alt:0in 5.4pt 0in 5.4pt;
mso-para-margin-top:0in;
mso-para-margin-right:0in;
mso-para-margin-bottom:10.0pt;
mso-para-margin-left:0in;
line-height:115%;
mso-pagination:widow-orphan;
font-size:11.0pt;
font-family:”Calibri”,”sans-serif”;
mso-ascii-font-family:Calibri;
mso-ascii-theme-font:minor-latin;
mso-fareast-font-family:”Times New Roman”;
mso-fareast-theme-font:minor-fareast;
mso-hansi-font-family:Calibri;
mso-hansi-theme-font:minor-latin;}