We first introduced readers to the "New Century of auto finance" (aka "Santander Consumer USA") several years ago when we first took note of their aggressive auto ABS facilities. In fact, here is a quick look at one of their ABS deals from 2015 which sported an average FICO of 595, LTV of 110%, APR of 16.2% and a term of 70 months.
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…
And if that isn't enough evidence to convince you that today's auto sales are nothing more than another subprime, debt-fueled bubble then perhaps you should also take note of today's Bloomberg article that highlights the fact that Santander USA apparently only took the time to verify income on roughly 8% of the loans they subsequently dumped into ABS facilities and sold off pension and insurance companies.
Santander Consumer USA Holdings Inc., one of the biggest subprime auto finance companies, verified income on just 8 percent of borrowers whose loans it recently bundled into bonds, according to Moody’s Investors Service.
The low level of due diligence on applicants compares with 64 percent for loans in a recent securitization sold by General Motors Financial Co.’s AmeriCredit unit. The lack of checks may be one factor in explaining higher loan losses experienced by Santander Consumer in bond deals that it has sold in recent years, Moody’s analysts Jody Shenn and Nick Monzillo wrote in a May 17 report, which reviewed data required of asset-backed bond issuers that’s recently been made available.
Limited verification of loan applicants’ stated incomes and employment “creates more uncertainty around whether borrowers will be able to afford their monthly payments, which becomes particularly important if they have poor credit records and risky loan terms,” the analysts wrote.
Andrew Kang, Santander Consumer’s treasurer, acknowledged the minimal level of income verification and said the company’s practice has been consistent over time even if it’s lower than levels reported among competitors.
Meanwhile, as we pointed out last week (see "UBS Hints At Rampant Auto Lending Fraud; 'It’s Not Just Smoke And Mirrors Anymore'"), this news comes just as there is growing concern among auto ABS investors that consumers, auto dealers and/or banks have been going beyond simply relaxing underwriting standards and have instead been forced to commit outright fraud in order to attract that incremental auto volume growth. As UBS Strategist Matthew Mish told Bloomberg, “something is definitely going on under the hood...it’s not just smoke and mirrors anymore.”
The evidence is growing. First, the explosion of technology makes gaining access to information to improve credit scores very simple. Internet searches for 'credit score' are at record levels. Second, our survey finds 21% of auto loan borrowers admitted to some form of inaccuracy in their loan applications. Third, there is growing concern reported among auto lenders around fraud, which is the extreme case of this behavior.
Overall, the explosion and adoption of technology makes gaining access to "proven" methods for improving credit scores extremely simple. To this point, the popularity of internet searches for "credit score" has been rising consistently and is near peak post-crisis levels (Figure 7). Similarly, our survey finds that 21% of auto loan borrowers admitted to some inaccuracy in their application for non-mortgage related debt (auto, student or credit card loan). More concerning, this trend may be systemic as 29% of other consumer loan (i.e., student loan, credit card) borrowers acknowledged some form of inaccuracy in their applications (Figure 8).
All of which helps explain those surging delinquencies....
...and loss severities in ABS structures...
...and what increasingly seems to be a long-term trend in SC's stock.
All great signs of a "plateau."