Auto Lender Checked Income on 3% of Loans in Subprime Bond

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(Bloomberg) -- Santander Consumer USA Holdings Inc., one of the biggest U.S. subprime auto finance companies, verified income on less than 3% of borrowers whose loans it bundled into more than $1 billion of bonds it sold this year, according to Moody’s Investors Service.

That’s down from as high as 17% of loans verified for some asset-backed securities Santander issued in 2017, Moody’s analysts including Gary Lampert said in a Sept. 4 report. By comparison, GM Financial’s AmeriCredit, also a major subprime auto ABS issuer, verified income on about 68% of loans for a subprime auto ABS it priced this past June and 66% for a March deal.

A Santander deep-subprime ABS that priced in June had 2.6% of loans verified for income, while the transaction before that had 3.2% checked, the Moody’s analysts said in an interview. A transaction currently marketed by Santander will likely be in the 3% range as well, or possibly lower, though that data won’t be released until the transaction closes, they said.

This steady decline in Santander’s income verification levels in recent pools of loans means “that there is a higher chance of borrowers having weaker credit profiles than they have stated,” the Moody’s team wrote in their presale report, which rates certain tranches of the deal as high as Aaa, the highest investment-grade level.

While a spokeswoman for Santander didn’t have any immediate comment on the Moody’s report, she pointed to information provided on the bank’s earnings calls and elsewhere saying that the percentage of income verification in ABS has declined as the company continues to refine its processes of screening high risk dealers and borrowers from its securitizations. Moreover, despite the lower percent of proof-of-income in more recent transactions, the performance of those transactions has been consistent or better than the historical deals that had a higher percentage of income-verified loans.

Ratings firms have demanded higher levels of credit protection in deals over recent years to mitigate increasing delinquencies in the underlying loans.

“Income verification is only one part of the entire underwriting process for the loans,” Moody’s analyst Nicky Dang said in the interview. “It’s only one factor that is baked into the historical deal performance we’ve seen, which has generally been consistent and stable.”

However, it could be a contributing reason as to why expected losses on Santander subprime auto bonds are higher than bonds from its peers, Dang said. Moody’s expects average losses as high as 17% for loans underlying the bonds from Santander’s typical subprime series of transactions, although it forecasts losses of 24% for the deal currently marketing, which is from a deeper subprime series. In comparison, expected losses are at about 10% for similar subprime auto ABS from GM Financial.

Borrowers in the bond currently marketing have an average FICO score of 581, and are paying average annual percentage rates of 18.9%, according to the Moody’s presale report.

©2019 Bloomberg L.P.

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