In the fourth quarter of last year, total auto loan outstanding balances peaked at $798.5 billion, climbing 11 percent from the 2012 figure. This number is also the highest total recorded ever since Experian started reporting numbers in 2007. 2013′s third quarter figures were also impressive: the total for Q3 was $782.9 billion. This is 15 percent higher than the 2012 Q3 total.
Aside from the loan growth, Experian also found another trend: the decline of delinquencies. Delinquencies slid slightly despite the growth of subprime loans in the fourth quarter. Subprime loans made up 36.2 percent of all outstanding loans, slightly more than the 35.7 percent recorded in the same period in 2012.
In Q4, 30-day delinquencies made up about 2.6 percent of outstanding balances. In the same period in 2012, delinquencies were at 2.7 percent. The same trend occurred in the third quarter of 2013: subprime advanced a bit while delinquencies went down.
Not everything had an upswing, though. Repossession rates for banks, credit unions and captives may have declined, but repo rates for independent finance companies rose. These companies only originate subprime loans. According to Experian’s senior director Melinda Zabritski, the increase was due to the tightening of repossession standards.
Last year may have ended on a good note for the auto financing industry, but the start of this year proved to be a challenging one. Less than two months into 2014, dealer reserve remains the big issue. Despite pressure from the Consumer Financial Protection Bureau (CFPB) to do away with dealer reserve and instead charge flat fees or adopt any other form of dealership compensation, auto lenders stick with dealer reserve.
Wells Fargo in particular is maintaining dealer reserve, though it closely monitors the CFPB’s campaign for a change in dealership compensation. Wells Fargo has a preferred-lender relationship with General Motors, and the automaker offers incentives for loans originated at its dealerships through the lender. In light of the controversy regarding alleged dealership loan discrimination, Wells Fargo has already sent letters to dealers to remind them to practice fair lending.
Wells Fargo is but one of the many in the auto lending industry that wish to maintain dealer reserve. In an attempt to keep dealer reserve and avoid discrimination allegations, Finance & Investment (F&I) vendors are adopting the Pacifico approach—that of limiting dealer reserve and documenting exceptions. The CFPB does not support or approve this approach.
It is unclear whether the federal regulations regarding dealer reserve or auto financing will affect auto loan growth this year, but what happened to Ally Financial has clearly made an impact to the industry and could influence how lenders and dealers alike proceed with financing in the future. The CFPB has made an example out of Ally and is expected to come up with stricter regulations. Auto lenders await the agency’s next move as they currently come up with ways to effectively address the issue.