【正文】 “Indirect” channels involve some manner of intermediation a middleman – between the lender (like a bank or finance pany) and the borrower. In auto finance, the finance and insurance staff at auto dealers (typically called the “Famp。 and (3) they attempt to use the loan sales process as a platform from which to sell highmargin, nonlending products. Although individual lenders can, and frequently do, participate in both direct and indirect channels, most lenders skew towards either working directly with customers themselves, or working through auto dealers. (See Figure 3). The “captive” finance panies (that is, those finance panies, like GMAC, historically owned by manufacturers) favor the indirect channel. Because auto manufacturing is an enormously scaleintensive business, manufacturers tend to feel pressure to artificially stimulate consumer demand for their products when sales volumes slow. In some measure because of manufacturers’ willingness to subsidize consumer credit in order to drive car sales, captives have e to control more than half of the indirect auto finance channel. In notable contrast to the captive finance panies, credit unions tend to have relatively strong consumer franchises, and no meaningful mercial business with dealers, so they disproportionately favor the direct channel. Put another way, credit unions have a petitive advantage working directly with customers, and very little to lose in their relationships with auto dealers. Commercial banks’ channel preferences tend to vary according to their size. Most munity banks are too small too pete meaningfully in the indirect channel, and instead participate directly with their retail customers. Many of the largest mercial banks, by contrast, are large players in the dealer channel. Funding models The split between direct and indirect distribution channels also has major implications on the funding model for auto finance. Auto dealers, of course, have no privileged access to funding with which to make consumer loans. As a result, in the vast majority of cases, dealers originate loans knowing that they will be assigned to lenders with whom they work. The lenders that work with dealers, in turn, are more often than not the captive finance panies. Captive finance panies are not banks. Among other things, this means that they lack the branch works or mercial customer bases to reliably attract low cost, stable deposit funding. Instead, they rely heavily on capital markets funding, which is typically raised by Wall Street firms’ unsecured or asset backed securities origination businesses. Indeed, even GMAC, which has been the beneficiary of serial taxpayer capital infusions, as well as the conversion into a bank holding pany charter in 2020, remains reliant on Wall Street funding today. (See Figure 4). By contrast, because the most significant lenders in the direct channel tend to be credit unions and smaller banks, the funding model for direct auto loans tends to rely more heavily on traditional deposits than on the capital markets. Most small banks and credit unions lack the scale to reliably access the assetbacked markets, and simply selling whole loans to Wall Street (so that they might be packaged with other small banks’ loans and securitized) is problematic as well, because it would typically require severing an ongoing servicing relationship with an existing, multiproduct customer. Impact of the Bubble and Crisis Not surprisingly, auto lending has suffered mightily since the onset of the credit crisis. Credit deterioration has afflicted both prime and subprime auto loans. (See Figure 5). Like other consumer lending categories, subprime constitutes a meaningful ponent of overall auto lending, and a greater ponent of industry profitability. But unlike in mortgage, the auto finance industry did not particularly expand its level of subprime borrowing during the course of the bubble. The fraction of overall lending attributable to subprime remained roughly constant: approximately 20% of loans to borrowers below FICO 660. This is an intuitive result: for lowerine Americans, in most parts of the country, car ownership is often a practical requirement to mute to and from work. Unlike subprime homeownership, subprime car ownership was not a onetime luxury transformed into an attainable “necessity” by the availability of easy credit. Rather, subprime car ownership has actually been a necessity, not a luxury, all along. Other underwriting criteria, however, did slip including loantovalue ratios and, especially, the length of loan terms. (See Figure 6). Cars, of course, depreciate quickly over time. Because older cars are worth a good deal less than newer cars, when a borrower defaults near the end of a long loan term, the resale value of the repossessed vehicle is typically significantly less than the unpaid principal balance owed. Lower recoveries on repossessed cars, in turn, mean worse loss severities, and, therefore, higher credit losses. Beyond the credit deterioration of existing portfolios, the bubbleera’s widespread availability of permissive LTVs and loan term