May 11, 2016

The Game of Subprime Lending: Will Smaller Players & Consumers Win?

While subprime lending has grown over the recent past, some of the larger lenders are pulling away from this sector.

As smaller, less regulated lenders continue to make an aggressive play for subprime loans and offer borrowers more attractive prices, larger players are making a dash for the exit.

Not long after Santander Consumer USA Holdings made a play for subprime auto loans, the Dallas-based auto lender is minimizing its presence in this market. Total loan originations dropped 6 percent from the same time last year as Santander continued to cut back on its loan activities with subprime borrowers.

With the subprime loan market showing signs of excess, prices are plummeting so low that lenders such as Santander feel simply isn't worth the risk any longer.

Over the first quarter of 2016, Ally Financial has also scaled back its subprime auto loans, which are those made to borrowers with a credit score under 620. Such loan assets comprised 12.6 percent of all its loan originations, down from 13.9 percent compared to the same time last year.

Wells Fargo has also capped the amount of subprime auto loans that they originate to no more than 10 percent of their total originations.

Larger lenders have taken measures to protect their loan portfolios by effectively avoiding the risk associated with subprime borrowers, opening up the playing field for smaller lenders to expand their own subprime loan assets and absorb this risk. Can smaller players survive if selling is expensive and losses are greater than expected?

Over the long term, big banks have not displayed a maintained presence in the subprime loan marketplace, despite the odd run for the market as Santander made a few months earlier.

Consumers Will Benefit From More Affordable Loans, But Will Smaller Lenders Survive This Higher-Risk Climate?

With the cost associated with securitizing subprime auto loans decreasing over the recent past, these smaller competitors are able to offer more loans. Borrowers, in turn, are able to benefit from much more cost-effective loans, despite poor credit history.

But the question is, can smaller lenders persevere if their securitization exit gets more expensive? What if their losses are higher than they anticipated, and their loan portfolios are underwater in value?

Not only that, but do smaller players possess the necessary tools to adequately assess credit risk in the subprime marketplace?

What these players need is a strategy to ensure an ideal risk and reward scenario is in place prior to selling or acquiring loan assets. Without the right team of experts, it's easy to see how such smaller-scale lenders are at risk of failing while trying to provide risky borrowers with cheaper, more easily-accessed loans.

Garnet Capital is a team of experienced valuation advisors who have helped countless buyers and sellers of loan portfolios to achieve appropriate risk/reward circumstances based on their specific asset allocation. We also assist warehouse lenders in selling loan portfolios from originators who were previously unsuccessful in establishing a successful business model, and we can help you too.

Discover more about our services and register for our online portfolio auction system today.