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Subprime auto origination trends vary by lender


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Subprime auto origination trends vary by lender

A selectionof first-quarter earnings reports shows diverging trends in subprime auto loan productionin a competitive and closely watched marketplace.

A resumptionof growth in subprime lending contributed to double-digit expansion in auto loanoriginations during the first quarter at CapitalOne Financial Corp., and GeneralMotors Financial Co. Inc. saw higher subprime production even as primebusiness continues to account for a growing portion of its portfolio. But said it booked fewer subprimeauto loans during the period, and several large banks downplayed the extent of theirparticipation in the lower credit bands.

CapitalOne did not disclose the specific percentage of the $5.84 billion in auto loan originationsduring the first quarter that were subprime in nature, but any favorable comparisonis noteworthy regardless of its magnitude under the circumstances. It comes onlythree months after Chairman, President and CEO Richard Fairbank said the company'ssubprime auto loan production declined in the fourth quarter of 2015 after havingbeen "essentially flat for several quarters." During the company's first-quarter2015 earnings conference call,Fairbank stated that subprime originations had been "essentially flat for nearlytwo years."

Fairbankexplained during an April 26 conferencecall that Capital One had "good success with our originations programs,"and he suggested that the competitive intensity in the marketplace "may havesoftened a bit." The company's auto loan production had fallen nearly 7.7%to $4.98 billion year over year in the fourth quarter of 2015, and it had been sincethe fourth quarter of 2014 that it had last generated a higher year-over-year rateof originations growth in that business. The year-over-year growth rates duringthe first three quarters of 2015 ranged from a low of 1.1% in the second quarterto a high of 9.7% in the first quarter.

Whenasked during a January callabout Capital One's cautious approach to subprime auto lending, Fairbank repliedby saying that "wesee practices that are inconsistent with where we want to go from an underwritingpoint of view," resulting in a "reduced opportunity" in that partof the credit spectrum. At the same time, Fairbank added that Capital One would"still go for as much origination as we can do in the subprime auto space."

He elaboratedfurther on the topic during an appearance at an investor conference in February.

"Welike the [auto finance] business, and we've spent many, many years investing inthe risk management capabilities to do not only prime auto but also subprime auto,"he said at that time, according to a transcriptof his remarks. He highlighted an underwriting practice that had emerged in thesector, however, that he likened to a low-documentation loan, where certain competitorshad essentially not been verifying borrowers' income.

"Wefeel good about the credit risk that we're taking in that particular business. It'sjust that that opportunity is probably not one that has a lot of growth in it andmaybe a declining one … until the underwriting practice is changed," he said.

In hisApril 26 comments, Fairbank advised the audience to avoid reading too much intoany one quarter's results.

"Westill feel the same way about this business as we have for several quarters,"he said. "We remain very vigilant about competitor practices. In our underwriting,we assume used-car prices decline further. We continue to focus on resilient originations,and we continue to expect gradual normalization of margins and credit."

CapitalOne's subprime growth led one analyst to question Santander Consumer executivesabout the market trends they saw during the first quarter, a period in which thecompany attributed a 5.6% year-over-year decline in its overall auto originationsand a 14.7% fall in core retail auto business volume to lower nonprime volumes andcapture rates.

"Wehave not seen, among the larger players, a sustained trend in taking share,"Santander Consumer President and CEO Jason Kulas said during an April 27 . He had previously explainedthat the company's effort to optimize the balance of risk and return had negativelyimpacted subprime capture rates during the first quarter as opposed to an effortto reduce its exposure to that part of the credit spectrum.

Othersin the auto finance space have chosen to take the latter approach over time, however,as the perception of subprime-related risk has grown.

executivesreported during a recent callthat they have opted to limit subprime production to about 10% of the bank's totalauto originations. JPMorgan Chase &Co. executives said during a callthat the company had pulled back on subprime auto originations a while ago, andthey accounted for only a small portion of its overall auto finance production.Ally Financial Inc. officialsreported during a callthat the company generated less volume in both the subprime and superprime spacesin the first quarter as a result of the company's focus on generating what it believesto have been an appropriate level of risk-adjusted profitability.

Eventhose that have been growing subprime production may not be especially eager totrumpet that development.

At GMFinancial, the General Motors Corp. captive that originally made its mark as a U.S.-focusedsubprime lender, loan and lease originations in North America to borrowers withFICO scores of below 620 increased 14.1% year over year to $1.71 billion duringthe first quarter, according to figures disclosed in an investor presentation. The company's overall North Americaorigination mix continued to shift to higher credit tiers, however, in a reflectionof the ongoing expansion of its strategic positioning within the automaker's franchise.The sub-620 FICO score originations accounted for 18.4% of North America loan andlease originations during the first quarter, down from 28.4% in the year-earlierperiod.

GM FinancialPresident and CEO Daniel Berce confirmed during an April 21 that the absolute level of the company'snear-prime and subprime originations had increased year over year. But GM CFO CharlesStevens during another call the same day described the captive's subprime productionas having been "relatively constant over the last number of years."

He added,"We're not growing that."