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Competition Driving Increased Risk in Auto Finance, Regulator Says

November 4, 2014

By Brittany-Marie Swanson

LAS VEGAS — A representative of the Office of the Comptroller of the Currency (OCC) told attendees of the Financial Services Collections and Credit Risk Conference here last week that auto lending is “a bit of a two-edged sword,” raising both credit quality and consumer compliance concerns.

Deputy Comptroller for Supervision Risk Management Darrin Benhart said there has been double-digit growth in auto lending — 13% in 2013 and another 4.8% through June 30 of this year — thanks to increased consumer confidence and improving economic conditions. However, it was not all good news, he said.

“Competition is one of the factors behind the increased risk we are seeing. Competitive pressure is driving some auto lenders to pursue growth by lengthening terms, increasing advance rates, and originating loans to borrowers with lower credit scores,” he explained, noting that banks hold about 29% of the total auto lending market, amounting to about $262 billion in outstanding auto loans. “The marketing of these loans is focusing more on monthly payment, with little attention to the overall debt of the borrower.

“Average loan-to-value rates for both new and used vehicles are getting more liberal and exceeded 100% for all major lender categories at the end of 2013,” he continued. “These high LTVs reflect both rising car prices and a greater bundling of add-on products such as [service contracts], credit life insurance, and aftermarket accessories into the financing.”

The agency rep went on to explain that the average loss per vehicle has risen significantly in the past 24 months, another “obvious” indicator of increasing risk. The OCC has also observed an increase in the average charge off for auto loans — from $6,832 in the fourth quarter 2012 to $7,618 in the fourth quarter 2013, a 12% increase in 12 months.

“Some in the media and industry have downplayed the significance of the risk we are identifying in the auto lending industry, but at the OCC, we will continue to monitor product terms and risk layering practices to ensure that banks manage growth and exposure prudently,” Benhart said.

The OCC issued guidance in August that described its expectations for banks that engage in debt-sale arrangements. If banks fail to comply with regulations, Benhart said the OCC will take supervisory or enforcement action when warranted. He cited an investigation of JPMorgan Chase’s credit card services, auto lending, and student lending business which resulted in a cease-and-desist order against the finance source, and an order to remediate thousands of harmed consumers.

Benhart also said the agency is coordinating closely with other regulatory agencies like the Consumer Financial Protection Bureau, which issued subpoenas to finance sources over the summer requesting documents related to subprime auto loans.

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