Stemming from subprime financing activity, TransUnion’s Q2 Industry Insights Report showed the magnitude of diminishing originations and rising delinquencies.
Or as Brian Landau, senior vice president and automotive business leader for TransUnion, explained it to SubPrime Auto Finance News this week: “This is just normal course of the industry recalibrating.”
For the first time since 2012, TransUnion found that originations to subprime consumers declined year-over-year for a number of major credit products, including auto financing. The report, powered by Prama analytics, determined that 4.63 million subprime consumers originated a vehicle installment contract or lease, personal loan or credit card in Q1. Comparatively, 4.89 million subprime consumers originated one of these products in Q1 2016.
“Across product lines, we saw a decline in subprime originations at the beginning of 2017, and for the first time in a number of years we observed this for consecutive quarters,” said Ezra Becker, senior vice president of research and consulting for TransUnion.
“Immediately following the recession, many lenders pulled back on subprime originations to control delinquency,” Becker continued in a news release. “As the economy recovered, lenders loosened their underwriting standards and allowed more subprime consumers greater access to credit.
“It appears that this trend may now be changing, though it is a much different environment than what we observed just after the recession. The economy is performing well, and after several years of increased subprime lending, some lenders may simply be taking a pause,” Becker went on to say.
When it comes to consumers being behind on their monthly payments, TransUnion’s latest Industry Insights Report found that the auto delinquency rate reached 1.23 percent in Q2 of this year, an increase of 10.8 percent from 1.11 percent in Q2 of 2016.
“For the past several years, lenders have offered more financing opportunities to non-prime consumers,” Landau said. “As a result, we expected to see a slight rise in delinquency. It’s important to note that we still remain at very low levels of auto delinquency, but we will continue to monitor this trend.
“This is the normal course of what to expect to happen next,” Landau added during a phone conversation ahead of the report’s release. “Right now we’re seeing lenders more prudent and proactive in terms of scaling back to manage the risk, more so than they probably did in 2008. That is playing out right now. It didn’t surprise me that the uptick showed up on the most recent quarter. I’m sure if you talked to many lenders, they would say that they continue to fine tune and calibrate the managed risk in their portfolio. This may be going on for another few quarters.”
Among finance companies that report their results publicly, a few have pointed to the 2015 vintage as a potential source of their delinquencies. SubPrime Auto Finance News also asked Landau about what TransUnion’s data shows regarding the performance of paper originated at that time.
“When I look at our analysis of vintages going back to 2010, you see the deterioration of loan performance throughout the years,” Landau said. “We’re seeing this migration in terms of the uptick in delinquencies. That trend continues.
“What I could say about 2015, in particular, (is that) there were some macro-effects that could have impacted that particular vintage,” he continued. “We talked about the oil shock in states like Texas and Oklahoma where there is a high penetration of subprime and non-prime. The performance of the loans originated in those states was a little bit not on par with the others. That could be one reason for it.”
Viewed one quarter in arrears, TransUnion indicated auto finance originations declined to 6.73 million in Q1, down 2.9 percent from 6.93 million in Q1 2016. This marks the third consecutive quarter of year-over-year declines in auto originations and the first decline in origination growth in any first quarter since 2010.
“Lenders have also raised concerns about the downward pressure on used-car values, and we are beginning to see this impact origination growth,” Landau said. “Despite this decline, total auto balances continued to increase in the second quarter of 2017.”
Total auto balances achieved a new high in Q1, reaching $1.145 trillion, according to the report. The total balance was up 6.9 percent from $1.072 trillion in Q1 2016.
Personal loan activity
Another segment where subprime activity is prevalent is within personal loans as some auto finance companies have a division that caters to this space, too.
In Q1, TransUnion determined subprime personal loan originations declined 10.6 percent year-over-year, compared to a positive annual growth rate of 11.0 percent in Q1 2016. This development marks three straight quarters of year-over-year declines in originations.
More than 100,000 fewer subprime consumers opened a personal loan in Q1 2017 than in Q1 2016, according to TransUnion.
In fact, the credit bureau pointed personal loan originations declined for all risk tiers, but at lower rates than for subprime originations. Total originations dropped 6.9 percent from 2.99 million in Q1 2016 to 2.78 million in Q1 2017.
“A combination of factors have influenced the decline in subprime personal loan originations. For example, FinTech lenders faced funding challenges in Q2 2016,” Becker said.
“After years of growth in auto lending for subprime consumers, not surprisingly we observed an uptick in auto delinquency. Higher delinquency rates have long been anticipated as the result of that credit expansion. The reduction in subprime auto lending is a natural reaction to the emergence of that increased delinquency,” he continued.
In the second quarter of this year, the personal loan delinquency rate declined to the lowest level since 2009. The delinquency rate was 3.02 percent in Q2, an 8.5 percent decline from 3.30 percent in Q2 of last year.
“After a difficult 2016 for many FinTech lenders, we observed growth and stabilization in key metrics such as balances, delinquency and consumer participation,” said Jason Laky, senior vice president and consumer lending business leader for TransUnion. “More than 16 million consumers now have a personal loan, and we expect this trend to continue as more banks and credit unions re-enter the personal loan market.”
Personal loan balances achieved a new milestone of nearly $107 billion in Q2, growing 10.8 percent above the same point a year ago when total balances were $96 billion.
While balances increased, the growth rate was lower than the average Q2 growth rate of 24.7 percent for the past three years. The average balance per consumer also reached a new high at $7,781 in the second quarter, up slightly from $7,745 in Q2 2016.
“The personal loan market continues to grow, but with the pullback in non-prime originations offset by a shift toward prime and super prime consumers,” Laky said.
“At the beginning of 2017, the larger loans taken by the most creditworthy consumers helped drive balance growth and higher average borrower debt, while lowering overall delinquency,” he went on to say.