Exclusive: U.S. auto loans soar, authorities ask banks for details of exposure
U.S. regulators have asked banks to provide more details on auto loan exposure, sources said, as rapid growth in auto loans draws attention from authorities to better assess risks.
The picture shows a slow-moving vehicle on a highway in Los Angeles, California, USA. REUTERS/Eric Thayer
Auto loan balances have grown by about a third since April 2011, reaching a record high of $924.2 billion in August, according to credit-research agency Equifax. About one-fifth of these loans are subprime loans with inferior credit quality.
Banking regulators worry that such a rise may at least be fueled by banks’ sloppy lending, and there are early signs that defaults on such loans are on the rise.
The Consumer Financial Protection Service said in September it was taking steps to oversee previously less regulated auto lenders, and companies including GM Financial and Santander Consumer USA Holdings SC.N also disclosed earlier this year that the Justice Department was investigating them car financing loan.
Regulators are not only asking banks to provide information on auto loans they undertake but also information on financing that banks provide to other lenders in the same industry, such as lines of credit to financial firms, the sources said. At least one regulator is looking into the area, the source said, and it’s unclear if others are too. In the United States, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), and state agencies all oversee the banking industry.
The types of exposure the banking industry has in auto loans can be as complex as mortgage loans. Take Wells Fargo WFC.N, the largest U.S. auto loan provider. At the end of 2013, the bank’s auto loan balance was $50.8 billion, of which about $15 billion was subprime. Wells Fargo is also the largest underwriter of securities backed by subprime auto loans, having sold $3.3 billion of such securities this year, according to industry publication Asset-Backed Alert.
Of course, auto loans are smaller in size than home loans — mortgages outstanding in the U.S. are about nine times larger than auto loans. Car loans also have shorter terms than home mortgages, meaning borrowers pay more each year. It’s also much easier to collect car loan collateral than a home loan.
Few analysts are now worried about a subprime auto loan collapse comparable to the mortgage crisis. Even if auto-finance firms that specialize in subprime loans go bankrupt in a downturn, they may not pose a broader threat to the financial system.
“Subprime auto loans appear to be too small to pose systemic risk,” Bank of America Merrill Lynch analyst Michael Hanson wrote in an October report. .”
While there is growing concerned about the global economy – as seen in the recent downtrend in U.S. and global stock markets – the U.S. economy is getting stronger, with unemployment falling below 6% and new vehicle sales strong.
It is too early to tell what the regulators will find wrong, and there is no evidence of wrongdoing by the banks.
But auto loans can still be risky and are already showing signs of stress. According to data from Experian Automotive, the proportion of borrowers who were 60 days past due on auto loan payments rose 7 percentage points in the second quarter of this year from a year earlier, and the collateral recovery rate also rose above 70% in the same period, but the two ratios remained close to each other. historic low. Used car prices fell for a fifth straight month in October, leading to less money for banks to sell repossessed vehicles.
“If you’re worried about risk, then you can say the indicators are moving in a bad direction, albeit not fast enough to be worrying,” said Colonnade managing director Christopher Gillock. (Finish)
