Auto Lending Hits New Record, Refuels Subprime Worries
At a time when regulators, prosecutors and the media have stepped up their scrutiny of subprime auto lending, some in the industry have changed their definitions of key terms in ways that downplay the risks involved.
Auto-lending profits helped make the quarter for Huntington Bancshares and TCF Financial, but their CEOs ended up on the hot seat, as they reported results a day after the U.S. comptroller of the currency issued another warning about declining credit quality in the market.
U.S. consumers are shouldering record levels of debt to get behind the wheel of an automobile.
In the third quarter, the amount of automotive debt outstanding rose to $1.05 trillion, up $90 billion from a year earlier, according to a new report from the Federal Reserve Bank of New York.
Meanwhile, the number of auto loans in the U.S. climbed to 98.6 million, up from 92.7 million in the third quarter of 2014.
Both numbers represented new high-water marks in the New York Fed's data, which goes back to 2003. The report suggests that the volume of auto loans originated in 2015 is likely to be roughly double its level during the depths of the Great Recession in 2009.
The auto lending boom is being fueled in substantial part by loans to borrowers at the low end of the credit spectrum.
In the second quarter, the percentage of auto loan originations that went to consumers with credit scores below 660 rose to 39%, its highest level in seven years. That figure receded to 36% during the third quarter, according to the New York Fed's data.
The amount of subprime borrowing is raising concerns inside the New York Fed, which has been monitoring the auto lending market in recent years.
"Last year we noted that subprime auto lending was growing, but remained below precrisis levels," economists at the New York Fed wrote in a blog post published Thursday. "With the surge in the second quarter, the total number of subprime originations has since reached a ten-year, precrisis high."
The data showed that 3.4% of auto loans were at least 90 days delinquent in the third quarter, which was up from 3.1% from a year earlier, but well below the 5.3% mark hit during the recession.
Delinquency rates on auto loans originated by banks and credit unions continued to decline, while the rates started to climb modestly at auto finance companies, according to the data.
The Fed researchers cautioned that if the U.S. unemployment rate jumps, late payments on auto loans could rise significantly — since borrowers, particularly those with low credit scores, will struggle to make their monthly payments.
Still, the New York Fed is urging that its findings be kept in perspective.
The researchers noted that the increase in auto loan originations, which hit a 10-year high of $150 million in the third quarter, is due in part to inflation; car prices have risen by about 6% since 2005.
They also suggested that the risks posed by the subprime auto lending boom are substantially lower than those related to the subprime mortgage market of the 2000s. Back at that time, there was nearly four times as much subprime mortgage credit outstanding as there is subprime auto credit today.
Cristian deRitis, an economist who is senior director at Moody's Analytics, attributed the rapid rise in U.S. auto debt to several factors.
He said that consumer demand for cars surged following the recession, when many consumers were unable to make auto purchases. He also noted that some consumers may be shifting their demand for credit away from the housing sector, where it remains relatively difficult to get a loan, and toward the auto industry.
In addition, auto lenders have loosened their credit standards. deRitis noted that loan terms have gotten longer, down payments have gotten smaller, and in some cases lenders are not verifying borrowers' income.
"It's that layering of risk that we view as the real cause for concern," he said.
Moody's Analytics expects auto lending standards to start tightening, and loan origination volumes to start declining as delinquency rates begin to rise, and regulators apply greater pressure to lenders.
But deRitis said that is the firm's baseline forecast, and noted that a darker scenario is possible. "The lenders continue to be very aggressive," he said.