Subprime car loans souring faster at nonbank lenders
Despite signs of trouble in subprime auto lending, U.S. banks and credit unions are well positioned to ride out any market turbulence, a new report from the Federal Reserve Bank of New York suggests.
More than $435 billion in auto loans to borrowers with credit scores below 660 were outstanding during the third quarter of this year, the report found. That total has been climbing steadily since bottoming out at $249 billion in early 2011. Delinquency rates have also been rising as it has become easier to qualify for an auto loan.
But only about one-third of all outstanding subprime auto debt was originated by banks and credit unions. And the loans made by insured depositories are performing far better than those made by other lenders, the report found.
At banks and credit unions, 4.4% of auto loans to borrowers with credit scores below 620 that had been less than 90 days late moved into that status during the third quarter. That level of performance is roughly in line with long-term historical trends, and somewhat improved from the 2007-to-2012 period.
Meanwhile, at auto finance companies, a category that includes the financing arms of auto manufacturers, the performance of subprime loans has worsened substantially since 2012.
In the third quarter of 2017, 9.7% of auto finance company loans to borrowers with credit scores below 620 that had been less than 90 days delinquent moved into that category.
“This suggests that bank auto loans may have some additional layers of underwriting — credit score alone does not explain the gap and divergence in the delinquency rates,” New York Fed researchers wrote in a blog post.
Over the last two years, banks and credit unions have held steady their auto loan originations to borrowers with credit scores below 660, while their auto lending to better-qualified borrowers has risen by 20%.
Overall, auto loan balances grew by $23 billion during the third quarter, according to the report. As of Sept. 30, 4.0% of all auto loan balances were 90 days or more delinquent, which was up from 3.1% three years earlier.
The New York Fed downplayed the possibility that problems in subprime auto lending will have a significant impact on the larger financial sector, but noted that more than 23 million consumers have subprime auto loans.
“These consumers may find their credit reports further damaged after a default or encounter further financial difficulties after experiencing a car repossession,” the report stated.