BB&T’s (BBT) Dealer Financial Services segment originates loans on a prime and non-prime basis for the purchase of automobiles. Non-prime, or subprime, loans are the loans where the borrower doesn’t score high on creditworthiness. These borrowers might have a hard time making timely repayments. They have low FICO scores—typically below 640.
Subprime loans generally have higher interest rates and less favorable terms for the borrower to compensate for the higher credit risk. Widespread default on such loans in the residential mortgage market was a major contributor to the 2008 crisis.
Specialized subprime subsidiary
RAC (Regional Acceptance Corporation) is a BB&T subsidiary. It originates the loans nationally. It specializes in non-prime, indirect financing. It has a network of 27 business buying centers in 32 states.
RAC purchases prime to near prime seasoned auto portfolios from banks, credit unions, finance companies, and captives. RAC portfolio’s average FICO score is ~566. The above graphs compare the geographic distribution and FICO scores of the segment’s prime and RAC portfolios. It’s important to note that 58% of the prime portfolio has a Beacon score greater than 740. In contrast, only 0.9% of the RAC portfolio has a FICO score greater than 700.
Dealer Financial Services’ net income decreased 10.3% compared to 2013. The segment’s net interest income remained flat. The allocated provision for credit losses increased by $23 million. The increase was primarily due to higher charge-offs in the non-prime automobile loan portfolio. Credit trends in the portfolio continue to normalize.
Easing underwriting standards across auto lenders is leading to an increase in subprime lending. Dealer Financial Services grew average loans by 10.5% compared to 2013. Non-interest expense increased by $8 million. It was driven by higher personnel expense—primarily related to RAC’s geographic expansion and operating charge-offs.