NEW YORK — Investment research firm DBRS expects that
lenders will begin to loosen credit standards to achieve growth strategies as
the auto finance market continues to improve, competition increases and credit
availability resumes.

As a result, the firm contends these developments will
likely put negative pressure on collateral performance, increasing pool
delinquencies and losses.

"Furthermore, the weaker, less disciplined players will be
more prone to financial stress if losses are in excess of original expectation,
which may lead to a reduction in the number of operators through consolidation
or bankruptcy," analysts said in their report titled, "Auto Finance and ABS Trends and
Outlook."

Nonetheless, DBRS believes that while the auto finance
market continues to perform better than original expectations, a careful
assessment of financial condition and changes in underwriting and servicing
practices will be critical to determine the future performance of auto loan
pools.

"As the auto finance market continues to improve,
competition increases and credit availability continues to expand, it is
expected that lenders will begin to loosen credit standards to achieve growth
strategies," analysts said.

"This will likely put negative pressure on collateral
performance, increasing pool delinquencies and losses," they added.

DBRS pointed out that any future degradation of performance
is expected to cause the originators/servicers to expand collection strategies
to fully utilize tools available to them to maximize collections on portfolios.
One such strategy the firm mentioned might be the increased use of extensions
or deferrals.

"If deployed judiciously, extensions and deferrals are an
effective way to help potentially borderline borrowers from losing their vehicle
over a temporary credit issue," analysts said. "While an acceptable practice
for maximizing the values in auto loan portfolios, extensions and deferrals can
also mute and/or dilute the measurement (and reporting of early indicators) of
deteriorating pool performance.

"As a result, assessment of the changes in collection
practices and the reported statistics of collection practices will be assessed in
the analysis of future deals," they continued.

While the auto sector has experienced a strong recovery,
according to DBRS, the firm acknowledged there are some challenges that will
need to be assessed going forward.

"The continued increase in competition may drive some market
participants to reduce the level of discipline and originate loans of lesser
quality. In a competitive market, aggressive buying practices and reducing loan
quality to achieve volume expectations is a practice that should be monitored
and is unsustainable in perpetuity," analysts said.

"Ultimately, the weaker less disciplined players will be
subject to financial stress if losses are in excess of original expectations,
which may lead to a reduction in the number of operators through consolidation
or bankruptcy," they went on to say.

DBRS stated a "careful" assessment and balancing of risk
factors impacting the performance of pools of auto loans is "critical."

DBRS concluded its report that it will continue to monitor
auto industry performance, trends in the values of used vehicles and other
factors that will impact the analysis of auto ABS transactions.


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