Losses Starting to Hit 'Near-Prime' Auto Lenders

The problems that for months have plagued subprime auto lenders- unexpected losses, rising provisions, the inability to recover on bad loans-are starting to migrate to auto financiers whose customers have better credit.

Last Friday, Union Acceptance Corp., an auto lender catering to "prime" consumers, disclosed it would suffer a loss of up to $11 million in the quarter ending June 30 and said it was increasing loss reserves.

Trading of Union Acceptance shares in the Nasdaq market was briefly suspended Friday morning. After activity resumed, the stock plunged 20%, to an all-time low of $8.81. The shares closed up $1.31 Monday, at $10.125.

In a statement explaining its move, which will come at the end of the company's fiscal year, Union Acceptance said there had been "no material improvement in recoveries and credit loss trends are higher this year than in previous years."

Union president John Stainbrook said rising delinquencies combined with manufacturers' selling cars coming off leasing programs have depressed recovery rates in his business.

"Although we don't have as many repossessed cars as others, so many cars are coming off lease right now that it's creating a glut," Mr. Stainbrook said.

For the three months ended March 31, Union Acceptance, which is headquartered in Indianapolis, said recoveries averaged 39.3% per charged- off loan. That was down from 49.75% the year before. Mr. Stainbrook said the company would try to sell more seized cars through retail dealers and also redouble its efforts to move them via auctions.

Union Acceptance is the second "near-prime" auto lender in six weeks to revise expectations of recovering on bad auto loans.

In late April, Arcadia Financial Ltd., the Minneapolis company formerly known as Olympic Financial, cut its chargeoff recovery rate to 60% of the loan, down from 81%, and said it would heighten efforts to sell seized cars through dealers. The company took a $75.3 million first-quarter loss, and its stock price dropped 23%, although it has since recovered.

Both Union Acceptance and Arcadia have tried to dodge the stigma marking subprime auto lenders by stressing to investors that they buy installment contracts for car loans made to consumers with good credit.

These companies, which deal primarily in used cars, attract customers who might qualify for a bank loan by offering longer terms than a bank usually would, which reduces the consumer's monthly payments, said industry analyst Michael K. Diana of Bear, Stearns & Co., New York.

Union Acceptance's announcement has some industry analysts thinking that Arcadia didn't cut its chargeoff recovery rate far enough. They said the 60% rate Arcadia now projects may be too high, considering that Union is reporting only around 40%.

Mr. Diana, for one, said he thinks Union Acceptance will survive the latest hit to the beleaguered auto lending business. "They presented a worst-case scenario," he said, "and investors reacted as if this scenario had already happened."

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