Subprime Lending Still On The Rise As GM Financial Grows Prime Lending Operations

Subprime auto financing continues to grow, and while one analyst at Moody’s says that banks are largely staying out of the subprime space, overall lending continued to rise, with retail banks seeing some of the strongest growth. This expansion in lending, particularly subprime, was attributed as a key driver in auto sales. SNL cited forecasts for a SAAR of between 16 and 16.7 million in 2014, up from 15.5 million in 2013.

SNL Financial, a finance industry trade publication, directly attributed strong auto sales to the increase in subprime financing, drawing a connection between the increased SAAR and an increase the portfolios of subprime lenders. Consumer Portfolio Services Inc saw a 37 percent growth in receivables year-over-year, with over $1.2 billion in receivables for Q4 2014.

The increase in subprime lending along with looser underwriting standards has led ratings agencies to view the sector in a negative light. Fitch, which has issued a negative outlook in the sector as a whole, told SNL that overall, losses were at “historical lows” and that the increase in lenders will make the segment more competitive.

SNL also reports that Moody’s has cast an eye on underwriting standards, with Moody’s VP Mark Wasden stating that longer loan terms (due to higher prices, more durable cars and increased ownership periods) is a major factor.

While Wasden noted that banks were remaining “relatively conservative” regarding subprime lending, savings banks saw the biggest growth in overall lending among depository institutions, growing 16.06 percent year over year (compared to 11.24 percent for credit unions and 10.04 percent for commercial banks). Even so, commercial banks remained the dominant force, issuing $331.92 billion in loans, with savings banks accounting for just $21.49 billion.

Another notable development is the increasing reliance of GM Financial on General Motors – while this sounds redundant, General Motors vehicle financing now accounts from 70 percent of GM Financial’s business, and receivables have more than doubled to $33 billion in Q4 2013 from just $13 billion a few years ago. GM Financial, once known as AmeriCredit Corp, was largely a subprime focused business when GM bought it in 2010, but plans are underway to transition GM Financial to prime lending. While GM Financial is now stepping into the role that the legendary GMAC once occupied, Ally (GMAC’s successor), is shrinking from the auto lending market, suggesting a reversal of roles for GM’s two finance arms .