By Amy Holbrook
In the past thirty days, the news in the auto finance world has been focused on the subpoenas that were issued by the Department of Justice to GM Financial and Santander Consumer USA. The subpoenas sought documentation on subprime auto loans dating from 2007 and raised concern about increased scrutiny and regulatory review. According to a statement made by GM Financial, the subpoenas are specifically seeking information about underwriting criteria and the methodology for the securitization for these loans.
It is likely that a number of factors brought about this investigation. In June 2014, the Office of the Comptroller of Currency commented that the average auto loan had a value greater than the actual value of the collateral, particularly when lenders were adding in the costs of extended warranties, credit life insurance and other factors. Others have raised concerns that an increased number of private equity firms willing to purchase subprime auto securities have entered the market. This creates greater competition for originators and lenders, who may elect to reduce their underwriting standards and provide credit to individuals with lower creditor scores in order to keep up.
A side effect to reaching further into the subprime space is that the length of the loan tends to get longer, and the monthly payment obligation gets shorter. It provides a greater length of time for a consumer to default and, with a smaller payment, there is a greater risk that if a vehicle must be repossessed, less will have been paid toward the principal.