Subprime Snaps: Largest US Subprime Auto Lender Delays Earnings Due To "Accounting Matters"

We first introduced readers to Skopos Financial, a company which we dubbed "The new king of deep subprime" which we have long expected to become ground zero for the upcoming subprime auto crisis, and which is run by Santander Consumer USA veterans, last April.

This is what we said about the company that has become increasingly more prominent: "Skopos Financial, a four-year-old auto finance company based in Irving, Tex., sold a $149 million bond deal consisting of car loans made to borrowers considered so subprime you might call them—we dunno—sub-subprime?"

As Bloomberg noted at the time, the details from the prospectus showed a whopping 20 percent of the loans bundled into the bond deal were made to borrowers with a credit score ranging from 351 to 500—the bottom 6 percent of U.S. borrowers, according to FICO. As a reminder, the cut-off for "prime" borrowers is generally considered to be a credit score of around 620. More than 14 percent of the loans in the Skopos deal were made to borrowers with no score at all.  That means the Skopos deal has a slightly higher percentage of no-score borrowers than the recent subprime auto securitization recently sold by Santander Consumer, which garnered plenty of attention for its dive into "deep subprime" territory."


In its own words, Skopos said that it was "leveraging our sophisticated, patented iLender technology and visionary management team, Skopos provides a streamlined process for franchise dealers to finance customers with low credit scores."

We decided to look at the "visionary management team" and found the following profiles which seem to indicate that at least for some industry veterans, Santander Consumer isn’t quite subprime-y enough (note that there’s a Countrywide link in there as well for good measure):


We concluded as follows:

We suspect we'll be talking more about Skopos in the not-so-distanct future, but for now, just note that the amount of paper floating around out there backed by the worst of the worst in terms of auto loans to underqualified borrowers just went up by another $150 million. With the market's biggest subprime issuer (Santander Consumer) increasingly at home in the deep subprime space, just about the last thing anyone needs is more supply from an entity run by former Santander Consumer execs.

Sure enough, in the coming months there was a lot to come on Skopos, first in November in "Subprime Auto Goes Full-Retard: Lender Sells $154 Million ABS Deal Backed By Loans To Borrowers With No Credit", followed soon after by "Subprime Auto Delinquencies Soar Past Crisis Levels, Now Highest In 20 Years."


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But while we had covered Skopos, the king of deep subprime, extensively and were long anticipating the "visionary" lender to be the canary on the coalmine, another company was also long in our sights: the king of all subprime auto loans: Santander Consumer USA.

Here is the boilerplate from the company's own description:

Santander Consumer USA Holdings Inc. (NYSE: SC) ("SC") is a full-service, technology-driven consumer finance company focused on vehicle finance, third-party servicing and delivering superior service to our more than 2.7 million customers across the full credit spectrum. The company, which began originating retail installment contracts in 1997, has a managed assets portfolio of more than $53 billion (as of March 31, 2016), and is headquartered in Dallas

Then recall from our March 2015 profile:

Santander is the largest subprime auto lender in the country with more than $15 billion in outstanding loans to underqualified buyers. Not surprisingly, the company also dominates the subprime auto ABS space accounting for a disproportionate share of YTD issuance. We noted that Santander’s first deal of 2015 (SDART 2015-1) carried an average FICO of 595, an average APR of 16.20%, and an average term of 70 months…



We went on to detail how Santander was set to float a new subprime deal that looked even worse called DRIVE 2015-A. The securitization “sold out in a matter of hours,” with the highest rated tranche yielding just 1%, proving beyond a shadow of a doubt that artificially suppressed interest rates are driving investors to take bigger and bigger risks as they desperately search for any semblance of yield.

Taking advantage of unprecedented demand for repackaged "yielding" subrprime loans, Santander simply wanted the loans off its balance sheet so it can make yet more bad loans which it will also move off its balance sheet in order to make still more, and on and on. This is precisely the mentality that existed when the mortgage securitization machine was set on overdrive and it represented a dangerous turn of events at a time when even the market for highly-rated corporate paper is facing a liquidity crisis.

However, since investor demand was there, there was little to prompt a slowdown in the process, and as such, Santander was happily churning more subprime issuance.

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Having followed these two narratives for nearly two years, the subprime giant Santander Consumer, and the overeager Skopos, we were curious which of the two would first signal the bursting of the auto subprime bubble, with our money on the latter.

We were wrong, and as one look at the chart of Santander Consumer, or SC, reveals, the largest US subprime lender appears to have been the New Normal's "New Century."


Why did the stock crash?

The reason is that earlier today, SC announced that the company will delay its Q2 results due to discuss with its current and previous accounting "certain accounting matters primarily related to the Company's discount accretion and credit loss allowance methodologies." To wit:

Santander Consumer USA Holdings Inc. (NYSE: SC) ("SC" or the "Company") announced today that it will delay the release of its Q2 2016 financial results, previously scheduled for Wednesday, July 27, 2016, because the Company's financial statements for the quarter have not yet been completed.


The Company is in discussions with its current and previous independent accountants regarding certain accounting matters, primarily related to the Company's discount accretion and credit loss allowance methodologies. The resolution of these matters may impact prior period financial statements and the timing of the filing of the Company's quarterly report on Form 10-Q for the quarter ended June 30, 2016 (the "Form 10-Q").


The Company is working diligently to file the Form 10-Q and schedule its earnings call as soon as practicable.

Delayed earnings?

Accounting matters?

In discussions with current and previous accountants?

For those who were in middle school when the last subprime bubble, back then mostly in housing, burst in early 2007, these were precisely the telltale signs that the party was over.

While we eagerly anticipate to see what the company will reveal regaeding its questionable "discount accretion and credit loss allowance methodologies" when it reports Q2 earnings, and just how impaired its balance sheet will be as a result, we have the nagging deja vu feeling that it's all downhill from here for the funding sector that provided billions in loans to the US auto sector, and kept this key aspect of the US manufacturing industry humming along.

And for confirmation, we now await a similar report out of the "other" subprime leading indicator, Skopos, which should reveal a similar "unexpected" warning any second now.

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Finally, for those who missed it, here is the email we received from an industry employee who warned our readers of the situation that appears to now be unrolling.

“I work for a smaller but fast growing auto finance company [and] we grew from opening the doors in 2013 to having a $250 million portfolio as of today. Things for the last 3 years have been booming and it seemed like there would be no end to our growth. We were rated by S&P in January and were ready to start securitizing our portfolio.


On March 1st I came into the office to find out that they had started layoffs. These people were fairly new and were in departments that the executive staff has now deemed unnecessary.


I had a meeting with my boss who told me my job is safe but due to us not being able to securitize we were freezing hiring going forward but we were hopefully done with layoffs.”

Expect much more to come.