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NEW YORK — As subprime auto lending volume continues on an
upward trend, both Fitch Ratings and Moody's Analytics shared cautious
assessments of recent data, including a rise in 60-day delinquencies both
month-over-month and year-over-year.

Fitch discovered subprime auto delinquencies of 60 days or
longer came in at 3.12 percent in June, a level analysts indicated was 20
percent higher compared to last June as well as the previous month.

Fitch also determined annualized net losses for subprime
loans increased month-over-month by 4 percent to 3.91 percent in June. The May reading
was 3.76 percent. Analysts pointed out the June level did represent at
6.7-percent improvement from a year earlier.

"Economic growth and solid wholesale vehicles values since
2011 have paved the way for improved loss performance for prime and subprime
sectors in the past year," Fitch acknowledged.

"However, volatility in the U.S. economy continues, as the
economic outlook in the near term remains weak, and the European financial
crisis evolves, dampening growth prospects in the U.S.," analysts continued. "Further,
the job market is still weak with few jobs created as companies remain skittish
on expanding and hiring new workers."

Fitch mentioned the Manheim Used Vehicle Value Index has
seen a steady slide during the past four consecutive months, declining most
recently to 123.4 in June from 125.1 in May, as supply and demand in the
wholesale vehicle market level off.

"Despite the recent leveling off, used vehicle values are
healthy and recovery rates in auto ABS transactions remain elevated," Fitch
analysts insisted. "Used vehicle values have just come off their record highs
in recent months, and June's level is still robust on a historical basis with
both production and inventory levels tight, and demand for both new and used
vehicles strong."

As Portfolios Weaken, Defaults Could Exceed Servicers' Capability

If losses rise quickly, Moody's conceded that inexperienced
lenders could have trouble servicing a loan portfolio that requires more
attention and greater servicing capacity, especially if the portfolio has been
growing rapidly.

"For smaller companies with rapid origination growth,
servicing that growth can be a secondary priority," Moody's said in its July
Auto Navigator. "Increasing originations without increasing servicing capacity
strains servicing quality and ultimately leads to higher losses. The need to
ramp up personnel will cut into profitability already suffering from those
rising losses. Ramping up personnel can also take precious time during which
losses can continue to mount.

"Today's collection staffs pare back and rebuild quickly,
but servicers will be less nimble in the future if unemployment falls because
additional staff will be less readily available," the firm continued.

Moody's noted that one of the strengths of today's servicing
operations relative to those of the past is that most are centralized in one
location. When the subprime auto finance market struggled about 20 years ago,
the firm recapped that many servicers in the 1990s had a decentralized model in
which originations and collections took place in branch offices.

"A decentralized approach affords the benefits of proximity
to local markets and greater understanding of their idiosyncrasies. However, a
decentralized approach also requires adequate control and oversight, the lack
of which can compromise branch effectiveness in maintaining underwriting
standards and collections, especially if the company is growing rapidly," Moody's
explained.

"Decentralized servicing operations pose particular risks to
troubled companies because branch closures make maintaining adequate
collections much harder," the firm added, pointed out two examples, bankrupt
lenders Reliance and First Enterprise, "whose decentralized servicing platforms
contributed to escalating portfolio losses following the transfer of their
portfolios to other servicers."

Moody's stated that originators can lose access to funding
because of weakening loan and  financial performance

"If losses mount to levels much higher than historical
averages, smaller subprime auto loan originators that rely heavily on
securitization will have trouble obtaining funding. As investors lose confidence
in an originator's ABS deals because of mounting loan losses and concerns about
the originator's viability, the originator's cost of issuing ABS will become
prohibitively expensive, or the originator will lose access to the ABS market
altogether," Moody's explained.

"Similarly, other sources of funding, such as equity or bank
lines, will also become expensive or unavailable as those investors and lenders
move to reduce their exposure to the originator, especially given the
disappearance of the ABS financing option," analysts continued. "The resulting funding
crisis can lead to the company's exit from the subprime auto lending business
or to its failure."

Moody's remembered this situation contributed to the
consolidation of the industry. From 1997 to 1999, 12 subprime auto loan
originators filed for bankruptcy and 11 exited the business; other lenders
acquired another 18, according to the firm.