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AFSA Panel Bursts Subprime Bubble

January 24, 2017

By Tariq Kamal

NEW ORLEANS — A panel of experts representing the three major credit bureaus and an auto finance company convened today for “Fiction vs. Reality: Examining the Subprime Auto Market,” a discussion that set off the American Financial Services Associations (AFSA)’s 21st annual Vehicle Finance Conference and Exposition.

Held this year at the Sheraton New Orleans, the AFSA event is an annual precursor to the National Automobile Dealers Association (NADA)’s conference, which kicks off this Thursday, Jan. 26, at the nearby Ernest N. Morial Convention Center.

Moderator Danielle Fagre Arlowe, AFSA’s senior vice president, was joined by Denise Brown, chief risk officer for Veritas Auto Finance and chair of AFSA’s Vehicle Credit Risk Committee; Amy Crews Cutts, senior vice president and chief economist at Equifax Automotive Services; Jason Laky, senior vice president and auto business lead for TransUnion; and Melissa Zabritski, senior director of Experian and an F&I and Showroom contributor.

Fagre Arlowe began the discussion by asking what the word “subprime” means to the panelists and whether a subprime auto finance bubble exists. The consensus answer was a credit score of about 600 or below, although Zabritski noted that the majority of delinquencies are found in the sub-500 group.

Responding to the question of whether a subprime bubble exists and, if so, whether it poses a threat to our nation’s economic health, the panelists answered firmly in the negative.

“I definitely do not believe there’s a bubble. There’s no asset-flipping,” Crews Cutts said, explaining that, unlike homes, there is little chance a customer is buying the car for anything but personal use.

Laky concurred, saying that, even if half of all auto loans defaulted, lenders would be able to recover most of that inventory. Zabritski blamed the appearance of a bubble on several factors, including the “massive trough” that appeared when the lending market dried up in 2009, when the Great Recession was in full swing. In fact, despite impressive year-over-year gains, Zabritski said, originations have yet to outpace 2008 levels.

Fagre Arlowe asked the group how lender policies and portfolios have changed over the past decade. Laky said lenders’ newfound ability to understand the “credit health” of consumers, thanks mostly to reams of new data, has led to more accurate behavior prediction models.

Brown agreed, pointing to the helpfulness of “alternate” data — information not found in credit reports — in making lending decisions. She cited examples such as the use of GPS monitors on deep-subprime deals, identity-verification products offered by the credit bureaus, and even Google Earth, which analysts can use to quickly verify an address is an actual home.

“When you can find the car and repossess it, that means lenders can open the doors a little wider,” Crews Cutts said.

Asked to identify behaviors common to every credit tier, Zabritski noted that demand for small cars has fallen behind crossover SUVs and pickup trucks, and there is more demand for leasing across the board. But prime credit customers have gravitated toward leasing in particularly high numbers, making the finance market appear “more subprime than it was.”

The conversation then turned to millennial buyers and their impact on the auto finance market. Zabritski said she has observed a generational shift away from high levels of credit-card debt, meaning that, for many younger consumers, their car loan is their first major outstanding balance.

“Millennials didn’t fall out of the sky,” Crews Cutts said, noting that the highest age in that bracket is 35, and observable behaviors between the high end of millennials and the low end of Generation X are negligible.

Laky agreed, saying, “Millennials are not that different in behavior, but we are seeing a delay in their behaviors.” That group may be more interested in car-sharing and ride-hailing services, he said, but only for as long as they live in a dense urban area. Once they have relocated to a suburban or rural area, “even if you use ride-share, you need a car or two in your garage.”

“One thing to not lose sight of is all the new-car sales those are spurring,” Zabritski said. “Quite a few of those folks are buying a car to become an Uber or Lyft driver.”

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