Bankers and industry analysts may dispute whether or not this is a worrisome trend, but the numbers paint a clear picture — more consumers are falling behind or defaulting on their auto loans.
Total delinquencies, those at least 30 days past due, increased 17% in the fourth quarter from three months earlier, to $9.9 billion, according to Federal Deposit Insurance Corp. data compiled by BankRegData.com. While it is common for auto delinquencies to rise in the fourth quarter of any year, the spike in last year’s fourth quarter from three months earlier was higher than in past years.
The delinquency rate has increased at banks across the asset-size spectrum: from Bank of America, which saw delinquencies rise 24% in the quarter, to the $18 billion-asset State Farm Bank, which reported a 30% increase in problem auto loans.
Delinquencies have increased because of rapid growth in lending to subprime borrowers, who are defaulting at higher rates, Rosemary Kelley, senior managing director at Kroll Bond Rating Agency, wrote in a Feb. 24 research note. Additionally, some lenders have extended loan terms and raised loan-to-value ratios, which increases the likelihood of defaults.
The upshot is that some banks have decided to pull back. JPMorgan Chase, Ally Financial and other banks reduced auto-loan originations by at least 10% in the fourth quarter, according to Autonomous Research. Banks are also decreasing their indirect-auto networks. The $125 billion-asset Regions Financial in Birmingham, Ala., in November terminated a lending relationship with an automotive dealer, even though it will reduce average loan balances by about $650 million this year.
Some of the largest auto lenders reported the sharpest increases in delinquency rates. At Wells Fargo, the largest U.S. auto lender, delinquent loans rose 25% in the fourth quarter, to $1.7 billion, compared with just three months earlier. At TD Bank delinquencies increased 18%, to $459 million, in the same three-month period.
Higher delinquencies are to be expected because banks are simply making more car loans, said Melinda Zabritski, senior director of automotive financial solutions at Experian. And as delinquencies rise, banks are adjusting their underwriting to make fewer subprime loans, she said.
“The lending market appears to be responding appropriately with a lower percentage of originations in the highest-risk space,” Zabritski said.
Indeed, some bankers have shrugged off worries about rising delinquencies, saying an uptick should be expected as volume increases.
TD Bank, for one, isn’t worried because the Canadian-owned bank doesn’t make subprime auto loans, said Mike Pedersen, group head for U.S. banking.
“I'd say we are very comfortable with what we're originating and there are no concerns on the credit quality part in the auto finance portfolio in the U.S.,” Pedersen said on March 2 during the bank’s fiscal first-quarter earnings conference call.
Still, for the whole banking industry, the credit quality of auto lending is moving in the opposite direction of overall lending. Total loans rose 17% to $9.3 trillion between the first quarter of 2014 to Dec. 31, according to BankRegData.com. In the same period, total delinquencies for all types of loans, including mortgages and business loans, fell 25% to $197 billion. Total delinquencies fell to 2.12% as a percentage of all lending, from 3.34% in the first quarter of 2014.
One troubling statistic is that more lenders are willing to stretch out maturity dates on loans for used cars, said Joe Cioffi, an attorney at Davis & Gilbert who represents banks as creditors in bankruptcy cases. The number of used-car loans with 6-year or 7-year terms rose from 16.4% in the fourth quarter of 2015 to 18.2% in the fourth quarter last year, according to Experian.
When a consumer has a 6-year or 7-year loan on a used car, that’s asking for trouble, Cioffi said.
“Borrowers can get underwater very easily on a used car with a 7-year loan,” Cioffi said. “They end up with negative equity and their monthly payment increases. It makes it easier for them to decide to walk away from their cars.”
Through November, about 32% of consumers had negative equity on their cars, according to Edmunds.com.