NAF Reports Growth in Nonprime Auto Finance Industry
HANOVER, Md. — The nonprime auto finance industry is gaining momentum, according to the 23 companies that participated in the National Automotive Finance Association's annual Nonprime Automotive Financing Survey. Overall, the study reported a cumulative increase in loan originations of 11 percent in dollars and 9 percent in accounts.
The NAF identified a few key trends in the industry, explaining that origination ratios and accounts financed grew this year, while portfolio dollars and accounts remained relatively unchanged. There was also a continued shift toward lengthier new car maturities, which first appeared in the 2005 data. As for used vehicles, maximum maturities, based on model-year and some mileage maximums, are longer, according to association executives.
The NAF survey found that delinquencies have declined. For instance, dollar delinquency rates averaged 6.5 percent, compared to 8.3 percent in the prior year. Moreover, account delinquencies came in at 6.8 percent, as opposed to 7.6 percent. Average monthly repossessions and dollars lost for each repossessed vehicle were also down slightly year-over-year.
The association broke participating companies into two primary categories for the study — companies with 40,000 or more accounts were classified as large, whereas businesses with fewer than 40,000 accounts were classified as medium to small.
The larger category tended to be banks or holding companies, while medium or small companies were more likely to represent independent finance companies. Responses for the study were due in April this year.
"Overall, credit quality appears to be improving based on lower delinquency rates," NAF officials said in the report. "Possibly, as a result of the Bankruptcy Act of 2005, dollar bankruptcies as a percentage of outstandings and charge-offs based on bankruptcy increased by more than 50 percent year-over-year, while average monthly repossessions and the average loss per repossessed unit have both declined slightly."
Additionally, NAF executives reported that more than 70 percent of nonprime originations fell between the credit score range of 500 to 679.
Looking specifically at portfolio trends, average portfolio dollars grew 22 percent, with portfolio accounts increasing 15 percent from the previous year. Ten of the companies said they securitized 78 percent of receivables. This, of course, was most common with the larger group of companies.
Both categories of companies told NAF that the median loan dollars financed was up this year, hitting $19,513 in the large class and $11,771 in the small-to-medium class, compared to $17,174 and $11,185, respectively. The average amount financed grew 10 percent on average and 0.5 percent in a weighted average, the NAF found.
"Average results provide equal treatment for each respondent, regardless of portfolio size," explained NAF officials in the study. "Weighted ratios are more reflective of the industry as a whole by using aggregate volumes in calculations."
Executives went on to note that, "All nonprime weighted average origination ratios are lower, indicating that increased competition may be forcing the industry to work harder for origination volumes."
Reviewing the average application time, the NAF said the majority of participating companies said it takes less than 30 minutes to process an application. However, almost half of the larger companies said they have an average processing time of 21 to 30 minutes. A total of 39 percent of those businesses questioned said they used generic techniques for application processing, whereas 65 percent said they utilized custom, 48 percent used matrix and 70 percent relied on judgment techniques.
Delving more into the origination data, the NAF reported that companies in the small-to-medium category tended to buy deeper than large respondents. Meanwhile, the larger companies were more likely to move up the credit spectrum.
The study also found that nearly 90 percent of contracts booked by the larger companies covered terms of 49 months or greater. A total of 58 percent of the contracts booked by the larger institutions covered terms of more than 60 months, while 54 percent of contracts booked by the smaller to medium companies covered terms of less than 49 months.
Discussing loan maturities, NAF executives explained, "While large respondents continued to show average maximum maturities of 72 months, small/medium respondents book new vehicle loans for longer maximum terms (i.e. 58 months in 2004 versus 64 months in 2005). Mileage is the preferred determinate for used maximum maturities. Maximum maturities for used vehicles based on model-year are lengthening in all categories, and maximum allowed miles at origination are increasing in the 75,000 to 149,000 categories."
When it comes to delinquent accounts, 11 of the 23 companies said they use behavioral scoring tools to analyze these. Also, the majority of companies said they send these accounts to collections at less than 60 days.
"The number of average accounts per collector range from 46 to 107 for large respondents and 110 to 150 for small/medium respondents; these numbers are much higher than in 2004," NAF officials pointed out.
Average monthly repossessions declined a bit, while losses lessened somewhat compared to the prior year. The average remarketing and selling cost per unit was $673, compared to $616 in 2004. Additionally, the median number of days from repossession to remarketing came in at 41, as opposed to 40 in 2004.
According to the NAF, the survey results were distributed at no cost to the participants; however, other companies interested in seeing the results may purchase a copy for $300 at www.nafassociation.com.
Editor's Note: For more insights into the subprime market, please see the inaugural issue of SubPrime Auto Finance News in early October, and stay tuned for its companion e-newsletter, SubPrime Update, which will be launched soon.