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Subprime auto lenders exercising caution: Moody's

U.S. auto sales got off to a slow start this year, and though they showed a modest rebound in March, industry analysts are questioning whether 2014 will see a recovery in the American car market this year—especially if lenders begin reining in financing.

That's a possibility that's being suggested by a new study by financial tracking firm Moody's, which found that U.S. subprime auto lenders are "exercising more caution," especially when it comes to higher-risk customers. Still, the study does not seem to indicate a major slowdown in subprime lending, Moody's concluded.

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The report points to slower growth in non-prime lending by banks and credit unions, as well as so-called "captive finance" firms, which are subsidiaries operated for or by the various automakers.

"Declining competition from non-traditional subprime lenders puts less pressure on independent finance companies to lend to weaker borrowers to maintain their lending volumes," said Peter McNally, Moody's vice president, senior analyst. "If lenders maintain this caution, loan losses among newer loans could stabilize."

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During the depths of the Great Recession, lenders all but abandoned the subprime sector. As a result, even some of the lowest-risk customers found it difficult to land loans and leases between 2008 and 2010.

The situation has improved for borrowers in recent years, and that has been credited with helping spur a sharp upturn in the U.S. auto industry, which collectively moved more than 15.5 million vehicles in 2013—the highest figure since the recession began.

Still, there have been concerns that defaults and delinquencies might rise, especially on subprime accounts, if the overall economy continues to sputter along. That has led some lenders to raise subprime interest rates or simply pull back on the number of loans they're offering.

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According to the Moody's report, loans that originated last year had the highest delinquencies since those that originated in 2008.

Nonetheless, there are other indications "that lenders are still willing to take on increasing risk," McNally added. "So we don't anticipate a major slowdown in subprime lending."

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