Time To Clamp Down on Auto Dealers?
Are we facing another subprime crisis, this time with auto lending? Are there steps the Legislature should take to clamp down on poor lending practices? Those were the basic questions considered by NYS’s Senate Banking Committee yesterday at a hearing dedicated to analyzing subprime auto lending trends. While legislation may not necessarily be imminent, some key Legislators and regulators are clearly growing concerned with what they are seeing, particularly when it comes to dealer practices.
First, the statistics certainly suggest that we are seeing the nascent signs of car lending abuses. For example, the New York Federal Reserve Bank reported that the dollar value of car loan originations to people with credit scores below 660 has roughly doubled since 2009, while originations for other credit score groups increased by only about half. In addition, a series of articles by the New York Times has highlighted both a growing demand for auto loan securitizations and the questionable practices of some dealers more interested in getting borrowers to agree to the most expensive loan possible with little regard to whether or not the consumer can actually repay the loan.
It was against this backdrop that DFS Superintendent Lawsky suggested that one step the Legislature could take to address these concerns is to allow the DFS to have more direct oversight over auto dealers. As he explained to the gathered Senators, the existing system allows the DFS to scrutinize loans once they are purchased by banks, but this provides little protection to the consumer who walks into the dealership in need of a car.
Another trend highlighted by the Superintendent is the growing securitization of car loans. Echoing sentiments similar to those expressed by the Association in its testimony, the Superintendent pointed out that securitization creates a misalignment of incentives, whereby a lender is more interested in originating a car loan for sale to Wall Street securitizers than it is in ensuring that the borrower can afford to make the car payments.
My sense is that we will not see the Legislature further regulate car lending practices in the near future. But unless, as evidence suggests, some of the abuses are being reigned in, expect legislation dealing with auto lending practices to be a priority next January. In the meantime, it is important for everyone to analyze the extent to which the trends that motivated the Legislature to hold this hearing are anecdotal incidents that reflect pent up demand for automobiles as the economy gradually improves or systemic defects in the auto lending process that legislation could fix.