In early April, I cautioned investors that subprime auto loan companies like Credit Acceptance (NASDAQ:CACC), Santander Consumer USA Holdings (NYSE:SC), and Ally Financial (NYSE:ALLY) were facing a potential nightmare. In much the same way that the subprime mortgage market began to collapse in 2007 -- resulting in a shock wave that kicked off a recession -- auto loan borrowers with less-than-great credit scores were increasingly falling behind on more and more loans. The economic impact of the coronavirus pandemic could leave many more of those borrowers unable to make payments on their loans, pulling the rug out from underneath the lenders.
It's been difficult to gauge exactly how much damage has been done to the subprime auto loan market in the meantime. A slew of borrowers have indeed stopped paying for their cars, but in some ways, they've been given tacit permission to do so. Once those people can get back to work, they might resume making payments.
If a recent decision from Wells Fargo (NYSE:WFC) is any indication though, the subprime auto lending business is in worse trouble than it was just a few weeks ago.