The Consumer Bankers Association (CPA) provided attendees of this week’s National Automobile Finance Conference and Trade Show, Austin, Texas, with a sneak peek at its 2007 Auto Finance Survey Preliminary Results.
“These are very selective findings, and what struck me, was that there was a little up tick in delinquencies,” said Fritz Elmendorf, vice president of communications and research at CBA. “We’re hearing some things about that at the conference; that lenders are coming out of a few years of declining delinquencies and loan losses, and we’re heading into a period where they’re going up. The people are wondering if we priced sufficiently to absorb the losses, whatever they’re going to be.”
Based on preliminary results, new loan dollar delinquencies increased from .87 percent in 2006 to 1.10 percent in 2007. Account delinquencies also increased from 1.08 percent to 1.14 percent during the period. Used loan dollar and account delinquencies, which had been on the decline since 2003, also experienced increases during the period.
Aside from delinquency rates, Elmendorf noted that loan margins are also putting pressure on lenders.
“We know there’s pressure on dealers and manufacturers and that every aspect of the industry is facing stress coming into this year and lenders are certainly part of that,” he said. “Although, we think this will be largely in the subprime area, whereas the prime portfolios are holding up pretty well.”
The study revealed that the average bureau scores for new-vehicle buyers has decreased, which has been a trend the last three years. Elmendorf said it could mean that customers are showing stress related to their debt and income levels. However, the average bureau score for used-vehicle buyers has increased over last year, possibly indicating that most creditworthy buyers are seeing the value of a good used car, and buying those instead.
Elmendorf noted that, when looking at the higher delinquency statistics, it could be a signal of greater credit problems ahead this year.
The study revealed that used loan maturities are becoming longer, showing that 50 percent of loans were greater than 60 months vs. 40 percent for 2006 and 38 percent in 2005. Elmendorf also noted that lenders are being advised to watch extended term financing, because it contributes to longer periods of negative equity and greater repossession losses. New loan maturities are also becoming longer, with 61 percent of loans being greater than 60 months, a five percent increase over 2006 and 15 percent increase over 2005.
“That’s been a long-standing trend, but loan maturities are starting to stretch out again,” said Elmendorf. “What I’ve been hearing at the conference is that a lot of that may be within the subprime area.”
Reserve caps are also continuing to shrink for new and used vehicle financing. According to Elmendorf, this may indicate that customers may be more financially stressed and lenders are under pressure from thinner margins, as well as potentially higher credit losses.
“Reserve caps are under pressure. We’ve had a three-year trend where they are decreasing,” he said. “The reserve cap issue is definitely going to be on the minds of the finance department.”
Bankruptcy charge-offs have also decreased in 2007 to 22 percent, down from 25 percent last year. CBA analysts say tougher standards should lead to a continuing downward trend.
Walter Cunningham, president of Cunningham Consulting presented the findings on March 20, 2007 at the National Automobile Finance Conference and Trade Show. The complete survey results will be released at the beginning of May 2007.