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CBA Study: Credit Quality, Repossessions a Concern

May 2008, F&I and Showroom - Feature

by Kelli Wood - Also by this author

The results of the Consumer Bankers Association (CBA)'s annual study weren't shocking. If anything, the results provided a snapshot of how the industry got to the point it is today.

Conducted by Benchmark Consulting International, the CBA's 2008 Auto Finance Study showed that 2007 loan terms stretched, advances increased and credit quality worsened. It also provided a clearer picture of what is becoming a major concern for the industry this year: repossessions.

"I think when you look at the data next year, you're going to see a significant increase in those numbers," says Rich Apicella, an executive for BenchMark Consulting International. "The biggest thing we see this year is the decrease in credit quality and the increase in repossessions. Terms are up as well, which is also a continuing concern."

This year's study attracted 32 participants, which, combined, accounted for more than 12.5 million loan accounts. The total outstanding principal balances for all was more than $223 billion. Surveyed were 16 large national banks, eight regional banks, five captive finance companies and three independent finance companies.

The study results were released at the CBA's annual conference and expo. Apicella said attendees weren’t too surprised by the findings, and added that many are looking to retrench this year.

"Many lenders are changing underwriting guidelines," Apicella adds, "Some are withdrawing from certain segments of the market, states and dealers."

Liquidity is a challenge today, says Apicella, especially for consumers who relied on home equity, and lenders who rely on the asset-backed securities market for funding. This is one reason why new 2009 vehicle sales are forecasted at their lowest levels in more than 10 years.

"Historically, many consumers have funded vehicle purchases by drawing down on their home equity lines. Today, this is less often the case, due to the slump in housing prices. With respect to the capital markets, investors are not buying ABS debt instruments as freely," says Apicella, who adds that many investors are looking at other markets. "As a result, lenders are picking their spots more carefully, they’re raising their underwriting criteria and many of them are cutting back their originations."

Signs of Housing Market Spillover

Credit quality for new-vehicle purchases was 31 points lower than last year's study, with FICO scores dropping from 709 in 2006 to 678 last year. Scores for used-vehicle purchases dropped one point.

"That's a pretty sharp decline in the average FICO for new vehicles," says Apicella. "I think part of that is the credit crunch for the homebuyers and the subprime market spillover effect, which is leading to higher debt levels for the typical car buyer."

The slight uptick in delinquencies was another side effect of the credit crunch, notes Apicella. Delinquencies increased six basis points last year for new-vehicle purchases, and 27 basis points for used-vehicle purchases.

The average for loan terms on new-vehicle purchases jumped one month last year, increasing from 64 months in 2006 to 65 months in 2007. Loan terms for used-vehicle purchases also increased by one month last year.

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