Revisiting the Subprime Crisis

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1 Revisiting the Subprime Crisis Brian Landau Senior Vice President and Auto Business Lead TransUnion May 31, 2018

2 Several news outlets have raised the question: is a subprime bubble in auto forming? Overstretched consumers raise fears of bubble in echo of subprime mortgage crisis Financial Times, May 29, 2017 The makings of the next credit crisis could be in your driveway CNBC, April 24, 2017 Why America's Auto Debt Boom Fuels Bubble Talk Bloomberg, March 23, 2017 Why The Auto Financing 'Bubble' Is Really An Affordability Issue Forbes, December 7, 2016 Is there a subprime auto loan bubble? USA Today, September 27, 2014 In a Subprime Bubble for Used Cars, Borrowers Pay Sky-High Rates New York Times, July 19, TransUnion LLC All Rights Reserved 2

4 Early speculation was driven by the subprime meltdown in mortgage Mortgage Originations, $B Financial Crisis, 12/2007-6/2009 Subprime Near prime VantageScore 3.0 risk ranges, calculated at origination Subprime = and Near prime = Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 4

2% Near prime and subprime segments grew more than 10% per year for five years VantageScore 3.

5 Higher-than-average growth in near prime and subprime allowed the speculation to grow Auto originations by risk tier, count 17.6M 28.0M CAGR 6.2% 7.8% Super prime Prime plus Prime Near prime Subprime % 12.6% 14.2% Near prime and subprime segments grew more than 10% per year for five years VantageScore 3.0 risk ranges, calculated at origination Subprime = , Near prime = , Prime = , Prime plus = , Super prime = 781+ Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 5

6 The growth in the near prime and subprime segments also attracted new entrants to the market # institutions originating 2,000+ non-prime 1 loans per quarter Independent finance companies Credit unions +67% % 20 5 Q Q Q Q VantageScore 3.0 risk ranges, calculated at origination 1. Non-prime includes Subprime = and Near prime = Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 6

7 % of borrowers with a delinquency Starting in 2015, delinquency rates began to rise sharply Delinquency rates, 60+ days past due Q4 results % 1.19% 1.27% 1.44% Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 7

8 Declining performance in near prime and subprime loans drove the increase in delinquency rates DQ rates 60+ DPD, 12 months Prime and above Non-prime: Near prime and Subprime +237 bps +19 bps 7.2% 7.8% 8.3% 9.5% 0.6% 0.6% 0.7% 0.8% Year of origination VantageScore 3.0 risk ranges, calculated at origination Subprime = , Near prime = , Prime = , Prime plus = , Super prime = 781+ Year of origination Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 8

10 We have seen average delinquency rates begin to stabilize why? Delinquency rates, 60+ days past due Q4 results ending in Q % 1.27% 1.44% 1.43% results ending in % 1.16% 1.30% Early sign of stabilization 1.32% Year T T+1 T+2 T+3 Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 10

11 Reason #1: Lenders have shifted more of their focus to prime plus and super prime originations Share of auto originations (count) by risk tier share (ppts) 20% 22% 21% 22% Super prime Prime plus Prime 22% 21% 21% 20% 16% 15% Near prime Subprime VantageScore 3.0 risk ranges, calculated at origination Subprime = , Near prime = , Prime = , Prime plus = , Super prime = 781+ Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 11

Delinquency rates 60+ DPD, cumulative Reason #2: Non-prime loan performance has started to improve DQ rates 60+ DPD, cumulative, for non-prime originations 25% 20% 15% 2016 2015 2014 2013 2012 10% 5%

12 Delinquency rates 60+ DPD, cumulative Reason #2: Non-prime loan performance has started to improve DQ rates 60+ DPD, cumulative, for non-prime originations 25% 20% 15% % 5% 0% 2017 The performance of the 2016 vintage is comparable to the performance of the 2015 vintage (notice the tight variance) VantageScore 3.0 risk ranges, calculated at origination Subprime = , Near prime = , Prime = , Prime plus = , Super prime = 781+ Months on Book Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 12

13 Performance has improved largely in the South, where many non-prime loans are originated Top 10 states with the highest percentage of non-prime borrowers % of borrowers by state, Q Top 10 states with the largest YOY improvement Change in average DQ rate by state, Q to Q ` ` ` ` VantageScore 3.0 risk ranges, calculated at origination Non-prime includes Subprime = and Near prime = Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 13

14 Many lenders have started to reenter near-prime and subprime an early sign of market stability Lenders expanding into NEAR PRIME Lenders expanding into SUBPRIME Lenders doubling efforts into SUBPRIME [Lender] has started the process of expanding its credit band to include near prime loans Auto Finance News, January 2018 [Lender] and [Lender] continue to express interest in subprime lending Auto Finance News December 2018 [Lender] is working on shifting the company s focus back to its niche as a subprime lender Auto Finance News February 2018 [Lender] moves down credit tiers as others move up; lender sees opportunity in prime, near-prime Automotive News May 24, 2017 [Lender] Eyes Subprime Expansion Amid Lower 3Q Originations Auto Finance News October 30, 2017 Buy-here, pay-here dealers could get back into the mix of auto financing in 2018 Auto Finance News January TransUnion LLC All Rights Reserved 14

16 % borrowers with a delinquency Consumers are willing to make good on their auto obligations, even during times of financial distress Delinquency rates (90+ DPD for Cards, 60+ DPD for Others) Financial crisis, 12/2007 6/2009 Personal loans Bankcard Mortgage Private label Auto HELOC Rank order for Source: TransUnion consumer credit database 2018 TransUnion LLC All Rights Reserved 16

17 Lenders are able to quickly make adjustments when early signs of distress arise Actions Lenders are able to respond quickly to changes in the market and rising levels of risk Lenders have the ability to tighten their underwriting requirements in different ways Lenders have other options to pursue to incrementally grow their business Evidence DQ rates began to rise in Q4 2015; lenders began to pull back on non-prime originations in Q (two quarters later) Lenders can Require more money down Pull back on extended terms Adjust price to changes in risk Auto refinancing Prequalification (to gain insight into in-market consumers) Etc TransUnion LLC All Rights Reserved 17

18 Lenders are armed with new sources of consumerlevel information to make more informed decisions >50% of non-prime auto lenders surveyed use alternative data They use alternative for a variety of applications % of total respondents (N = 32) % of active users (N = 17) Do Not Use Alternative Data Today 47% Loss Mitigation Pricing Enhancement 88% 74% Universe Expansion 71% Currently Use Alternative Data 53% Additional Approvals 65% Second Reviews 47% Survey Results Source: Alternative Data Survey Results sponsored by Factor Trust, June TransUnion LLC All Rights Reserved 18

19 In summary Is a subprime bubble forming? If no, what makes us believe this is the case? What have we learned from this experience? No despite some speculations Delinquency rates, especially in near prime and subprime, appear to be stabilizing A number of lenders are expanding into or reentering near prime and subprime risk tiers Our forecast model indicates that delinquency rates will remain steady throughout the rest of 2018 Consumers are willing to make good on their auto loan obligations even during times of financial distress The market is fairly resilient to market changes Lenders now have access to alternative data to more accurately predict credit behavior 2018 TransUnion LLC All Rights Reserved 19

Q Industry Insights Report

Q Industry Insights Report Q1 2016 Industry Insights Report U.S. Financial Services Nidhi Verma Director, Research and Consulting TransUnion In this session, we will review industry trends for major lending products with respect