Is Auto Lending The New Subprime?

July 21, 2014 at 8:22 am Leave a comment

That’s the question posed by the New York Times in an article yesterday in which it seeks to sound the alarm:  in a nutshell it argues that, just like the mortgage meltdown, major banks are loosening lending standards in an effort to ensure they have enough automobiles to meet Wall Street’s growing demand for securities comprised of auto loan pools. This is one of those times where I am glad that credit unions aren’t mentioned alongside the banks.

This is the type of article that gets regulators thinking that more needs to be done, so you may want to take a quick look to see how appropriate your underwriting standards are for auto lending.  Here are some things to keep in mind.

The NCUA deserves credit for raising concerns about indirect auto lending long before it was trendy.  The banks highlighted in the article are accused of hiding behind dealer practices when asked about questionable sales techniques and underwriting standards.  But remember “the dealer made me do it” is no defense.  This is particularly true for credit unions that have the added requirement of ensuring that any person taking out a car loan is a qualified member.  As summarized succinctly in this indirect lending guidance from the NCUA from 2011:

Indirect lending standards should be consistent with the credit union’s direct (internal) loan underwriting standards. The standards should be reviewed at least annually or more often if risk levels increase or if negative trends begin to surface.  Exceptions to the indirect loan policy should be infrequent. All exceptions should be approved by credit union personnel responsible for administering the indirect lending program and reported to the board of directors for their review.

One other quick point about the article.  Not all securitization is bad.  Financial institutions, and especially smaller ones, need a vibrant secondary market to sell off loans and make new ones to members.  The Times is right to highlight the negative influence that demand for higher yielding securities may be having on auto lending standards, but I just hope that regulators don’t overreact and throw the baby out with the bath water.

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I’ve done this blog long enough now that every so often I feel like Steve Martin in The Lonely Guy.  When the new phone book is delivered, he runs down the street yelling:  I’m in the book, I’m in the book.  I was excited to find out this morning that the Annual Review of SAR Filings had been published by FinCEN.  California and New York lead the way when it comes to depository institutions filing Suspicious Activity Reports.

On that note, have a nice day.

Entry filed under: Compliance, General, Regulatory. Tags: , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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