Separating Fact From Fiction On Auto Loans

August 18, 2014 at 8:53 am Leave a comment

I had a longer commute than usual into work today (if I wanted to spend an hour and a half in the car on a Monday morning I would live in Long Island and not in suburban Albany, thank you), but it helped me decide what I should do my blog on this morning.  Actually, the latest commercial from upstate’s ubiquitous car dealer bragging about how he once got credit for a dead person clinched it for me. 

As I pointed out in a previous blog, there has been increasing concern that subprime auto lending is the next mortgage crisis in waiting.  The argument goes that with larger banks increasingly securitizing auto loans, dealerships and banks, credit unions and financers they work with have a huge incentive to qualify even the most irresponsible borrowers. 

Is the perception reality?  An analysis performed by the Federal Reserve Bank of New York answers the question with a qualified yes.  Looking at data from the Fed’s Quarterly Report on Household Debt and Credit, researchers point out that there has actually been a smaller percentage of auto loans being originated for borrowers with credit scores below 620.  Currently, these borrowers represent 23% of all originated car loans, which is actually lower than the 25% to 30% witnessed in the years prior to 2007.  So, is the conventional wisdom wrong?  Not really.  According to the researchers “the dollar value of originations to people with credit scores below 660 has roughly doubled since 2009.”  What’s more, this gain in origination value reflects an increase in the average size of loans being made to these borrowers.  In other words, larger loans are being made to people with bad credit and financial institutions are more than willing to spread out the length of repayments.

However, it’s important to differentiate between banks and credit unions — which the analysis groups together — and auto finance companies.  Since the recession “ended” in 2009, finance companies have been the ones most aggressively catering to subprime borrowers while banks and credit unions have been lending to these borrowers at rates lower than historical trends.  Interestingly, the report indicates that the auto loan 30-day delinquency rate for banks and credit unions has been about 1% in recent years, but about 2.5% for finance companies.  Two take-aways from this report: one, it underscores the fact that Dodd-Frank missed the mark when it tied the hands of the CFPB to regulate car buying activity to the same extent it can regulate other consumer lending.  It also serves as a warning that examiners should not let media reports about a new subprime lending bubble drive them into placing more scrutiny on credit union car lending than is actually justified by the numbers. 

Entry filed under: General, Regulatory.

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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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