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The Detroit lender gave a favorable outlook on credit losses despite the fact that it expects a decline in used-car prices.
October 29 -
The CFPB's very public concerns regarding both auto lending and add-on products has led observers to conclude the agency will soon focus specifically on add-on products tied to auto loans, such as extended warranties and theft-prevention services.
September 26 -
From the architects of multibillion-dollar mortgage settlements comes the latest scare for banks: a Department of Justice investigation of subprime auto lending. But the auto loan market has a different track record and players than mortgages, setting the stage for a unique fight among prosecutors, lenders and dealers.
August 6
For many months, subprime auto lenders have been insisting that the industry's boom will not be a precursor to the kind of collapse that knocked out the subprime mortgage business.
But now more than ever, low-credit-score lenders find themselves on the defensive, due to a mix of stepped-up regulatory scrutiny and growing worries about credit quality.
On Tuesday, after subprime lender Santander Consumer USA reported a 29% year-over-year jump in its quarterly provision for credit losses, Chief Executive Officer Thomas Dundon acknowledged that falling used-car prices, increased competition for loans and the watchful eye of regulators are all putting pressure on the business.
"But we remain confident in our ability to originate loans with appropriate risk-adjusted returns," Dundon said.
Santander Consumer, which held an initial public offering in January, also said that its net chargeoff ratio rose to 8.4% in the third quarter, up from 6.4% a year earlier.
The company attributed some of the increase to the runoff of loans originated between 2009 and 2012, when competition was less fierce and terms were more favorable to the lender.
"We see the shift in losses returning to more normalized levels," Chief Financial Officer Jason Kulas said in a news release, "and our yields today are in line with our expectations."
Still, investors reacted negatively. Shares in Fort Worth, Texas-based Santander Consumer the nation's tenth-largest retail auto lender, according to Experian fell 7% Tuesday.
Santander Consumer has acknowledged receiving a Justice Department subpoena in connection with its subprime auto business, and some of its biggest competitors also find themselves under the microscope.
On Friday, Ally Financial disclosed that it received a document request from the Securities and Exchange Commission in connection with a subprime auto finance investigation.
And on Monday, Capital One Financial noted in a securities filing that it received a subpoena from the New York District Attorney's Office regarding the subprime auto lending business.
During a conference call with analysts last month, Capital One Chief Executive Officer Richard Fairbank said: "When you think about the economics of the business, subprime has high margins and higher losses. And it's all about how well one can play the credit risk management game. I think this is not for the faint of heart."
Rating agencies have also recently begun to express increased concern about the securitizations that have fueled the subprime auto lending boom.
In one recent report, analysts at Fitch Ratings raised concerns about so-called "domino risk" the possibility that financial difficulties at one subprime auto lender could spread quickly to competitors.
"Negative headlines could result in credit lines being pulled and private-equity support withdrawn for several lenders simultaneously," the report's authors stated. "It is dangerous to assume that larger lenders would automatically step up and support a wave of consolidation."
At the same time, Fitch cautioned against drawing direct parallels with the subprime mortgage market of 2006 and 2007, noting that the subprime auto loan market is much smaller, and that cars are far less integral to the U.S. economy than housing.
Last week, analysts at Moody's noted that the credit quality of auto asset-backed securities continued to decline in the third quarter. "Loan maturities are still lengthening, and the average FICO has decreased again," Aron Bergman, an analyst at Moody's, said in a news release.
Nonetheless, Moody's said that it upgraded several auto-asset-backed securities, some of them non-prime, because they include better protections against investor losses.
Bank regulators are also issuing warnings about the weakening quality of auto loans. In
"Notably we are seeing average chargeoffs in auto lending rise across all lender types over the last year banks, credit unions and nondepository finance companies," said Darrin Benhart, the OCC's deputy comptroller for supervision risk management.
Matt Scully contributed to this article