By on July 3, 2014

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The Office of the Comptroller of the Currency, a government entity that regulates and supervises banks, is sounding the alarm regarding risks related to auto loans.

In its semi-annual report released earlier this week, the OCC warned about the usual factors that TTAC has been discussing for some time: rising loan terms, an increased focus on monthly payments and deteriorating underwriting standards

Across the industry, auto lenders are pursuing growth by lengthening terms, increasing advance rates,
and originating loans to borrowers with lower credit scores. Loan marketing has become increasingly
monthly-payment driven, with loan terms and LTV advance rates easing to make financing more
broadly available. The results have yet to show large-scale deterioration at the portfolio level, but signs
of increasing risk are evident. Average LTV rates for both new and used vehicles are above
100 percent for all major lender categories, reflecting rising car prices and a greater bundling of add-on
products such as extended warranties, credit life insurance, and aftermarket accessories into the
financing…

The average loss per vehicle has risen substantially in the past two years, an indication of how longer
terms and higher LTVs can increase exposure. Average charge-off amounts are higher across all lender
types over the last year. These early signs of easing terms and increasing risk are
noteworthy, and the OCC will continue to monitor product terms and risk layering practices to ensure
that banks manage growth and exposure prudently.

The OCC report did not single out subprime loans specifically, but instead focused on the entire auto loan sector. The full report is available here.

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29 Comments on “OCC Warns Of Auto Lending Risk...”


  • avatar
    28-Cars-Later

    Which gov’t, the Canadian gov’t or the US gov’t?

  • avatar

    Home loans are damn-near frozen. Auto loans are the only thing moving right now.

    Shorter terms, easier to close and if you mess up and default, we can take the car back a hell of a lot easier than a home foreclosure.

    • 0 avatar
      hreardon

      I don’t know that I’d say that home loans are ‘frozen’. Two of my clients are title companies and business has been very brisk this year.

      If you meant “more stringent”, then yes, I would agree with that.

      I think we are getting close to the top in the cyclical credit market again, though, based on the opening of several Auto Title Loan shops around my office. Another client handled the real estate transactions on those and according to him, the ATL (auto title loan) shops are cash cows because people will almost always pay their car loan before they pay their other debts. No car = no work, no pay = easy repo.

    • 0 avatar
      Kyree S. Williams

      Oh for sure. What’s more, a lot of people (most people) depend on their vehicles to get to work…which means that they will pay their car payment and miss the mortgage payment.

  • avatar
    morbo

    You can sleep in your car. You can’t drive your home.

  • avatar
    87 Morgan

    These reports are disingenuous. Here in CO the dealer has to collect sales tax, and that can run as high as 8.25%. If a buyer puts down 1k on a 20k car and finances the rest including dealer handling and title fees the deal looks like this.

    20k + 499 d&h + 1691 (tax) + 17 (title fee) = 22,207 – 1000 = 21207

    The customer is at 106% of book….

    Since quality used cars are hard to come by, ala yesterday’s Lexus 470 SUV thread, you pay all the cheese for the car with out large sums of cash it is hard to be below book. Coupled with the fact I can get money on a used car at 2% why would you want to do anything but borrow all the dough?

    • 0 avatar
      Kyree S. Williams

      That’s true, although at the very least, I would pay cash for the tax & title fee instead of financing it into the loan. I also wouldn’t buy a car that I couldn’t negotiate enough on to be under book price for the full financed amount. And cars here in Oklahoma are taxed at 3.25% if they’re new; if they’re used, it’s $20.00 of tax on the first $1,500 paid, and then 3.25% on the remainder.

      • 0 avatar
        87 Morgan

        I agree I would not either, but I spend most of my day in car stores of various ilk and consumers putting any cash down are in short supply…most times it is none or all of it, little in between. Further, the in between are putting enough down to get to the amount the bank will lend.

        My general point was the primary large expense is sales tax that is being added to the loan.

        The OCC fails to recognize that when a car is repossessed the vsc, gap, credit life (which is rare) policies are cancelled and the refund applied to the loan. These items are not driving the loss ratios when the deal goes south.

  • avatar
    SCE to AUX

    I wonder who really cares enough to change their ways.

    Lenders don’t want to see a loan default, but they also don’t want to be shut out of the business by being the first to tighten lending rules in a hot car market.

    This trend will bite us with another recession in a few years, just as the $10-15 minimum wage is coming on line at a neighborhood near you.

    • 0 avatar

      SCE to AUX

      It’s always nice to meet another reader who shares my distrust of the government and upbeat pessimism.

      Your obligation is to yourself and your family.

      You need to be preparing for the next crash so YOU can benefit from it. I’m not sure when that crash will be, but I already have an investment property in mind for when it does come.

  • avatar
    sunridge place

    Wow! A Risk Committee lays out risks!! This is HUGE news.

    Any reason why this committee doesn’t discuss leases? Leasing is now over 25% of the new car business.

    This is just another slice of data looking at a few trends. Their charts are from the Experian data that people should be reporting on. Look at ALL the data…not just a small slice with ominous warning signs on a small part of it please.

  • avatar
    Astigmatism

    This is the way the credit markets work. Lenders tighten standards after a crisis, loan origination drops, the loans coming in are higher quality and lower risk, spreads tighten, investors get sick of <1% returns, so lenders chase riskier borrowers paying higher rates with more aggressive terms, and everyone holds their breath until the next crisis.

    This is why it's called a business "cycle."

  • avatar
    319583076

    Uh-oh! A government warning!!!

  • avatar
    RogerB34

    There is no point in an auto credit risk warning.
    If subprime lenders will make a deal with credit risks, that is their problem.
    But, no bailout by Government.

  • avatar
    kvndoom

    The cost of cars is rising much much faster than the median wage.

    C4C took a lot of good running, paid-off cars off the road and exchanged them for a new debt cycle. The used car market has been artifically inflated ever since.

    I’m starting to feel like this isn’t predatory lending… it’s an industry doing what it takes to survive, and a populace doing what it takes to get “new and shiny.”

    • 0 avatar
      sunridge place

      Do you really think CFC gutted the used car market more than the fact that the industry massively cut production from 2009-2011 ish?

      Pretty sure CFC ended up with about 700k units involved over a month or two. The INDUSTRY produced 5-7 million less units per year during that 3 year period.

      So, used car market skyrockets…do ya think it might be from that lost production that isn’t cycling through the used car market due to economic conditions rather than a one month event?

      Think about the numbers.

  • avatar
    KixStart

    To some extent, longer terms are probably justifiable, as cars are almost certainly lasting longer and have higher resale values down the road.

    The resale value trend may change, of course, and then the lenders are screwed.

    • 0 avatar
      Kyree S. Williams

      In my current financial situation, I wouldn’t go longer than 48 months for a new car or 36 months for one that’s 2-3 years old. And I’d do some extra payments on the principal if I could. That’s not because I think a new or used car will break prior to being paid off (unless it’s European); rather it’s because I want to leave myself some positive equity in it so that if I want to switch it for something else, I can. For example, I’m currently shopping for a Chevy Cruze, which is a lovely car, but something I know I’ll probably want to get out of within a few years.

      But I don’t look down on or sneer at people who want or have to make less-ideal purchasing arrangements.

      • 0 avatar
        bunkie

        Why put capital into a depreciating asset? Look, I know we love our cars but at these interest rates it’s crazy to put more cash into a car than necessary. I’d rather hang onto the cash and wait for the next mini-panic on Wall Street so that I can buy some quality stocks at discount prices. Better yet, lease and preserve almost all of your capital.

  • avatar
    thegamper

    This is curious to me because of the hard depreciation cars usually take in the first year, not to mention the several years during the loan. If you are financing a fast depreciating item, it stands to reason that lenders will almost always be lending more than the asset is worth except in cases with heafty down payments. Is book value a measure of the average value of the asset during the loan, value at inception, value at end of loan term? As others have mentioned, it seems to me that this is a relatively good business to be in due to the low default rate. What is more troubling is people agreeing to terms they will struggle to afford and make no sense such as a 10 year loan. Financing on new cars is at such incredibly great rates, if i didnt have good credit, I think I would just buy a cheap ride with cash. Its hard to believe that people are paying a bunch of interest when 0% financing is available on plenty of cars.

    • 0 avatar
      Kyree S. Williams

      I do remember my mother’s credit union saying that they were willing to pay up to 110% of the book value for whatever car she was getting, which seems to be a norm within the industry.

      As far as your second comment goes, some people just don’t have the $3500-$4500 it takes to get a *good* cash car, or even the $750-$1500 it generally takes to get a poor one. But they know that they can get X Model for no money down and financing for 72 mos, and that they’ll have the money for the first payment in 30-45 days…


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