August 1, 2021

Government, lender pandemic response bolstered subprime auto loan performance

While subprime shares shrink in the auto-lending marketplace, new research from the Federal Reserve Bank of Chicago suggests the performance of these loans exceeded lender expectations because of steps taken by the government and auto lenders early in the coronavirus pandemic.

Many auto lenders set aside hefty reserves to insulate themselves from future losses, anticipating a jump in delinquencies and repossessions amid historic unemployment from mandatory stay-at-home orders during the crisis.

Yet those losses never materialized. According to a blog post on June 30, the Chicago Federal Reserve posits that subprime auto loan performance was assisted greatly by the extension of government assistance through the Coronavirus Aid, Relief and Economic Security Act; temporary moratoriums on vehicle repossession in many states; and proactive moves by auto lenders to extend forbearance programs. In short, the steps taken to protect vulnerable populations during the pandemic were successful.

Examining a sample of 1.2 million subprime auto loans used as collateral for asset-backed securities, the researchers found a relationship between forbearance programs and delinquency rates. Namely, the longer an auto loan remained in forbearance, the less likely a delinquency would occur once that loan exited a forbearance period.

For example, loans that received one month of forbearance in April 2020 were the quickest to return to delinquency. Delinquency rates stayed lowest on loans with four months of forbearance.

Many lessons will come from the pandemic period, but it’s clear that assisting customers during times of economic strain can only help the industry in future crises.