Some lenders get too risky, Capital One Auto Finance chief says

Jim Henry
Automotive News -- November 9, 2011 - 12:01 am ET

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Borgmann: "We are in an unbelievably cyclical industry."

Kevin Borgmann worries that cutthroat competition is leading some auto lenders to approve risky loans despite the lessons of the 2008-09 credit crisis.

The president of Capital One Auto Finance said some lenders are still approving loans for subprime customers with poor credit histories, lending those poorly qualified borrowers more than they can afford, financing vehicles of dubious value for the money and offering interest rates that are too low for the circumstances.

'Irrational' lending: 3 examples

Kevin Borgmann, president of Capital One Auto Finance, cites these vehicle loans to subprime borrowers that were approved by other lenders in 2011 to show "irrational" lending continues despite the lessons of 2008-2009. Dealer back end gross reflects F&I products like extended-service contracts. Payment-to-income ratio reflects the monthly payment as a percentage of the customer's monthly income.

	GMC Yukon	Ford Fusion	Ford F-250
Vehicle Age	5 years	new	9 years
Transaction price	$22,971	$29,250	$19,300
Dealer back end	$4,989	$2,143	n.a.
Buyer's FICO score	441	498	530
Buyer's prior bankruptcies	2
Buyer's prior repossessions	1	2
Approved APR	7.15%	1.90%	4.99%
Other	80,000 miles	37% payment- to-income ratio	72-month term

Source: Capital One

"We can never forget we are in an unbelievably cyclical industry," Borgmann said last month at a presentation in Las Vegas. He cited some real-life examples. (See table) He said other lenders approved them, but he wouldn't identify the lenders.

But some lenders aren't as worried as Borgmann.

"Pricing seems rational," said Jim Landy, CEO of CarFinance Capital, in a separate panel. "But yeah, there's always that one guy that didn't see the movie, or something."

CarFinance Capital, of Irvine, Calif., makes subprime and near-prime auto loans.

Borgmann said lenders need to be disciplined. "We need to kind of collectively remember in this industry ... it's a cyclical industry. We need to make sure people are in vehicles they can afford in the long term," he said. "If somebody ever tells you, 'This time is different,' run the other way."

You can reach Jim Henry at autonews@crain.com.

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