Photographer: Luke Sharrett/Bloomberg

Subprime Auto Loans' High Rates Hit Southern Motorists Hardest

  • Analysis of recent auto bonds show highest rates in southeast
  • Disclosure of loan-by-loan data now required by SEC regulation

Drivers in the heart of the American South are proving to be the riskiest borrowers, according to newly available data that sheds light on the expanding market for subprime auto loans.

Borrowers from South Carolina were charged the highest average original interest rates this year -- 18.36 percent -- according to a loan-level analysis by Bloomberg of a subset of subprime auto asset-backed securities. Alabama, Georgia, Mississippi and Tennessee all had average rates of at least 17.3 percent. Massachusetts and Delaware had the lowest rates.

Source: Bloomberg Global Data

The data come as concerns mount that underwriting standards in subprime auto debt have been loosening, leading to higher delinquencies and posing a threat to the soundness of loans bundled and sold to investors as asset-backed securities. Two months ago, credit reporting bureau Equifax called the overall market for car loans to the least creditworthy borrowers, known as deep subprime, “awful.”

The latest figures provide a picture of regional diversification among subprime rates that wasn’t available before the Securities and Exchange Commission late last year ordered the increased disclosures on loans that have been securitized. This was the first time the SEC made the data available, preventing comparisons to prior periods.

The geographic divergence was also visible in the market for prime loans that had been bundled. Borrowers from Florida, Georgia and South Carolina had the highest average original interest rate, at least 4.5 percent.

ABS investors also got a warning in October, when analysts at S&P Global said that delinquencies and loss rates were rising and recoveries worsening for recent bundles of subprime car loans. The firm said its ratings on the deals should remain stable because the bonds’ structures are well protected and the agency’s criteria has evolved to address heightened risks.

Source: Bloomberg Global Data

Since then, at least some market participants have suggested that the protections baked into auto ABS to protect bond investors -- known as credit enhancement -- may not be as strong as assumed, especially considering the impact of depreciating used-car prices, increasingly easier auto credit, growing household debt and elevated levels of student loan debt.

Moreover, in an October research report, analysts at Wells Fargo urged investors to be watchful of future legal risks in subprime ABS.

The Bloomberg analysis of recently disclosed loan-level data for auto bonds looked at 21 U.S.-issued auto loan-backed SEC-registered public ABS sold since Jan. 1, 2017. It comprised 15 prime deals and six subprime auto ABS transactions.

— With assistance by Brian Pennisi, Shaina Palmere, Tony Vangi, Sebastian Silva, and Rachel Barenburg

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