Perspectives on 2021: Subprime Auto Optimism and Regulation on the Horizon

Last week, Joseph Cioffi moderated a panel of industry professionals on the state of subprime auto lending and securitization to coincide with the launch of our third annual 360 degree market study, Subprime Auto: Participants’ Expectations Moving on From 2020.

Below are some highlights from the panel discussion and additional insights from Joseph and his fellow panelists: Ines Beato, Senior Vice President, US ABS – Global Structured Finance, DBRS Morningstar, Sean Morgan, Vice President of Finance, Westlake Financial Services, and Clayton Triick, CFA, Senior Portfolio Manager, Angel Oak Capital Advisors.

  • Voluntary extensions and forbearances by lenders and servicers during the pandemic have helped borrowers bridge to a post-pandemic tomorrow. These actions have complimented government stimulus programs to underserved consumers, demonstrating good governance and social impact ESG criteria for investors to consider. This is an unexpected outcome for the sector, which many expected to be in crisis.
  • Subprime auto securitizations have performed well during the pandemic thanks to a combination of deal structures, credit enhancements, and external factors such as the importance of vehicle ownership, which has led to high prioritization of payments, and high used vehicle values that have benefited from strong demand relative to short supply. Negative equity (when a vehicle is worth less than the borrower owes), once a significant risk factor, is in the rear view mirror for now.
  • The new administration is shifting the federal government’s approach to regulation, but the subprime auto market has faced such changing political winds before. Rather than make significant preemptive moves in anticipation of any new rules or enforcement actions, lender and servicers believe they have learned enough from past investigations and regulatory changes to adapt to what may come.

Looking Ahead

The market is optimistic after a year of challenges, but there are still issues to be wary of as we approach the light at the end of the pandemic tunnel.

Used vehicle prices are likely to decline at some point once supply normalizes, and when that happens, negative equity could rise again to be larger than before. Past regulatory adaptability is encouraging, but political priorities and enforcement are not wholly predictable based on past administrations and a seismic shift in regulatory scrutiny could impact the market. This week Joseph also published an article with Westlaw on what areas of regulation might get more attention in the coming year from the Biden/Harris administration. As noted there, fair lending, disparate impact, debt collection and usury limits are areas to watch.

Lenders and servicers have stepped up to assist borrowers (and regulators have been watching this keenly), but when government stimulus runs out and vehicle prices soften, whether they can or will maintain the same level of accommodations remains to be seen. We are on the cusp of a new tomorrow.

To view the recording of the panel, visit hereTo download the full report, click here.

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