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Hot Money Fuels Subprime Growth

Money continues pouring into subprime auto finance as investors seek yield, but some industry watchers wonder if the sector is becoming overheated.

It seems everyday brings a new creditor into the market. Meanwhile, existing firms find ready buyers for their asset-backed security offerings.


Another sign of the sector’s appeal is the number of buyouts.


The latest came when the management of White River Capital, the parent of Coastal Credit, agreed to sell the firm to private equity for approximately $79.5 million.


Subprime creditors continue to grow more aggressive. Ken Shilson, the founder of the National Alliance of Buy-Here, Pay-Here Dealers, said finance companies are competing for consumers with 490 credit scores.


“This is about as competitive and lively as it gets,” said Jack Tracey, executive director of the National
Automotive Finance Association.


Tracey’s association formed in the ‘90s as a response to a market that collapsed when a flood of money turned into a drought. That time the money came from Wall Street investors.


The sectors saw several more downturns since then. The last came in 2007 when the major banks that came to dominate the business exited.

That leads to a common industry game of speculating on when the next peak will come.


Shilson said that would happen sometime next year when defaults start to mount.


Tracey expects a retreat, but not a full collapse.


He said every time a credit cycle runs up people say it’s different this time.


But there really are some differences.


One is that many of the players today are small and more focused on auto finance.


They have to stay in this segment, rather than changing their focus to other types of credit.


Industry veterans are forming these smaller players.


For example, Global Lending is one of the newest names, but its management staff includes veterans from Wells Fargo Auto Finance and Hyundai Capital.


Dealer Steve Hall said much of the expansion is driven in ways other than taking on more poor credit consumers.


“We see the lenders taking more low risk strategies,” sad Hall, the president of Dallas-based Dealerselect.


Creditors aren’t waiving stipulations or making more exceptions to underwriting. Instead, they’re working with dealers to process applications more quickly and they’re making more informed decisions about both customers and collateral.


Hall said the improved process is a positive result of the latest downturn.


“When money gets tight, companies figure out more efficient ways to do things,” he said.