Analyzing 2009 auto industry data, the average rate markup was $714 per consumer with an average rate markup of 2.47 percentage points. Even though the number of vehicle sales declined by 20% from 2007 to 2009, total markup volume increased 24% during this period (from $20.8B to $25.8B) largely due to an increase in the level of rate markups on used vehicle sales.
|2009 Total Rate Markup Volume
|Average Rate Markup 2009
|Average Markup Per Loan 2009
|Dealer Gross Profit Per Retail Sale 2009
As shown in the chart below, loans made by subprime finance companies have higher rate markups, and rate markups also increase with lower borrower credit scores. In addition, larger rate markups occur on loans with longer maturities, loans for used vehicles, and when smaller amounts are financed. These findings suggest that dealers may use certain borrower or loan characteristics as a way to identify people that would be vulnerable targets for increased rate markups.
Markups have a strong association with 60-day delinquency and cumulative loss rates (what the lender has to write off due to repossessions) for finance companies that target low-FICO borrowers. These results occur for loans performing within the same macroeconomic environment, discounting the notion that the economy is the sole reason for recent loan defaults. Rate markup increases the odds of delinquency and cumulative loss for subprime borrowers by 12% and 33% respectively.
Odds ratios based on coefficients from linear regression models using auto ABS securities data. Changes in odds are based on an increase of one standard deviation of rate markup for finance companies (4.55%). Regression model for non-finance companies produced results that were not significant.