COF- Could the wheels fall off the subprime auto lending

The topic of subprime auto lending defaults was brought up on @TheHouse AN thread. I think it warrants it’s on thread as this is definitely a trend to keep an eye on. First and foremost I am no banking expert so any help from that stand point would be great.

It was largely decided that COF by @juangomez053 pointing out should be the main attraction of this market which I agree however I’m going to watch CACC myself as well. So I will include some data from both as well as some information about the potential downfall of the subprime market and the affects of the last couple years automotive environment on this market.

COF writes nearly 50 Percent of their total automotive book of business in the subprime segment.

CACC is the biggest bottom feeder of them all. If you ever see a dealer advertising guaranteed credit approval they most likely write through CACC. They will give anyone and everyone a car loan.

Now as I had mentioned in AN thread this isn’t the great bubble burst of subprime mortgage lending from 08. However was a great point to look at. As everyday spending increases with gas food utilities and pretty much everything. Stimulus checks are thing of the past now folks won’t be able to afford it all. Most households are two vehicle households or more. So if money spreads thin your two highest payments your house/rent and then your cars. The house is a must for most. Inflation largely affects the subprime type of customer more so than a prime customer. So if they have to skip a payment on something it will be the expendable auto. It is also way easier to acquire a car for cash or even so much as get another auto loan if end up with a repossession. However you can’t say the same with a home or with food or essentials.

This is probably not something that is going to happen immediately but as inflation numbers have skyrocketed I’d bet the default and repossessions rates on subprime auto lending rocket in last half of the years reporting.

Just for context I want to provide an example of some of the practices of the subprime auto lenders

Secondly on my research of this I stumbled upon an apparent effort to crackdown on subprime lenders by the CFPB.

Now how the actual environment of the auto industry plays a roll. The valuation of used and new vehicles have skyrocketed over the last 2 years. These subprime auto lenders finance loans up to 125% of the current market values of these cars. This to me screams bad news if the default rates accelerate coupled with a drop in inflation and valuation. That leads these lenders to repossessions that are vastly under water. Leading to large losses and decreased revenue. Which in my professional opinion the valuation drop is currently a ticking time bomb as the FED try’s to slow demand by increased rates it’s not if it’s going to happen it’s when.

Appreciate any feedback or insight to the financial aspect of it from the banking experts. IE repo rates losses etc.


Second aspect to this is COF does have a number of subprime Credit cards available as well. If default rates accelerate on auto/mortgages you would certainly see it amplified on credit card losses as well as the are largely unsecured where auto loans have some recouping abilities.

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@Shadowstars shared this on AN thread thought it was relevant here

COF has added a new product that is a widget to dealers websites for consumers to get pre approved with them. Seems to be a good product and is bullish for them as they get first crack at securing financing over the 20-30 plus lenders dealers have. However I still think short term as default rates begin to rise and collateral valuations decline they are gonna take some big losses in the next year or so. If the Repo rates goes up and values go down many lenders are going to take significant hits.


Found this article to be interesting. Just to be clear I don’t foresee an auto bubble burst on loans. As it would take hundreds of thousands if not millions of repos to hit dealer inventory to catch up with last two years. However I do see high repo rates and losses affecting the larger auto lender segment. COF has earnings this week be interesting to see their loss by defaults.

COF got some bullish news after hours today. For one declared their quarterly divi of .60 per share to be paid to shareholders as of May 15th so this likely has no affect going forward.

But also Berkshire disclosed a stake in COF in their 13-F filing. Of 900 million dollars worth and a 9.9 million share position. This has been a bullish mover for some tickers before IE OXY. Would calculate a position of roughly 90-91 per share. Could be one to watch over next couple of days.

They also recommended the shareholders decline a tender offer at price of 94.xx meaning the board feels that is an undervalued price per share.

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