OCC Warns Of Auto Lending Risk

by Derek Kreindler

Published: July 3rd, 2014

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.

#AutoFinance #AutoLoans #Finance #Loans #Sales #Sub-prime #Subprime

Derek Kreindler

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8 of 29 comments

RogerB34 on Jul 03, 2014

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.

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Kvndoom on Jul 03, 2014

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."

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- Sunridge place on Jul 03, 2014
  
  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.
  
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KixStart on Jul 03, 2014

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.

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- Kyree on Jul 03, 2014
  
  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.
  
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- Bunkie on Jul 03, 2014
  
  @Kyree 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.
  
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Thegamper on Jul 03, 2014

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.

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- Kyree on Jul 03, 2014
  
  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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