COSTA MESA, Calif.-As competition for auto lending continues to heat up in the tight lending environment, banks and CUs are taking on more risk, expanding their reach outside of prime and extending terms.
That is the finding from Experian, which reminded that such a shift will increase delinquencies in the coming years. The company advised credit unions to pay close attention to pricing and monitor their auto-loan risk profile carefully to avoid getting caught again by a marked increase in member defaults.
Referencing Experian's State of the Automotive Finance Market report for the second quarter, Melinda Zabritski, director of automotive credit, told Credit Union Journal that after auto lending delinquencies have finally leveled off, "you can see the data start to cycle again. There is significant growth in subprime lending, and terms-especially outside of prime-are getting longer. You will probably see in four to six quarters the delinquency rate begin to increase. So how lenders manage their portfolio through this next cycle will be key."
Delinquencies for all lenders have improved by 11 basis points when looking at data through the second quarter of 2011 compared with the same period for 2010. CU delinquencies continue to be the lowest. "This is giving lenders more confidence again," said Zabritski.
Banks Taking More Chances
But banks are taking most of the chances, the Experian data shows, increasing their lending portfolio 20.08% outside of prime in 2011 compared with 2010, while CUs have inched up 5.25%. Captives have grown 7.94%.
Zabritski noted that the increased competition is also stretching out terms. "When you are in a very competitive market there is a greater tendency to be more lenient on terms and have more aggressive products."
Zabritski said that her greatest concern is with lengthening terms on new and used cars, and especially the marked increase in terms for deep subprime and prime. "We are watching this trend. Terms dropped [during the recession] and they are starting to creep back up again, even on the much more extended terms like the 72 and 84 months."
If credit unions are extending terms, Zabritski reminded they have to price appropriately for the risk.
"Definitely analyze their risk exposure and make sure they have strong risk policies in place, and watch the markets carefully and what is going on in the industry."
