Tuesday, March 28Welcome

Why the Concerns Over Subprime Auto Bonds Are Just Beginning

Investors already bracing for a recession and rising defaults are in a different kind of concern after a new lawsuit that claims Credit Acceptance Corp defrauded them with more than $7 billion in subprime auto bonds. confronting.

A lawsuit filed Wednesday against Credit Acceptance has slammed the bank as used-car prices fall from record levels and low-income borrowers struggle to keep up with interest rate hikes by the Federal Reserve. Add increased regulatory scrutiny to the list of concerns facing investors.

credit acceptance CACC,
is one of the largest publicly traded auto lenders with over $4.9 billion in loans in 2020 alone. He has contributed to the boom of the last decade in subprime asset-backed securities (ABS) related to used car loans.

The U.S. Consumer Financial Protection Agency and New York Attorney General Letitia James said Wednesday that Credit Acceptance tricked low-income borrowers into high-cost loans that exceeded the interest rate cap, causing a debt spiral for borrowers. Appealed.

Specifically, the complaint alleges that the company engaged in fraud and misleading investors in approximately $7.4 billion worth of subprime auto loans packaged in ABS transactions from 2015 to 2021. there is

“This shows where the focus of the CFPB is,” said Joseph Cioffi, a partner at New York City law firm Davis+Gilbert, who has been active in subprime mortgage securities litigation for the past decade. said. “The problem is that something could be discovered that could make investors uneasy.”

Risk of subprime automobile boom

Fears of repercussions from the booming subprime auto industry have existed for years, but used-car prices have hit record highs amid growing recession fears and pandemic shortages. After reaching , it gained momentum again.

Cioffi called the threat of water-scarce borrowers with expensive auto loans “a wizard of more economic pressures” for subprime borrowers seeking new financing in the current high-interest-rate environment.

Delinquencies and losses in subprime auto ABS have surged since the summer as pandemic stimulus waned (see chart).

Subprime Auto Bond Delinquencies and Losses Soar as Pandemic Stimulus Eases


Delinquency rates for subprime auto ABS loans rose to about 4.9% in December, according to fixed income performance tracker Intex.

Dave Goodson, Head of Securitized Credits at Voya Investment Management, said, “Despite keeping regulatory risk fresh and potentially getting ahead of potential negative risks, new claims for Credit Acceptance have risen. , is unlikely to cause spillovers to the broader subprime auto sector.” credit cycle. ”

Several Credit Acceptance ABS holders were testing market liquidation levels after the regulatory filing, according to data from EmpireSign. A portion of 2020 senior bonds issued traded at $94.75 on Thursday, down from $101.34 in September 2021.

Bond prices tumbled as the Federal Reserve (Fed) raised interest rates to their highest level in 15 years, cooling rampant inflation. US central bank officials have also warned that policy rates could hit 5% this summer and remain high for some time.

readNo Fed Official Expects Rate Cuts Appropriate This Year, Minutes Show

But even before the Fed’s tightening cycle began, nearly 90% of all credit-approved loans to New York borrowers between 2015 and 2021 exceeded the state’s criminal interest rate cap of 25%. was

According to Cioffi, Credit Acceptance and other subprime lending companies have filed a lawsuit without admitting wrongdoing to settle similar malpractice allegations, including one made by Massachusetts Attorney General Maura Healey in 2020. known to pay fines. An early settlement prevents the allegations from becoming known as facts, whether true or not. If another settlement is reached, he said, it could limit public disclosures about the subprime mortgage business.

A spokeswoman for Credit Acceptance declined to comment beyond the initial response, saying the allegations were “without merit” and the lender “will vigorously defend itself in this matter.”

Still, Voya’s Goodson wants to change subprime auto loans. “Often these are expired loans,” he said. “Honestly, I think we need reform.”

His team has recently invested in subprime automotive ABS from only a select few issuers whose lending practices align with the ‘s’ part of their environmental, social and governance (ESG) strategy. .

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