No evidence now of subprime auto lending bubble, Equifax says

subprime auto lendingSubprime auto lending is not a bubble in danger of bursting like the subprime mortgage lending bubble that set off The Great Recession, despite predictions to the contrary, said a white paper by one of the Big Three credit bureaus.

“The lending landscape today is not the same as it was in 2007 – both because lenders generally have a reduced appetite for risk and because regulatory scrutiny has increased,” said Dennis Carlson, deputy chief economist at Equifax. “The evidence at this time does not suggest there is a bubble forming.”

Equifax examined data from credit reports of more than 210 million consumers in its credit database to evaluate whether traditional characteristics of a bubble are present.

The credit bureau defines subprime as credit scores below 640 on a scale of 280 to 850.

The Equifax analysis shows that subprime auto lending has been fairly stable since 2012, and originations have been shifting toward the higher end of the subprime credit score spectrum. Besides Equifax, analysts for Moody’s Analytics, Standard & Poor’s Rating Services and the New York Federal Reserve Bank have made similar statements, Automotive News reported online.

Santander Consumer USA, a full-spectrum lender, participates in subprime auto lending indirectly through car dealerships as Santander Auto Finance and directly to consumers through RoadLoans.

“There has been a great deal of attention recently on the topic of auto lending, with a particular focus on ‘subprime lending,’” said the Equifax analysis, which provided multiple graphs of data. “The tone of many of the articles on subprime lending is negative … suggesting that, similar to the mortgage issues that precipitated the financial crisis, there is a bubble being created that is ready to burst.”

But the credit bureau, which compiles data on more than 600 million consumers and 81 million businesses worldwide, countered by citing the value of subprime auto lending:

“A fair and functioning ‘second-chance’ market is necessary for a fully-functioning economy. In many cities in America, an individual’s job prospects are limited without a car. In the absence of a subprime auto loan, many would be unable to finance a car and therefore face difficulty obtaining and maintaining employment. Many suffered job loss, foreclosure, or other hardships during The Great Recession and, as a result, became delinquent on one or more debts. These delinquencies or defaults may have put their credit scores into the subprime range for now, even if underlying economic stress has been reduced.”

Additionally, Equifax, said, “If a borrower with subprime credit obtains a loan from a financial institution that reports the complete payment histories of their clients to the national credit reporting agencies, and that borrower makes timely payments on that loan and other credit obligations, then over time that borrower’s credit score will likely improve, possibly enough to qualify for prime credit terms.”

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